China Trade balance unaffected by trade war

If there is a “trade war” no one told China importers/exporters. China’s exports growth unexpectedly rose above expectations despite U.S tariffs and heavy media rotation of protectionist rhetoric. Imports also accelerated indicating solid domestic demand. A key focus for the market was Chinas surplus with the United Sates, which fell only marginally. China July trade balance came in at $28.05, Exports 12.2% vs. 10.0% y/y, Imports 27.3% vs. 16.5% y/y. Ironically for US President Trump the negative sentiment on trade which has driven the CNY against the USD, down 10% since April, actually supported exports. Yet with no sign either nation is prepared to back-down as disagreement expanding further then trade into intellectual property, investments and technical transfer, downside the risk to China’s growth has increased. In response, Chinese officials have moved proactively by releasing additional liquidity into the banking system and suggested further fiscal stimulus. As the potential for a trade war shifted from a tail-risk into base scenario, equites, specifically Chinese shares become vulnerable for deeper correction. Our base scenario, China will now seek to negotiate with the US to avoid further escalation, however, outcome is uncertain. The directional risk to the CNY at this point is at an unstable equilibrium.

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