China Export Growth Misses Forecast, Trade Surplus Falls

China Export Growth Misses Forecast, Trade Surplus Falls

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2014-01-10 02:00 GMT | [CNY - Trade Balance]

• past data is 33.8B
• forecast data is 31.2B
• actual data is 25.6B according to the latest press release

if actual > forecast = good for currency (for CNY in our case)

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China's exports growth eased more than expected in December, while imports beat expectations signaling robust domestic demand, the latest figures released by the General Administration of Customs showed Friday.
As a result, the trade surplus missed forecast sharply at the end of the year.

Exports grew 4.3 percent year-on-year in December, slower than a 5 percent expansion forecast by economists. The pace of growth decelerated sharply from November's 12.7 percent increase.

Meanwhile, import growth accelerated unexpectedly last month, taking the annual growth rate to 8.3 percent. This followed a 5.3 percent gain in November and exceeded forecasts for a 5 percent rise.

The trade balance showed a surplus of $25.6 billion, down from $33.8 billion in November and $32.15 billion surplus forecast.

In the whole year of 2013, exports recorded a gain of 7.9 percent compared with 2012. Imports rose 7.3 percent. The trade surplus for the year amounted to $259.75 billion.

The country's exports and imports value totaled $4.16 trillion last year, recording an increase of 7.6 percent from the previous year. Customs spokesman Zheng Yuesheng said that this was the first time the total value exceeded the $4 trillion-mark.

Zheng also noted that China's external trade environment will improve in 2014 as global recovery strengthens.

Growth in China's manufacturing and non-manufacturing sectors slowed in December, according to the latest purchasing managers' surveys. All together, the indicators suggest that the recovery of the world's second largest economy is yet to gain a firm footing.

Chinese leaders have pledged to achieve a "reasonable" growth for the economy in 2014 while also pressing ahead with the economic reforms.

The Chinese economy expanded 7.8 percent in the third quarter, the fastest pace in 2013, government data showed in October. The statistical office is scheduled to release the fourth quarter GDP data on January 20.

China Economy to Dictate Global Monetary Policy, Currency and Commodity Prices?

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The recent credit crunch in China is due to PBOC’s (People's Bank Of China) or China's Central Bank refusal to act as the lender of last resort so as to help banks to get out from their financial mess. It also demonstrates that Central bank is willing to allow market forces to play a bigger role in the daily operations of the banks. This also means that banks will have to be on their own since PBOC has indicated that it will not be bailing them out anytime soon. As a result banks will have no choice but to be more conservative in their lending policies. What PBOC hope to achieve out of this?

Problem with Shadow Banking System

One reason for not intervening is to punish China’s shadow banking system which according to Fitch Ratings is equivalent to 60% of China’s GDP. Due to the strict lending practices or rather priority of bank loans given to SOEs (State Own Enterprises) there are not much funds left for the private sector. As a result they turned to the illegal or underground money lenders for their borrowings.

Due to the nature of the loans which are short on maturity and expensive in yield, it can present grave problem to China’s economy. Since the Shadow Banking System is out of its jurisdiction, it is unable to estimate the extent of the loan exposures and also the portfolio of their customers. It is estimated that many small to medium size developers are getting their finances from it and hence if the economy were to reverse, the authorities afraid the developers will start liquidating their housing stock to stay afloat. Once the selling begins and when selling begets selling, real estate prices will start to collapse.

Cracking Down on Fake Invoices

Another reason for PBOC’s tightening is to get rid of the bulk of the fake invoices coming in from Hong Kong and Taiwan. Fake invoices have always been a thorn in the flesh for the Chinese authorities. It not only reduces the Government tax collection but also helps to inflate the export figures and hence resulted in distorted trade statistics. Due to its control over the Yuan, The State Administration of Foreign Exchange (SAFE) which governs the country’s foreign exchange activities will make it very difficult for foreigners to bring money into China. The reason behind is to be able to control their movement. Say if I would like to buy an apartment in China for the price of $5 million and if I were to go through the normal channel, there will be a long wait and also I have to pay a very unfavourable exchange rate.

Hence, to bypass this procedure there is an alternative method whereby the developer can arrange for an exporter to issue me an invoice on something say car tires which I never received. Then I will send them the $5 million plus some extras for their work (commission) in money laundering. Hence I can then purchase my condominium without much hassle but my invoice will be added to the balance of trade and finally the current account in the country’s balance of payments. As a result it will help inflate the trade statistics. The following is China’s GDP growth since 2004.

