Art Vandelay Is Calling: China Exports, Imports Miss Badly

It’s that time again – time for China trade data. Which means it’s also time to break out the Seinfeld reference.

See China, like Art Vandelay, is an importer/exporter, “ok?”

And generally speaking, you want to keep up with how that whole importer/exporter thing is going for Art China, because you know, the fate of the entire global economy kinda depends on it.

When last we checked in on how Art’s import/export business was doing, things were going ok, all things considered. And by “all things considered,” we of course mean given still shaky global demand and Beijing’s ongoing effort to tighten policy.

The July data comes against a backdrop of soaring commodities prices, something we noted earlier.

“Steel and iron ore are China’s hottest commodities right now, and it’s policy makers that are driving the gains,” Bloomberg wrote on Monday, recapping a hilarious overnight session that saw steel futures go limit-up in Shanghai while everything from iron to eggs was bid right out of the gate.

Here’s some perspective for iron and rebar:

IronOre

Steel

Meanwhile, the LME Metals Index just rose to its highest since 2014 as traders effectively bet on cutbacks in China.

LME copper closed at highest since May 2015:

Copper

Bloomberg’s Cameron Crise is (rightfully) skeptical about the read-through for the real economy. To wit:

Base metals are probably a half-decent coincident indicator that capture some economic growth and some speculative/credit dynamics. For now, the base metal trend is clearly up, and with it sentiment on China. A poor trade number, however, could let some of the steam out of the bull run in a hurry.

That bolded bit is key. Recall what we said earlier today:

The bottom line there is that it is notoriously difficult to determine what’s speculation and what’s rational trading when it comes to commodities prices and China.

Crise also notes that some of the pressure has been taken off the trade data by the stability of the yuan:

While the importance of monthly trade data may have waned slightly now that pressure on the renminbi has abated, the figures nevertheless provide an early read on Chinese and foreign demand for the third quarter.

In our week ahead preview, we talked quite a bit about the extent to which the slumping dollar and intervention has put the brakes on depreciation pressure. Just to give you an idea of what kind of effort China has put in when it comes to using FX to curb outflows in the absence of wiggle room for more OMO hikes, consider the following annotated chart that illustrates the short squeeze in late May/early June and subsequent concerted efforts to ensure that things didn’t start moving in the “wrong” direction again (this is a bit dated, but it’s a nice visual):

Yuan

The yuan has since strengthened further and the FX reserve data we got today served as further evidence that capital flight has abated, tortured attempts to prove the headline prints fallacious notwithstanding.

“After several decades serving as factory to the world, China is becoming increasingly important as a global consumer, and import growth has been outpacing export growth since mid 2016 amid that shift,” Bloomberg’s Kyoungwha Kim wrote this evening, adding that “in the longer-term, the tilt toward greater consumption should see China’s government favor a stronger local currency in a bid to bolster the purchasing power of its citizens.”

Ok, so that brings us to the July trade data, and here it is:

  • China July Exports Rise 11.2% Y/y in Yuan Terms; Est. 14.8%
  • July imports climbed 14.7% y/y; median est. 22.6% rise (range +16.0% to +26.9%, 10 economists)
  • CHINA JULY EXPORTS RISE 7.2% Y/Y IN DOLLAR TERMS; EST. 11.0%
  • CHINA JULY IMPORTS RISE 11.0% Y/Y IN DOLLAR TERMS; EST. 18.0%

ChinaImportsExports

So what to make of that?

Well, we’ll see how markets react overnight. Right now, the yuan is extending gains that had already started ahead of the news and that looks to have accelerated as the USD numbers and the rest of the data trickled in:

USDCNH

Generally speaking, the report could obviously have been better, but you have to make sure and view this in the context of the monumental balancing act Beijing is trying to pull off. In that respect, it’s something of a miracle that nothing terrible has happened yet and if what you see there in the yuan is any indication, it certainly doesn’t seem like anyone is taking the news too hard.

Again, let’s see how the overnight session unfolds and what the reaction ends up being from analysts. It takes a while to digest these numbers and put all of the pieces together because Art Vandelay’s importer/exporter gig is an exceptionally complicated business…

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