Sep 09, 2021 04:11 PM

Wang Tao: China’s Trade Numbers Surprise, But Their Strength Might Not Last

Containers get loaded onto freighters Sunday at Tianjin Port in Tianjin. Photo: VCG
Containers get loaded onto freighters Sunday at Tianjin Port in Tianjin. Photo: VCG

China’s headline export growth accelerated to 25.6% year-on-year in August versus 19.3% year-on-year in July, import growth also improved to 33.1% year-on-year from its prior of 28.1% year-on-year. The monthly trade balance widened to $58.3 billion from $56.6 billion. This set of data offered a positive surprise against the market consensus. Given the high statistical base and softening new orders measures, the market had anticipated further slowdowns in China’s headline trade growth rates in August. The Bloomberg consensus expected export and import growth rates to moderate to 17.3% year-on-year and 26.9% year-on-year respectively.

Taking the 2019 levels as the base, August exports stand 37.0% above their 2019 level. Similarly, the latest import value stands 31% above its 2019 level. In July, export and import levels were 27.5% and 27.2% above the 2019 levels. The two-year compound annual export growth accelerated to 17% from 12.9%, and the figure for imports jumped to 14.4% from 12.8%.

Shipment growth to key destinations accelerated

Exports to the U.S. grew by 15.5% year-on-year versus the prior of 13.4% year-on-year. Shipment growth to the EU jumped by more than 10 percentage points to 30.6% year-on-year from 17.8% year-on-year. Export growth to ASEAN economies also improved, to 16.6% in August from that of 14.5% year-on-year in July. Similarly, export growth to the North Asia economies (Hong Kong, South Korea and Taiwan) accelerated to 29.9% year-on-year from 23% year-on-year.

These accelerations of year-on-year export growth rates in August led to the larger positive gaps between the current shipment levels to the key destinations and their 2019 bases. Export shipments to the U.S. remained at 38.6% higher than 2019 level vs. 27.6% in July. Those to the EU stood at 45.3% above the 2019 level in August versus 32.4% in July.

The acceleration of shipment growth to the U.S. is consistent with the improvements seen in the U.S. ISM manufacturing PMI new orders. In August, exports to the EU contributed 4.5 percentage points to export growth, 1.8 percentage points higher than its July contribution. At the same time, the headline trade export growth went up by 6.4 percentage points. Thus, EU contributed around 28% of the export growth acceleration while its export share is 16%. This is consistent with the growth strength in the eurozone as observed by our European economics team. This is also consistent with what we highlighted earlier on, as the U.S. consumer recovery shifting to more survey demand driven, exports to the EU is playing a bigger part in driving China’s export growth. Another destination that made large contribution to export growth acclamations is South Korea. With around a 4% export share, shipment to the country contributed 11% of the export growth accelerations in the month. South Korea’s solid growth performance and further fiscal spending may be supporting higher demand growth for China’s exports.

Key commodities drove more than half of the import growth accelerations

Key commodity imports have mostly recorded higher year-on-year growth rates for August versus July. The import value of iron ore grew by 95% year-on-year in August, versus that of 64% in July. Coal imports jumped by 124% year-on-year in August, almost double the growth rate seen in July. The import volume growth rates of key commodities have mostly shown positive swings. The import volume of iron ore contracted by only 3% year-on-year in August, a notable improvement versus a 21% contraction in July. The import volume growth of coal accelerated to 36% year-on-year from its prior of 16% year-on-year. Improvements in import volume growth were also observed across other commodities, such as copper ore, crude oil, and refined petroleum products, steel and copper products, among others. At the same time, the import price growth rates of key commodities have mostly moderated.

A commodities basket, including iron ore, copper ore, coal, crude oil petroleum products, steel and copper products, recorded an export value growth at 59.3% year-on-year in August versus 46.5% in July. This key commodity basket forms around 22% of China’s import value. It contributed 13.1 percentage points to the overall import growth in the month, 2.6 percentage points more than its contribution in July. The key commodities basket contributed around 52% of the import value growth accelerations between July and August.

Compared with two years ago, the import value of the key commodities basket stands at 42% above its 2019 level, versus 35.3% in July. The import value of iron and ore reached 85.5% above its 2019 level in August, while that of copper ore stands at 69% above. Volume-wise, the import volume of iron ore, copper ore and crude oil stand at 2.8%, 3.9% and 5.6% above their 2019 levels in August, versus their prior ratios at -2.9%, -9.0% and 0.5% respectively.

Other than the key commodities, the import value growth of information technology components remained largely unchanged at more than 20% year-on-year, while the import volume growth of integrated circuits accelerated by 7 percentage points to 26% year-on-year. Import value growth and volume growth of display panels both accelerated. These are consistent with the fact that the factories are preparing the new smart phone launches in the coming month. It is also worth noting that, the import volume of machine tools picked up again to 17% year-on-year in August, from 3% in July. This continues to support our previous view that corporate capital expenditures in China remain strong.

Softening external new orders in general, headwinds could re-emerge ahead

The Chinese mainland’s NBS PMI new export orders index stayed below the 50-benchmark for the fourth month in a row, falling another 1 point to 46.7, marking the weakest reading since June 2020. This mirrors an overall moderation in new order measures of external economies, despite an uptick in the U.S. data.

The U.S. ISM manufacturing PMI ended its three month decline, rebounding to 59.9 from 59.5, its new orders index also rebounded sharply to 66.7 from 64.9. The EU manufacturing new orders softened to 61.1 from previous 62.7. The German Ifo Business Climate Index for industry and trade declined for the second consecutive month to 103.8. In aggregate, the manufacturing new orders in DM economies softened to 58.1 from 60.2. For the EM space as a whole, the new export orders took another step down to 47.4 from previously 49.7. Both Taiwan and South Korea’s manufacturing new orders moderated to 57 and 50.6 from 59.3 and 51.6 respectively.

In net, the external orders development seemed to be carrying over the moderating stream in August. However, China’s August export growth accelerated. Given the diffusion index nature of the new orders survey, it is not easy to bridge the marginal changes of new orders with actual monthly export shipment. The fact that the DM new orders index still remains at high level, the growth differentials across different product mixes, as well as some rerouting impact may offer the explanations to the gap between the improved export shipment and the weakened survey data. That said, continued weakness in survey data and the high statistical base may still bring challenges to China’s export growth rates in the coming months. The return of production from other economies may also put downward pressure on export growth through reshuffling orders away as well as weakening demand for Covid-related products.

Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank. The article was edited for length.

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