China's headline trade numbers declined significantly in July. Exports dropped 8.3% from last year, with imports down 8.1%. The numbers hint at continued weak demand, but within the details there are two main factors contributing to the declines.
Chinese Yuan 1 Year % Change Vs. Large Trading Partners
First, China's exporters are paying the price for Beijing's efforts to make the CNY a reserve currency. China has held the CNY steady vs. the USD for the purpose of convincing the IMF to include the yuan in its Special Drawing Rights when it votes this Fall. SDR inclusion is seen by Beijing as an important step for pushing the yuan into major reserve currency status. The CNY has in turn inherited the US dollar strength, giving a significant competitive trade advantage to China's major trading partners (see the chart on the right) at the expense of Chinese exports. Because of the CNY strength, expect exports to show further weakness for months to come. This will act as a headwind to manufacturers; an opposing force to Beijing's fiscal and monetary stimulus.
Second, the dramatic drop in commodity prices has contributed the bulk of the declining headline import number. Some of China's largest commodity imports have seen dramatic price drops this year. Iron ore prices are down 42% from last year. Oil prices are down over 50%. After adjusting for commodity prices, imports show weak demand, but a more mixed picture. By volume, the overall demand picture for many commodities in July was positive. The import weakness has come more from manufactured goods than commodity demand. A very simple commodity price adjustment shows imports by volume increased around 7.4% on the year (see chart on the right). As with exports, import numbers will be weak for some time as commodity price declines lower the overall volume numbers, and currency competitiveness helps trade partners.
Some useful details in the trade numbers:
- Crude oil imports were up 29% from last year as strategic reserves are filled, and stockpiling on price declines takes place.
- Other commodities also fared well, based on import volume: Iron ore up 4% from last year, palm oil up 36%, copper ore up 7%, soybeans up 27%, and unwrought copper finally showing a gain up 1% after declining all year.
- Automobile imports saw the biggest drop in import demand, down 27% from last year, replacing coal as China's weakest import.
- Consumer goods and electronic exports saw the largest declines among export categories.
- Exports for processing and re-export were down 9.5%, indicating weaker supply chain activity.
- Imports from South Africa, New Zealand, Germany, and Japan saw the largest declines, as currency appreciation and weaker commodity prices weighed on imports.