At least it wasn’t a double-digit drop like February. That’s what people are saying about China’s export data for March, which fell 6.6% from a year ago.
After a more than 18% year-on-year drop in exports in the second month of the year, March’s contraction may feel milder that that but there is strong reason to believe that real exporters have taken a harder hit than in the last two months.
The keyword in Chinese trade data for more than a year has been “distortion.” The slowly but steadily appreciating yuan inspired traders to inflate the value of their shipments with the intention of bringing more cash onshore. This was done mainly through partners in yuan trading hubs such as Taiwan and Hong Kong. The proposition has looked less promising since the central bank pushed the value of the yuan downward in recent weeks. Hot money inflows have slowed down considerably.
The depreciating yuan, along with some seasonal factors such as Chinese New Year, led to the jaw-dropping collapse in February after exports beat analyst expectations just a month earlier.
Some of the distortion is starting to clear and a distinct difference can be drawn between the numbers for February and March. Some haze still remains, though. For example, exports in the first two months of 2013 surged by 23% when the market expected only 11% growth. Analysts should have seen the drop off from that towering base coming in February.
March’s data is strikingly different. Government measures had cooled much of the speculative cash inflows by the end of the first quarter last year. Exports grew by 10% in March 2013, spooking the market with the threat of a slowdown. Off the relatively low base, economists expected positive growth in exports between 4-5% last month. They didn’t get that; many may prefer the cloak of distortion to what is shaping up to be a clear slowdown.
One strong piece of evidence counters that negative view, however. London-based Capital Economics pointed out in a note on Thursday that, if Hong Kong and Taiwan are taken out of the export equation, shipments to the rest of the world would have grown by a healthy 7.8%; exports to the two offshore yuan centers sunk by a whopping 42% year-on-year.
“Our field study also shows that the exports are more resilient than what the headline data suggest,” ANZ Research said on Thursday in a note. HSBC economists say that exports likely grew by more than 5% in March if distortion from speculation a year ago is removed from the picture. Still, “March trade numbers disappointed,” HSBC said, “and the contraction in both exports and imports cannot all be blamed on base effects or seasonal distortions. Weak demand is the main culprit, both internally and externally.”
Activity inside of China is in some ways more surprising.
Imports fell 11.3% year-on-year, a further sign of waning domestic demand. The decrease in inbound shipments is also closely linked to exports because large quantities of raw materials are imported, processed and then re-exported. But the slowdown is also connected to products consumed on the mainland. Retail figures have looked bleak this year, falling to a 10-year low in the first two months.
Will the distortion ever end, and can the market adjust to meaningless and misleading trade data? That’s hard to say right now. Markets haven’t been hit hard by Thursday’s news. Perhaps stock traders learned a lesson from February. Coming off of a -18% base, next February’s data will undoubtedly be distorted too. The question is whether or not the market will remember.