Front-loading ahead of potential downtrend in China exports, says ANZ

October 12, 2018

HONG KONG – ANZ Bank says the jump in China’s exports in September suggests a strong front-loading effect ahead of the implementation of an additional US$200 billion of tariffs, and says it will watch for downside risks to China’s exports in Q4.

Electrical machinery exports, China’s biggest export item to the US, increased 14% y/y in September, compared with 9.8% in August.

35% of this sector was subject to an additional 10% tariffs from late September, according to the US tariff list on US200 billion of Chinese goods.

“Therefore, Chinese exporters may have front-loaded their shipments earlier in the month, before the new tariffs took effect,” ANZ says.  “China’s exports to the US further increased by 14% y/y in the month, taking its monthly trade balance with the US to a historical high of USS34 billion.”

ANZ says the better-than-expected export growth is unlikely to prevent China’s Q3 current account balance from falling into negative territory.

“China may experience a quarterly current account deficit for the second time this year, due to a shrinking trade surplus,” it says.

“China’s trade surplus likely declined to USD$4.1 billion in Q3 in balance of payments terms, from US$103.6 billion in Q2. This is unlikely to be sufficiently big to offset the deficit in services and income accounts.

“We expect China’s current account balance to have become negative – US$3.9 billion in Q3 from US$5.3 billion in Q2.”

ANZ adds that, despite the dark clouds gathering over the export outlook, it is of the view that China will not prefer to use CNY depreciation as a retaliatory tool in the trade war.

“The renewed depression pressure on the CNY has triggered speculation on whether USD/CNY will rise further to breach the psychologically important 7 level,” it says.

“The US has also recently warned China on its currency depreciation, ahead of the publication of its semi-annual currency report due in the month.

“We reiterate our view that it is not the value of USD/CNY but rather the pace of CNY depreciation that will matter more from policy makers’ perspective.”  www.live.anz.com (ATI).