Mixed news from China’s economy – and nothing really that will give us any heart that the slide has stopped and will soon start improving. If anything the suggestion from the trade and inflation data at the weekend – along with the July reading on manufacturing activity, but not the solid report on the expanding services sector – tells us there’s a bit more pain to come.
The rest of the monthly data is out on Wednesday, with investment, retail sales and industrial production to be closely watched, along with home loans, car sales and housing investment.
And data released on Friday on the country’s foreign reserves showed another multi billion outflow in July – more than $US42 billion to be exact and the country’s total foreign reserves are now at a two year low – admittedly the $US3.6 trillion is still pretty impressive, but so is the total outflow of some $US343 billion since June of last year.
What is concerning though to some economists is whether the $US40 billion plus outflow in July was linked to the stockmarket crash and is really a sign of nervous investors whisking money out of a strained financial system and weak economy.
Helping the outflow is the strong Yuan – Economists also blame a strong yuan for the export weakness, with ANZ Research estimating the currency’s nominal effective exchange rate has risen by 13.5 percent since June 2014.
Analysts say Beijing has been keeping the currency strong to wean its economy off low-end export manufacturing.
A strong yuan policy also supports domestic buying power, helps Chinese firms to borrow and invest offshore, and encourages foreign firms and governments to increase their use of the currency. It is also adding to the deflationary pressures for manufacturing.
Certainly the inflation data shouldn’t be a concern – consumer price inflation rose to an annual rate of 1.6% in July (up from 1.4% in June) because of higher pork prices – that’s no big deal.
But producer price deflation remains intense and shows no sign of letting up. It’s been gripping manufacturing now for nearly three and a half years and deepened in July to an annual 5.4% from 4.8% in June. And its a growing concern.
Chinese exports fell 8.3% in July, which worse than forecast and the biggest drop in four months. It reinforced expectations that an increasingly concerned government will be forced to roll out more stimulus for the world’s second-largest economy.
But unlike previous occasions, China is restricted in what it can do. It has too much debt and too many financial stretched local governments and companies, especially in property and resources (coal, aluminium for instance).
The 8.3% slide was much deeper than the 2.8% rise in June. Imports also dropped sharply – down 8.1% from the 6.6% drop in June. That left a trade surplus of $US43 billion, less than the $US53 billion forecast and the $US46.5 billion surplus in June.
But while the sharp fall in imports led some of suggesting domestic demand is weakening, the volumes and prices of the major imports tell a very different story. In fact much of the immediate commentary at the weekend missed the impact of the slide in commodity prices in July (and cumulatively)
For example, China’s crude oil imports, by volume, rose to a record on a monthly basis as global oil prices eased through the month low oil prices (and hit their second lowest level of the year on Friday).
China imported 30.71 million tones of crude oil or 7.23 million barrels a day in July, up 4.1% from June, according to data from China’s General Administration of Customs.
China also lifted coal imports in something of a major surprise – after cutting them in June. Imports totalled 21.26 million tonnes of coal in July, up 28.1% from June, as buyers took advantage of weak global prices.
In fact coal deliveries reached their highest level since last December. Coal imports over the first seven months as a whole reached 121 million tonnes, still down nearly 34% compared with the same period of 2014.
Soybean deliveries jumped 17.4% to reach a new record of 9.5 million tonnes, with buyers chasing cheap South American crop. Global prices eased during the month.
And despite a rise in prices in July, imports of iron ore also beat forecasts, jumping 15% from June to reach 86.1 million tonnes, its highest level since December, and one of the highest on record. The rise came despite a rise in stocks as steel mills eye the usual seasonal upturn in production over the next few months.
But with domestic demand weak, mills continued to boost steel exports, with shipments jumping 9.4% to 9.73 million tonnes over the month and an annual rate of well over 112 million tonnes.
Copper imports were flat from a month ago at 350,000 tonnes in July, with demand for spot copper still in a seasonal lull.
Looking at exports, shipments to the European Union fell 12.3% in July while those to the United States dropped 1.3% and there was a 13% slide in exports to Japan.
On Friday the central bank published a report warning of further economic weakness, but argued the economy needed a revamped growth engine, instead of short-term stimulus.
From the July data so far, its hard to see any prime candidates for retooling and boosting growth.
