China’s August imports lifted by stronger domestic demand

HONG KONG – China’s August trade data surprised the market on the upside. The biggest surprise was import growth, which rebounded to 1.5% y-o-y in USD terms, the first positive reading in well over a year. Domestic demand, including demand for commodities, rebounded strongly, likely as a result of robust infrastructure investment growth over the past months, says HSBC.

There are also signs that imports were helped by some production chain effect, possibly related to launch of new electronic products over the month, the bank adds.

“Given the lift from electronics is temporary, growth rates over the next few months will likely be weaker. But the underlying trajectory of import growth, and the shape of domestic demand, will ultimately depend on the pace of fiscal expansion. We expect fiscal policy to remain expansionary in 2H 2016, offsetting weakness elsewhere in the economy.”

The trade figures for August showed that total exports fell less than expected, by 2.8% y-o-y;

Ordinary exports contracted by 0.7% y-o-y, up from -3.8% in July ;

Processing exports contracted by 8.0% y-o-y, up from -9.5% in July;

By market, exports to G3 countries grew by 0.9%, up from -3.3% y-o-y in July, and exports to non-G3 countries contracted by 5.9% y-o-y, up from -8.4% in July;

Total imports grew more than expected by 1.5% y-o-y (vs. bbg-5.4%), up from -12.5% y-o-y in July;

Ordinary imports grew by 5.7% y-o-y, up from -7.5% y-o-y in July;

Processing imports contracted by 3.2% y-o-y, up from a fall of18.7% in July;

In value terms, imports of iron ore, coal, crude oil and copper grew by 10.7%, 39.7% , -5.6%, -0.1%, compared with -8.8%, -18.9%, -23.7%, 14.2% in July (all y-o-y);

In volume terms, imports of iron ore, coal, crude oil and copper grew by 18.3%, 52.1%, 23.5%, 25.9%, compared with 2.7%, -0.2%, 1.2% and 42.8% in July (all y-o-y);

Imports from Hong Kong grew by 14.3% y-o-y, down from 122.7% in July;

Imports of high-tech products grew by 2.8% y-o-y in August, up from -10.6% y-o-y in July;

Imports of machinery products grew by 5.3% y-o-y in August, up from -10.9% y-o-y in July; and

The trade balance came in at USD52.1bn, down from USD52.3bn in July.

HSBC says these Processing and Ordinary trades are based on its own estimates, which are slightly different from official numbers.

“The biggest surprise in today's data release was import growth,” HSBC says.

“After contracting for 21 months in a row, import growth rebounded to positive growth of 1.5% y-o-y in August 2016.

“Two factors were instrumental to the recovery. Firstly, domestic demand, including demand for commodities, grew strongly. Imports of iron ore, coal, crude oil and copper (the four items which can be tracked monthly in a timely manner) grew at double-digit pace. Favourable y-o-y price movement also helped.

“Non-commodity imports rebounded sharply as well, as imports of machineries rose 5.3%, after a year-long contraction.

“We think the rebound in domestic demand (for commodities and more broadly machineries) is a reflection of the robust infrastructure investment over the past few months. This is the result of an expansionary fiscal policy, which we believe will continue into 2H 2016, and possibly well into 2017.

“Secondly, there are also signs of some temporary lift due to a positive production chain effect. Processing imports, for example rebounded quite sharply, as did imports of high-tech products.

Similar pattern”s can be observed in the trade data released in recent months in economies such as Taiwan and Korea. We think this is probably related to the launch of new electronic products over the month.

“As these products get assembled and re-exported, the positive impact will shift from the imports to the exports data over the next few months. But on the whole, these are at best temporary help rather than permanent boost to the regional trade cycle.

“Given the lack of very detailed breakdown of data, it is difficult to say for sure which of the two factors, domestic demand, or electronics, is the bigger contributor to the upside surprise. But there are two points to bear in mind.

“Firstly is that the electronic cycle is an annual occurrence and while it has always been somewhat impactful on smaller economies such as Taiwan and Korea, it is not always that obvious in China's trade data, given how large the trade sector is in absolute terms.

Secondly, given the lift from the electronics cycle is temporary, the growth rates may become weaker over the coming month as data normalise. But the underlying trend of import growth, and ultimately the trajectory of domestic demand will still depend on the pace of fiscal expansion. Therefore domestic demand is definitely the more important factor to watch.

“” We expect fiscal expansion to continue in 2H 2016. We also think there is an increasing likelihood that fiscal policy in 2017 will become more expansionary. “Despite the smaller than expected contraction in export growth, we remain relatively wary of external demand in 2016 and 2017. The numbers may look slightly better as the electronic goods get shipped overseas. But the fundamental issues that weigh on trade, in terms of poor business investment and global growth will likely continue be a drag on external demand.” www.hsbc.com (ATI).