• Import growth surprised on the downside, gaining only 5.3% y/y in March, compared with the last reading of 39.6%. Imports of iron ore declined 9.1% and crude oil surged 26.2%. Meanwhile, soybean imports soared, growing 23.6%.

• China recorded a trade surplus of $5.4bn in March, much larger than the market expected, as imports slowed.

• Q1 combined data: exports and imports grew 8.9% y/y and 9.8%, respectively, producing a trade surplus of $670m, an improvement on last year’s Q1 trade deficit of $706m. Crude oil and soybean imports in Q1 rose 32.8% y/y and 11.6%, respectively, to US$58.2bn and $7bn. Iron ore imports declined 8.2% to $25.7bn, impacted by the price effect. Iron ore import volume in Q1 actually increased 6%.

ANZ ASSESSMENT

March export growth beat market expectations, suggesting that external demand conditions have continued to improve. We expect export growth in April to improve further to 10-12% y/y, as indicated by the surging containerized freight index (see chart 2).

A small trade surplus was registered in Q1, compared with the trade deficit of Q1 last year. This means that net exports will contribute positively, though marginally, to GDP growth in the Q1 figure to be published this Friday.

Though headline export growth will continue to moderate - compared with last year’s annualised 20.6% - the strength of China’s trade sector remains solid, given it is the world’s top exporter and global growth remains below potential.

Meanwhile, our analysis suggests that China’s imports are increasingly linked to domestic demand: since 2007 ordinary imports, which are mainly for domestic consumption purposes, have outweighed processing imports. This shift in the country’s trade structure suggests that China’s trade surplus will progressively decline. If the trend continues to hold, import growth this year will likely reach 15-18% y/y, and will continue to outpace export growth.

The small Q1 trade surplus appears to support the view that the RMB exchange rate is moving closer to its equilibrium value. As a result, the RMB will likely experience increased volatility as its exchange rate will be mostly affected by the vicissitude of capital flows.

As the Chinese authorities are pushing for faster capital account liberalisation, and to maintamaintain an independent monetary policy, the RMB exchange rate will need to be floated in the not so distant future.

CONTRIBUTORS: Li-Gang Liu, Hao Zhou