China: No export crisis despite weak headline number

China’s export growth remained subdued in March with total exports declining 6.6% y/y (consensus: +4.8% y/y) after dropping a whopping 18.1% y/y in February. China’s import growth was even weaker in March declining 11.3% y/y (consensus: +3.9% y/y) after increasing 3.9% y/y in February. In March China returned to a USD7.7bn trade surplus on the back of a trade deficit in February.

Despite the weak headline number for exports for two consecutive months China does not face an export crisis, in our view. The weakness in exports in March was largely driven by a 44% drop y/y in exports to Hong Kong. Part of the explanation for the large decline is the impact from over-invoicing of exports that mainly affects exports to Hong Kong and appears to have artificially boosted exports particularly early last year. The government has since cracked down on over-invoicing but it still weighs substantially on the year-on-year growth in exports. China’s total exports excluding Hong Kong in March actually accelerated slightly to 6.3% y/y from 3.1% y/y in February.

When looking at export orders in China’s manufacturing PMIs we see a more resilient picture of China’s exports. Export orders in March improved in both China’s manufacturing PMIs and are currently at 51.3 in the Markit/HSBC manufacturing PMI and 50.1 in China’s official manufacturing PMI. While this is not stellar, it does not suggest that China is facing an export crisis. The current large gap between export orders and actual exports suggests a substantial improvement in exports in the coming months. However, regarding imports the manufacturing PMIs suggest we could still see some weakness in the coming months on the back of the recent weak domestic demand.

China’s exports to the EU increased 8.8% y/y, to the US 1.2% y/y, to Japan 11.1% y/y and to the ASEAN countries 10.3% y/y. As mentioned above, exports to Hong Kong plunged 44% in March. Momentum has been strongest in exports to the EU in recent months, while exports to the US have slowed somewhat.

It would be wrong to take today’s weak foreign trade data as evidence of further weakness in the Chinese economy. In our view export growth will improve to the high single-digits in the second half of 2014. Our view also remains that the Chinese economy will stabilise in the second of 2014, albeit hard data might continue to be weak for a couple of months. We do not find any evidence of a severe competitiveness problem for China and hence strong arguments for a weaker CNY. If anything, China’s current account surplus is poised to increase slightly. The CNY in the medium term remains on a moderate appreciation trend in our view.

After an initially very negative reaction stock markets have gradually recovered in Asian trade. The CNY has also recovered some of its initial losses but it remains weaker with USD/CNY trading 6.2054.