Sharp drop in China’s trade surplus but increasing foreign reserves

February 8, 2018

HONG KONG - Chinese authorities released trade data today and foreign reverses data yesterday, pointing to a mixing picture of the country’s external balance amid global uncertainties.

On the trade front, imports significantly rocketed by 36.9% in US$ terms (30.2% y/y growth in terms of CNY), while exports mildly accelerated to 11.1% in US$ terms in January (6% y/y growth in terms of CNY), which, as a consequence, have narrowed trade balance significantly to US$20.34 bn (CNY135.8 bn).


Meanwhile, foreign reserves increased to US$3,161.5 billion from US$3,139.6 billion in December 2017 (Bloomberg consensus: US$3,170.7 billion; BBVA forecast: US$3,160 billion), a consecutive 12 months of increase.


BBVA Bank says the continuing increase in foreign reserves reflects the recent strong RMB exchange rate and the authorities’ measures of “stimulating capital inflow and controlling capital outflow”.


“Looking ahead, we expect the PBoC to continue to keep vigilant on the flows under the capital account and to push forward domestic financial deleveraging,” BBVA says.


“We maintain our exchange rate projection of 6.5 CNY/USD at end-2018.”


BBVA says that a significant increase in imports led to a narrowing trade balance.  Imports surged significantly to 36.9% y/y from 4.5% y/y in December 2017 (consensus: 10.6% y/y).


Imported goods with the highest growth rate included metal manufacturing machines and natural gas.


BBVA said the sharp increase in imports might be related to China’s large-scale imports of US goods after US President Trump’s visit to China in November 2017.


“In addition, we suspect that it could also be related to activities of mis-invoicing in cross-border trade as a means to circumvent tightening restrictions under the capital account.


“On the other hand, exports increased to 11.1% y/y in January, marginally above the last month’s outturn of 10.9% y/y and market expectations (consensus: 10.7% y/y), indicating robust global demand.


“Put them together and the trade surplus narrowed significantly to US$20.34 billion in January, compared with US$ 54.69 billion in the previous month (Bloomberg consensus: US$ 54.65 billion).


“RMB appreciation contributes to consecutive foreign reserves increases.


“According to our estimation, taking into account the trade balance and valuation effect, capital outflow in January was US$25.14 billion, compared with US$39.7 billion the previous month.


“A decreasing capital outflow, a significant drop in the trade balance and a large valuation effect all contributed to foreign reserves increasing.


“In particular, the large valuation effect is due to the depreciation of 2.8% of the DXY index in January, thus other currencies (around 30%) in the foreign reserve basket appreciated accordingly.


“Looking ahead, we predict the DXY index will continue its downward trend in coming months as the market holds depreciation expectations of the US Dollar, together with US stocks.


“Thus, the pressure on China’s foreign reserve and capital outflow will be kind of released in this year.” (ATI).