China Trade Balance, CPI
Heading into Q4, some of the recent economic data points out of China have suggested that the slowdown in growth which began in Q2 2012 could reaccelerate. One of the more relevant economic figures is the China purchasing managers’ index (PMI). China’s most recent PMI, 51.1 for September, was the highest (Figure 1) since April 2012. The modest recovery in Chinese manufacturing lifted the performance of the materials sector (Figure 2) in the second half of 2013 and reversed its significant first-half underperformance.
This past weekend the China trade balance, CPI, and PPI readings for September were released. Media headlines for those releases will certainly focus on the contraction in exports and the rise in the CPI. However, based on the collective evidence below, I urge not to make decisions purely on those media headlines.
Let’s take a look at the evidence…
- September trade balance reports a surplus of $15.21 billion, down from August’s $28.52 billion and below consensus estimates for a surplus of $26.25 billion
- Two-way trade with China’s largest trading partner, the European Union, moderated from +3.5% in August to +2.6% in September
- However, the economic recovery in the U.K. continues to stand out globally, as two-way trade with China rose in September to +12.9% from +11.2% in August
- Two-way trade with the U.S. moderated to +6.9% from +9.2% in August
- September exports contracted 0.3% after rising 7.2% in August; consensus estimates were for a gain of 5.5%
- Exports to India fell 10.7% year on year
- Exports to Brazil fell 5.0% year on year
- Exports to the U.S. rose 4.2%, down from the prior month’s +6.1%
- Exports to Southeast Asian nations fell to +9.8% after August’s +30.8%
- September imports rose 7.4% better than the +7.0% consensus estimate, which was also the reading for August
- China oil imports rose to a record 6.26 million barrels per day, an increase of 25% from August
- September CPI rose to 3.1% from 2.6% in August; consensus estimates were for 2.8%
- Food rose 6.1% in September after rising 4.7% in August
- Non-food rose 1.6% in September after rising 1.5% in August
- September PPI contracted 1.3%; consensus estimates were for a contraction of 1.4%; and August PPI contracted 1.6%.
- September new yuan loans rose to 787 billion yuan ($129 billion USD) ahead of August’s 711 billion yuan and consensus estimates for 675 billion yuan
- Q3 foreign exchange reserves reached $3.66 trillion from Q2’s $3.5 trillion – the largest quarterly increase in two years
- Money supply growth moderated to 14.2% from August’s 14.7%
Investors must be careful not to focus solely on the media headlines of weak exports and rising inflation. China’s economic evidence must be collectively reviewed. On the export side, the past few months have witnessed a strong recovery in the U.S. and Europe. The September figures present moderation of that recovery, in particular for the U.S., where I suspect the looming government shutdown did impact late September figures. Export figures for Asia, Brazil, and India confirm the continued cyclical headwinds facing those regions from weakening domestic currencies.
As far as the inflation uptick, please keep in mind that the People’s Bank of China (PBOC) has an inflation target of +3.5%. September’s reading of +3.1% (Figure 3) is still below that target. Also there has been significant regional flooding in China that has decimated domestic food supplies and elevated food pricing. CPI readings over the next few months should continue to trend toward and above the PBOC’s +3.5% target. However, I do not expect that will motivate government officials to moderate the current fiscal growth initiatives that have at the very least stabilized the decline in growth over the past few months.
Unfortunately, what is little reported on is what I have urged investors to focus on most – the continued rise in the value of the China yuan. While most other emerging market economies continued to be challenged by weakening currencies, the yuan (Figure 4) is currently trading near its highest all-time highs. The value of the yuan remains near the top of my list of relevant China metrics.
Next up from China is this Thursday evening’s GDP release. There has been a steady decline in Chinese growth since the first half of 2010 when GDP (Figure 5) was running well above 10%. However, Q3 GDP should present a modest increase – consensus estimate is for +7.8%, from Q2’s +7.5% – and position GDP to reach back above 8% in early 2014 for the first time since early 2012.
Figure 1 China PMI, 2012 to Present
Figure 2 XLB Materials Sector, Year to Date
Figure 3 China CPI, July 2011 to Present
Figure 4 China Yuan Trades to All-Time High
Figure 5 China GDP, 2010 to present