Headlines will doubtlessly (and rightfully) tout China’s record exports in 2021, but if you’re looking to get a read on the near-term outlook for the world’s second largest economy, the more important figure released on Friday may have been a large downside miss on December imports.
China said shipments rose nearly 30% last year to a record $3.36 trillion, while imports jumped to $2.69 trillion, leaving a record surplus.
Trade has been a bright spot for China at a time when the economy is facing a series of gale-force headwinds, many of which are directly related to policy decisions ostensibly aimed at promoting balance and long run stability at the expense of near-term growth.
Exports rose 20.9% YoY in December, more than expected. It marked the fifteenth consecutive month of double-digit growth in shipments (figure below).
But imports rose just 19.5%, missing consensus by two standard deviations, perhaps underscoring concerns about domestic demand amid a worsening COVID outbreak and ongoing drag from the property slump.
The most recent activity data suggested the economy remained under pressure in November as property curbs, regulatory tightening and virus containment measures continued to stifle and otherwise weigh on the expansion.
Although monetary policy began to pivot dovish last month, the lag between incremental easing and real gains for the economy could mean growth slows further in the months ahead. The market now expects the PBoC to cut OMO rates imminently. Earlier this week, a cooler-than-expected read on factory-gate inflation and a similarly benign CPI print bolstered the prospects for PBoC action. December saw both an RRR cut and the first reduction in the one-year loan prime rate in 20 months.
Export strength has contributed to a stronger yuan. December’s surplus — $94.5 billion — was the largest ever and represented a near three standard deviation beat versus consensus. “The sum of trade surplus beats versus forecast in H2 2021 now amounts to $59 billion, or 0.7% of GDP, on an annualized basis,” Bloomberg’s Simon Flint marveled. “Going forward, it’s worth noting that [although] Q1 numbers tend to endure a large seasonal decline, the underlying surplus seems likely to remain strong, as Omicron reinforces demand for China’s PPE exports, and undercuts domestic consumption of imported goods,” he added.
Remember, China benefits both from re-opening and virus flareups. While the abatement of the pandemic increases demand for services at the expense of cheap physical goods, better growth outcomes abroad are still beneficial for “the world’s factory.” On the other hand, pandemic dynamics increase demand for goods produced in China, including PPE and cheap electronics that facilitate work-from-home arrangements. Either way, the world wants what China’s factories churn out.
But the trade boon notwithstanding, China is on shaky footing, as exemplified by the burgeoning monetary policy divergence between the PBoC and the developed world. Over the years, the global cycle has become increasingly tethered to the Chinese credit impulse and the ebb and flow of the world’s second largest economy more generally.
Sometimes that’s a good thing. Sometimes it’s not. As we saw in 2020, the idea that the world catches a cold when China sneezes is no longer just a figure of speech.
“But imports rose just 19.5%, missing consensus by two standard deviations…” How meaningful is it to say it missed it by two standard deviations? The fact that imports rose by 19.5% YoY for the second largest economy is just a mind blowing number.
It’s extremely meaningful. Consensus wanted +27.8%. But more to the point, it’s very important in the current context. I guarantee you that every Street analyst who covers China mentions weakness in December’s imports in their coverage of this data. It’s not a “mind blowing number.” That was a very weak number. You have to put it in the context of the lackluster recovery in domestic demand, “zero COVID” policy and, particularly, the generally sluggish nature of retail sales growth during the recovery.
Lower than expected imports often denote an economy that is has below expected consumer spending.