Domestic demand to underpin China growth

China’s exports surged in July, growing 38 percent compared to last year and again beating expectations.

However, imports in the same month dropped to a below-consensus 22.7 percent year-on-year against a backdrop of moderating domestic demand and cooling prices, said HSBC’s Qu Hongbin, co-head of Asian economics research

“As a result, China's trade surplus hit a new 18-month high of USD28.7 billion. Exports will likely slow in the coming months, but despite a downside risk to its external outlook, China's internal demand should continue supporting a GDP growth rate of around nine percent for 2H and 2011,” Qu said in a report.

The export growth was unexpected given recent issues in South Korea and Taiwan's most recent trade results. Qu suspected the expiration of exports tax rebates (effective July 15) may have encouraged front-loading of exports during the first half of the month.

“The strong July number also suggests that the impact of Europe's debt crisis and the US' slower than expected recovery on China's total exports is limited, although exporters may not start feeling the pitch until later,” he said.

By destination, exports growth to the G3 countries (Colombia, Mexico, and Venezuela) eased to 34.2 percent year-on-year in July from 42 percent previously.

Shipments to the EU saw better performance of 38 percent in July (June 36 percent), although shipments to the US and Japan cooled to 35 percent and 22 percent respectively (June 43.8 percent; 37.2 percent). Exports to non-G3 regions moderated to 41.4 percent year-on-yeas in July, versus 45 percent a month earlier, but the support offered by emerging market demand for Chinese exports holds strong.

By product, rapid growth continued to be recorded across the board, albeit at a slower pace. Machinery and electronic goods (which make up over 50 percent of China's exports) slowed to 37.6 percent year-on-year in July, down from 42 percent in June.

Labour intensive products such as textiles, toys, shoes and suitcases also saw steady growth in July (at 35 percent, 28 percent, 36.3 percent and 61 percent respectively). Beijing's scrapping of export tax rebates also spurred exceptionally high exports growth for products such as steel (rising over 150 percent year-on-year in volume terms), further boosting an already higher than expected pace of growth.

In contrast, imports growth dropped significantly to 22.9 percent in July, from 34.1 percent in June. On a seasonally adjusted month-on-month basis, growth dropped 5.6 percent in July, following a 0.9 percent dip in June. Possible reasons for this sharp deceleration of imports growth include: a) the softening of import prices caused by relatively lower international commodity prices from a value perspective; and b) cooler demand for raw materials and commodities from a volume perspective.

The latter is reflected in the year-on-year volume growth decline for a number of key commodities, including: crude oil (-3.2 percent), iron ore (-11.8 percent), unwrought copper (-15.9 percent) and unwrought aluminium (-70 percent).

As a result, China's trade surplus expanded from $20 billion in June to $28.7 billion in July. The bulk of the July trade surplus came from emerging markets countries due to China's decelerating domestic demand growth.

Only $2.8 billion of the monthly increase of $8.7 billion can be traced back to China's trade surplus with the US and EU. For the first seven months of the year, China recorded total trade surplus of $83.9 billion or 21.2 percent less than that in the same period last year.

Looking ahead, Qu said China's exports were set to ease gradually in the coming months, “not only due to a base effect but also a disappointing pace of recovery outside of Asia”.

“This was underlined by the new exports orders component of HSBC's China manufacturing PMI, which recorded sub-50 readings in recent months. That said, we don't expect a collapse in China's external demand as seen in 2H 2008.

“Rather, the strengthening of intra-regional trade and positive outlook for emerging market economies should help cushion the slowdown for China's exports growth. We expect China's exports to soften gradually in coming months, whilst still maintaining a double-digit pace of growth,” Qu said.

“Resilient domestic demand underpins our expectations for China to expand by around nine percent in 2H and 2011.”
(Source:www.cargonewsasia.com)