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Weakening Imports may Prompt More Easing

04-10 16:36 Caijing
Today's trade data confirms the weakness in both China's external and domestic fronts. Net exports will likely become a major drag on GDP growth in 1Q 2012.

Export growth is slightly better-than-expected, yet import growth is below expectations. True, low import figures were partly driven by payback from high growth in previous months. But, the underlying message is that domestic demand is still slowing. Today's trade numbers reinforce the need for easing efforts to be stepped up in the coming months. We expect a RRR cut in the coming weeks.

Facts

At 8.9% y-o-y March exports growth came in a touch higher than our and consensus expectations (Bloomberg: 7.0%, HSBC: 8.0%). In turn, Chinese exports grew by 7.6% y-o-y in 1Q 2012, down from 14.3% recorded in 4Q 2011. Seasonally adjusted, exports increased by 34.3% m-o-m following a 27.4% m-o-m contraction in February.

By destination, the slowdown in export growth was broad-based with the biggest drag coming from Europe (China's largest exports destination), driven by the sovereign debt crisis that remains to be fully resolved. Exports to the EU contracted by 3.1% y-o-y in March, compared to a decline of 1.1% y-o-y in Jan-Feb. Shipments to Japan slowed down to 3.4% y-o-y in March, compared to the 14.9% y-o-y increase over the first two months of 2012. Despite a rebound in exports to the US (14% in March vs. 12% during Jan-Feb), exports to the G3 markets decelerated to a pace of 6.0% y-o-y in 1Q from 6.7% y-o-y in Jan-Feb (4.7% y-o-y in March). Meanwhile, exports to non-G3 markets accelerated to 8.9% y-o-y in 1Q, compared to 6.9% y-o-y in Jan-Feb (12.1% in March).

By product, exports of electronic and machinery, which accounted for approximately 60% of total exports for the first quarter, outperformed the overall exports growth slightly by 9.1% y-o-y in 1Q 2012, compared with 8.8% y-o-y in Jan-Feb and 11.5% y-o-y in 4Q 2011. Meanwhile, exports of major labor-intensive products witnessed rebound in March: textiles exports increased by 7.7% y-o-y vs. -2.6% y-o-y in Jan-Feb; clothing exports accelerated by 18.6%y-o-y in March vs. -2.5% y-o-y in Jan-Feb; shoe exports rebounded to 13.7% y-o-y in contrast to a contraction of 2.1% y-o-y during Jan-Feb.

March imports were much weaker than expected, slowed to 5.3% y-o-y in March, compared to the 39.6% y-o-y in February. Imports growth in 1Q was 6.9% y-o-y, down from the 20.6% y-o-y in 4Q 2011. In seasonally adjusted terms, import growth was flat from last month vs. a negligible growth rate of 0.3% m-o-m in February. The weaker imports growth implied that domestic demand is still on track of slowing.

Imports of most major commodities were mixed. On the one hand, imports of iron ore increased by 5.7% y-o-y in volume terms in March but contracted by 9.1% y-o-y in value terms. On quarterly basis, iron ore imports in 1Q decelerated to 6% y-o-y, compared to 10.6% y-o-y in 4Q. Imports of steel products dropped 17% y-o-y in March and 18.4% y-o-y in 1Q, respectively, compared to a 7.9% y-o-y contraction in 4Q. On the other hand, imports of unwrought copper and unwrought aluminum surged by 50.5% y-o-y and 38.6% y-o-y in 1Q, respectively (vs. 38.7% y-o-y and 5.5% y-o-y in 4Q). Imports of crude oil picked up to 32.8% y-o-y in 1Q compared to 12.5% y-o y in 4Q on rising restocking demand.

As a result, China's trade balance turned to a small surplus of USD5.3bn in March, compared to consensus expectation for a USD3.2bn deficit. China recorded a trade surplus of USD660mn in 1Q2012, compared to a trade deficit of USD1bn recorded in 1Q2011.

Implications

Both export and import growth rates slowed down to single-digits in March. Exports were hit hard by the ongoing European debt and economic crisis, despite being counterbalanced by better-than-expected growth in the US.

Given the EU debt crisis is still unfolding and the US remains likely to face a bumpy recovery, China’s export is on track to slow further over the coming months. In addition, risks of elevated oil prices could continue to weigh on final demand in developed markets.

The trade balance in 1Q 2012 recorded a small surplus at USD0.66bn, compared to a surplus of USD48bn in 4Q 2011. As a result, net exports will likely become a drag on GDP growth in 1Q 2012, with its contribution to be in negative territory. For the renminbi, volatility in China's monthly trade balance will likely trigger further reform in renminbi exchange rate to better reflect the demand of a higher flexibility and volatility in the currency. The pace of renminbi appreciation will likely slow down for the remainder of the year.

On the domestic front, softer import growth of steel and iron ore reflects the continued slowdown in investment. The Statistics Bureau will release quarterly GDP data this Friday (April 13), and we expect the growth momentum continue to slowdown to around 8% before bottoming out in 2Q.

Bottom line: Today's trade data confirms the weakness in both China's external and domestic fronts. Net exports will likely become a major drag on GDP growth in 1Q 2012. This reinforces the need for further easing measures.

Chart 1. Both exports and imports slowed to single-digit growth rate

Chart 2. Shipments to G3 decelerated to 6% in 1Q (vs.11% in 4Q11 )



Xiaoping Ma, China Economist
Hongbin Qu, Chief Economist, Greater China

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