Five charts to better understand the Chinese external trade momentum.
The main point is the change in regime after the 2009 crisis. Before it annual growth for both exports and imports was between 20 and 40 %. Currently and since 2011 their growth rate is close to 10 % and sometimes less.
These two figures explain why it is necessary for China to find new sources of impulse for its economic activity. The main sources of economic momentum have to be found in the Chinese economy not outside.
As it is shown on charts 2 and 4 monthly data are very volatile and then very complicated to interpret. That’s why I have drawn the purple line which is a 3 month moving average. Looking at monthly data usually implies an over-interpretation of short term trends. In June negative change for exports was interpreted as a risk of recession, the 5.1% seen in July as a source of recovery. The purple line shows that exports growth remains slow and is probably not a source of large impulse for the economic activity. It is the same with imports. We see that on a 3 month average basis imports growth currently decreases. The 10.9% seen in July (July 2013 / July 2012) is not yet a sign of recovery.
What we have to keep in mind in on chart 3 where the 3 month change shows a very different trajectory in 2013 that in the 10 previous years. The lower trajectory for 2013 means probably a weaker contribution to GDP growth. This can reflect the new rules that have been put in place by Chinese authorities. Some capital flows were registered as goods flows to bypass regulations. Authorities have stopped that behavior last spring and this is probably part of the 2013 trajectory.
In other words what we have to keep in mind is the fact that external trade does not play anymore the strong role it played in the past. It is still important but we have to look more carefully to internal demand and dynamics. This situation will continue as China wants to rebalance its economy on internal expenses. The resources allocation will not be driven by exports and investment as it was the case in the past.
This strategy is a bet to satisfy a new middle class but with a lower growth trend, constraints will be different. One main issue in China is debt. With lower growth prospects the debt management will be different. That’s probably why the Chinese Monetary Authorities try to change the rule on the money market as it was seen in late June.
Chart 1 – External Trade Balance
External trade surplus was USD 17.8bn versus 27.1 in June. This reduction comes from stronger imports. The 12 months balance remains above USD 260bn which gives to China a large source of foreign reserves accumulation.
Chart 2 – Exports Annual Change
What is important to keep in mind is the change in regime since 2011. This reflects lower competitiveness for Chinese products and lower demand due to poor economic outlook from Chinese two mains clients which are the USA and Europe.
Chart 3 – Exports – 3 month Change
2013 profile is very different. For spring data the trajectory is lower than what was seen in the past. This is probably the impacts of the new rules but this can have a strong impact on exports’ impulse and contribution to GDP growth.