China logged a record trade surplus in June, data out Wednesday showed. There were caveats aplenty.
Exports rose almost 18% YoY in dollar terms, the best showing since December (figure below). That was easily better than the 12.5% increase seen by economists.
Plainly, the reopening effect in Shanghai was still at work, and shipments were likely bolstered by the generalized resumption of factory activity and the abatement of logistical frictions associated with COVID containment protocol.
Imports rose just 1%, leaving a surplus of $97.94 billion, up sharply from the prior month, more than $20 billion above consensus and the most in 30 years.
Ostensibly, that augurs well for the world’s second largest economy and also for the global economy given the read-through for demand — “ostensibly” is the key word.
Global demand is destined to recede going forward if for no other reason than policymakers in developed economies are determined to engineer slower growth in an effort to bring down inflation. On Wednesday alone, Canada, New Zealand and Korea hiked rates by a combined 200bps.
Importing more cheap Chinese goods could help ameliorate inflation in some locales (most notably the US), but trade with China is hopelessly politicized (even more so in 2022 given Beijing’s refusal to admonish Moscow for Vladimir Putin’s Ukraine misadventure) and consumption in the developed world is undergoing a mix shift in favor of services. Moreover, anemic imports suggest domestic demand in China is… well, anemic. Especially considering rising prices for some imports.
Credit data out earlier this week showed total social financing hit a record for June at 5.2 trillion yuan (figure below). Medium- and long-term loans to corporates likewise notched a June record, and mortgage financing improved. M2 growth was very robust in June at 11.4%, and the total stock of outstanding credit rose 10.8%, a brisker pace compared to May.
That’s all encouraging, but some of this feels like an exercise in question-begging. Lockdowns have prompted authorities to take steps aimed at juicing credit provision, and while it’s good news that demand for credit appeared to rebound (on a delay) after COVID measures were eased, it’d be preferable if there were no lockdowns in the first place.
If there are new lockdowns, which seems likely given the proliferation of Omicron sub-variants, it’ll jeopardize trade, crush credit demand anew and render most forms of stimulus ineffective.
Additionally, I’d suggest June’s credit data decreases the odds of outright monetary accommodation. The PBoC, like other state institutions, has repeatedly pledged to support the economy, but its actions have, at times, underwhelmed expectations.
Reports of new infrastructure investment funded by what amounts to borrowing from future borrowing (i.e., pulling forward a portion of next year’s local government bond quotas) failed to move any needles this week. It simply doesn’t matter when investors are wary of rising COVID cases and incremental nods to the onerous reality facing mega-cap Chinese tech in the era of Xi’s “common prosperity.”
Ultimately, it always comes back to the same thing — namely, whether Xi is willing to take a more moderate approach to COVID containment.
If he doesn’t, key indicators of economic vitality including trade data and credit provision will continue to oscillate with the ebb and flow of rolling lockdowns. It’s just that simple.
To be sure, balancing growth and public health is possible, even when the public was inoculated with an inferior vaccine. And nobody would blame Xi’s government for an approach that was stricter than most other countries given the sheer size of the population and what one certainly imagines is a lack of ready access to hospitals and emergency care in many rural regions.
But “zero COVID,” by definition, isn’t about balance. It’s a single mandate. You can’t have a “no tolerance” COVID policy that’s sensitive to growth tradeoffs. No tolerance means no tolerance.
Given that, data out of China now includes even more asterisks than usual. Activity data for June is due later this week, alongside second quarter GDP, which is seen at 1.2% (figure above).
Somehow, the Party still expects to meet this year’s 5.5% growth target. Or, actually, I should rephrase. The Party still expects to claim it met this year’s 5.5% growth target. That, at least, is doable.
