China trade still weakening, with Brexit impact yet to come

HONG KONG – China’s June export growth numbers, showing a fall of 4.8% year-on-year, were roughly in line with expectations as demand slowed across-the-board, notably more so in emerging markets, says HSBC. Imports fell more than expected by 8.4%, as ordinary imports such as commodity imports eased.

HSBC says this is consistent with the message from inflation numbers released earlier, suggesting weaker momentum in the industrial sector in June.

“Today's data offer another indication that the global trade cycle remains sluggish. We expect both import and export growth to head lower in the near term as Brexit will negatively impact corporate sentiment and investment in the developed markets,” Julia Wang, HSBC Economist, Greater China, said.

“The main surprise in today's data release was weaker-than-expected import growth. Imports fell 8.4% y-o-y in June, down from -0.4% in May. The breakdown suggests that the main drag came from ordinary imports for domestic consumption.

“Indeed, demand for commodities (coal, iron ore, crude oil, copper) have slowed across the board, both in volume as well as value terms. This suggests that the domestic industrial sector has probably slowed over the month.”

Meanwhile, Wang says, China’s processing trade cycle appeared to have held up in June. Processing exports and imports all registered improvement. Processing imports in particular, registered a positive growth rate of 8.6%, after a year of double-digit contraction.

“This could feed into better export growth in the next few months, but it is unlikely to be a beginning of a sudden turnaround in the global trade cycle,” she says. “In fact, we have probably not yet seen the full impact that Brexit could have on corporate capex in Europe, which is a key market for Asia's exporters.

“Our view is that as the negative impact ripples through, both export and import growth could take another leg down in the near term.

“We had recently lowered our forecast for external demand, and shaved 0.2ppt off our 2017 GDP forecast (now at 6.5% vs. 6.7% previously).

“The policy takeaway is that Beijing must focus more on ways to lift domestic demand in order to secure its 6.5% bottom line on growth in 2016 and 2017.”  www.hsbc.com (ATI).