As can be seen China’s GDP has been growing at the rate of about 8% per annum for the past 20 years. However the Chinese authorities found out recently that part of the GDP growth has been over-inflated due to fake invoices. To find out the extent of the fake invoice, the Chinese authorities need to cross audit its import with the exporting countries such as Taiwan and Hong Kong. Theoretically, China’s imports should be close to Taiwan and Hong Kong’s exports to China then a cross audit should reveal the size of the fake invoices. If the number of fake invoices are considerable then their national exports statistics will be way out of China’s import statistics.



How PBOC dictate our Monetary Policy?

In recent years, China has become increasingly more important to Malaysia in terms of trade. China is Malaysia’s largest import partner and at the same time provides the second largest export market for Malaysian goods. The following charts show Malaysia’s trading activity with its partners.

Malaysia Total Imports 2012
Country	Import ($Bil)	% Share
China	91.6	15.10%
Singapore	80.48	13.30%
Japan	62.39	10.30%
USA	49.09	8.10%
Thailand	36.31	6.00%
Malaysia Total Exports 2012
Country	Export ($Bil)	% Share
Singapore	95.48	13.60%
China	88.75	12.60%
Japan	82.93	11.80%
USA	60.79	8.70%
Thailand	37.71	5.40%
Total Trade (Imports + Exports)
Country	Imp+Exp ($Bil)
China	180.35
Singapore	169.23
Japan	145.32
USA	109.88
Thailand	74.02

The above table clearly shows that as of 2012, China is our biggest trading partner and hence we are increasingly dependent on China for trade. As a result we are redefining our monetary policy towards China’s policy direction. We have to follow China’s domestic monetary policy and its external exchange rate policy very closely. Since the Yuan is pegged to the US$ and any downturn in the dollar will also cause the Yuan to depreciate. If our exchange rate policy does not respond to the depreciation of the Yuan then it will automatically affect our exports due to our expensive Ringgit.

We are living in a globalized world and China has many trading partners supplying almost the same goods and services. Comparative advantage is almost non-existent hence price will be the main determinant for the demand and supply of the goods and services. For example in the electronics sector, Malaysia’s Carsem and Unisem are not the only Semiconductor and Test Services (SATS) players around. There are bigger and more cost-effective players like ASE and Powertech Technology from Taiwan. Thus, if the Taiwanese Government responds to China’s Yuan depreciation by doing the same to its NT dollar, then products from Taiwan will certainly have a price advantage over us. To compete we have no other choice but to follow.

The reason to follow China’s Yuan’s direction is due to the fact that there is a limitation by central banks to promote both the monetary and exchange rate policy at the same time.
Monetary policy deals with the domestic issues such as price stability, full employment and sustainable economic development.

Exchange rate policy on the other hand deals with the external sector such as sustainable balance of payment, favorable exchange rate regime and also a sustainable foreign reserve position.

As a result of globalization, the implementation of policy objective on both monetary and exchange rate has somehow been converge. For example monetary policy implementation has increasingly dependent on techniques that affect the money supply in the banking system. In trying to achieve monetary targets, central bank will either expand or contract the money supply either through open market operations, interest rate or the Statutory Deposit Ratio (SDR).

As for the exchange rate policy, Central Banks are also increasingly depending on currency intervention. Intervention is a situation where central banks use open market operations to buy and sell foreign currency so as to influence its domestic currency. However such operation will also influence the foreign reserve holdings in the country. This is because when the central bank buys foreign exchange it will need to sell its own currency and similarly when it sells foreign exchange then it will be buying its own currency.

The interrelationship between the exchange rate and monetary policy is very complex. To simplify matter, I present you the following example. Say for example Bank Negara Malaysia wishes to promote a tight monetary policy so as to take some heat off the economy. The basic policy tools available are as follows.

1. Open Market Operations (OMO). By this we mean the Central Bank will sell securities in the Secondary Market to financial institutions so as to mop up the excess liquidity from the market.
2. Interest rate hike. When interest rate is hiked then the cost of borrowing will increased and hence the demand for money will decrease.
3. Increase the Deposit Ratio that commercial banks need to adhere to say from 5% to 10%. Thus having to set aside more funds to meet the deposit ratio, banks will have less to lend out. The fractional reserve banking system works two ways. In this case when the Central Bank increases the ratio then the ability of banks to lend is reduced by half. To calculate the point of leverage we can use the following formula.

100/Deposit Ratio, hence in this case the leverage has been reduced from 20 (100/5%) to 10 times (100/10%). In the end, banks will need to recall some of their loans from the market so as to adhere to the new Deposit Ratio.

In this case if the hike in interest rate is a policy of choice then naturally it will attract an inflow of capital from international investors which will help appreciates the Ringgit and increase our foreign exchange reserves. On the other hand the open market operations of the exchange rate policy also tend to increase or decrease the foreign exchange reserves through the buying and selling of foreign currency. When our Ringgit appreciates then our exports will be more expensive while our imports will be cheaper. Hence, this will further deteriorate our exports but at the same time increases our consumption due to the cheaper imports.

