China: Downward export surprise in September

September exports surprised on the downside with 8.1% YoY growth (INGF: 8.6%, consensus. 10.0%, prior 5.6%). The year-to-date growth, also 8.1% YoY, was up from -8.6% year ago yet still an underperformance among Asian economies.

Part of the blame could lie with the structural shift in China’s manufacturing, especially the drive to reduce excess capacity in sectors such as coal and steel, while China also seems to be losing its lustre as the world’s factory. Machinery and transport equipment have historically been China’s main export drivers, accounting for about a half of all goods exports.

Weak Chinese exports were at odds with strong bounce observed in exports from Korea and Taiwan in the last month whose dominant export destination has been China. As such, China’s 18.7% import growth in September, although well above expected (INGF 13.5%, consensus: 14.7%), doesn’t come as a real surprise. The 17.4% YoY YTD import growth was even a bigger positive swing (than exports) from -8.3% a year ago. The trade surplus of US$303bn in the first nine months of the year was US$76bn narrower than a year ago.

As well as reflecting structural shifts and strong domestic demand, China’s narrowing trade surplus may also reflect its position in the regional production of next-generation flagship smartphones. China tends to be located further down the production chain than, say, Korea or Taiwan, whose components outflows are pushing up exports in these economies. As we near the West’s holiday season, the export of finished handsets from China is likely to pick up, while we may see exports of integrated circuits easing back, helping China to play catch-up on trade with other Asia economies.

A silver lining in China’s second consecutive year of narrowing trade surpluses is that it should deflect the US Treasury’s attention from China as a potential currency manipulator in its October report. Our Greater China economist Iris Pang forecasts USD/CNY at 6.50 by end-2017 (spot: 6.59, cons: 6.65) and further 4.5% appreciation in 2018.