The extent of the exchange rate policy targeting depends on the size of our domestic money market. If our daily currency intervention is large relative to the size of our domestic money market then it is feasible to use it as a domestic monetary policy tool. However such operation can only be performed in an environment called
unsterilized foreign exchange intervention due to the size of netting.

Malaysia’s Exchange Rate Targeting

Since China’s Yuan is pegged to the US$, PBOC does not need to intervene too much in its daily exchange rate setting and thus can concentrate more on its domestic monetary policy. Hence, PBOC can now have more leeway on its monetary policy to promote internal stability.

Malaysia on the other hand has to target its exchange rate through its managed or dirty float regime. It is very difficult to target both unless Malaysia is willing to ‘free to float’ the Ringgit or lose some sovereignty over it. This means that Malaysia will lose control over the Ringgit and its level to be determined by market forces in the short term. But we doubt Malaysia is willing to do that as with other countries such as Turkey and Brazil as they consider it is too dangerous to let the market decide the exchange rate.

So, how China is going dictate Malaysia’s Monetary Policy? The answer is size matters. Being our largest trading partner, whenever China embarked on either a loose or tight monetary policy our Bank Negara Malaysia will have to follow. As a result, how will the recent credit crunch in China going to affect Malaysia?

Declining prices in Most Commodities

Malaysia’s Credit Squeeze is a direct result of China’s monetary tightening. Malaysia’s monetary policy is closely tied to China’s due to the large extend of its trade with China. When our exports are dependent on China then naturally our domestic monetary policy will have to readjust according to the monetary conditions in China. Due to the credit crunch in China, Malaysia’s exports to China will likely to be reduced in the coming months and hence this will put pressure into commodity prices as we saw back in the financial crisis in 2008. Commodity prices then declined on the average of 40-60%.

014-01-10 02:00 GMT | [CNY - Trade Balance]

• past data is 33.8B
• forecast data is 31.2B
• actual data is 25.6B according to the latest press release

if actual > forecast = good for currency (for CNY in our case)

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EURUSD M5 : 6 pips price movement by CNY - Trade Balance news event :

USDCAD M5 : 9 pips price movement by CNY - Trade Balance news event :

AUDUSD M5 : 19 pips price movement by CNY - Trade Balance news event :

XAUUSD M5 : 539 pips price movement by CNY - Trade Balance news event (The pip cost for 1 ounce of Gold (minimum trade size) is $0.01 per pip) :

CAUSE FOR OPTIMISM

So here's a tip – if you want to form a view on China over the next year ignore the headline economic data and focus on reform.

For it is reform and nothing else that will keep growth at elevated levels.

Already there's some cause for optimism.

Andrew Baston, the China economist at Gavekal Dragonomics, has identified financial liberalisation, fiscal reform and business deregulation as three "main areas of achievement" so far.

"Some economic reform projects have indeed made real progress," he says.

He is among a growing chorus of analysts who say China is no longer paralysed by inaction.

This has gone some way to silencing the China bears in recent months, partly because the leadership has also proven itself surprisingly deft at managing some of the bigger problems.

The property market looks to have been stabilised, the shadow banking sector tamed and a solution found to the indebtedness of local governments.

As UBS's Wang Tao said in a recent report: "What happened to the crisis?"

MAIN GAME

Topping the Party's list of economic achievements has been resisting the urge to allow the yuan to devalue in line with the yen and euro, which would have provided an easy boost to the manufacturing sector.

Not doing this has taken some geopolitical heat off of Beijing, while forcing manufacturers to retool, upskill and move quickly to higher value products.

Such a transition will take many years, but in the meantime, the strong-yuan policy has allowed the People's Bank of China, the central bank, to move more quickly on interest rate liberalisation and opening up the capital account.

This has advanced to a point where China is now expected to lift capital controls for mainland residents from their current level of $US50,000 ($65,700) a year.

Such a move was effectively flagged last week when the state media said a pilot program would soon be launched allowing mainland residents to invest directly in offshore bonds and equities.

EASY WINS

At the same time the government has taken a few easy wins. It announced import duties on cosmetics, shoes and clothes would be slashed in an effort to boost domestic consumption. Economists have urged the government to do this for years as higher prices on the mainland only encouraged parallel trading, smuggling and tourists to shop overseas.

Perhaps even more significant than the announcement however was the fact that Beijing slashed the duties, by half on average, in the absence of a free trade agreement or pressure in another area.

It was straight-out pragmatic reform.

the source