China’s Trade Surplus… To the Moon!
August 08, 2022
Read Time 2 MIN
China’s External Surpluses
China’s trade surplus topped USD100B in July – a historic record for a month (see chart below). What are the main takeaways? First, such a large trade surplus is growth-positive at the margin – an important consideration when other growth drivers (such as household consumption) are still soft, and the consensus growth forecast for 2022 has been cut below 4%. The contribution of net exports to China’s real GDP growth surged above 20% in 2020-21 – not a negligible amount. And this also suggests that authorities will continue to be super-conservative with any additional policy stimulus (on top of the infrastructure plan), focusing on specific sectors and specific issues (real estate). As regards the stimulus timeline, we would expect to see a lot of frontloading – forthcoming credit and money aggregates for July should provide more color (and evidence that this is indeed the case).
Global Growth Outlook
The second takeaway from China’s foreign trade numbers is that exports growth remains solid (up by 18% year-on-year), suggesting that the global supply chain disruptions might be easing (especially in Europe and Asia) and that the global growth backdrop might not be as dismal as news headlines suggest (I saw a couple of “Schroedinger’s recession” comments in my inbox this morning). Indeed, the latest labor report in the U.S. was quite upbeat, strengthened the market’s conviction about another large rate hike in September – the Fed Funds Futures currently price in +69.6bps vs. +56.6bps on August 1.
China’s Currency Depreciation
The last takeaway is that larger trade surpluses can translate into large(r) current account surpluses, which is one of the key fundamental drivers for the currency. Granted, there are other equally important factors – interest rate differentials (5-year yield differential between China’s government bonds and U.S. Treasuries is still negative and close to the widest – negative – point in years), foreign direct investments (down in Q2), portfolio inflows (we do not have the actual Q2 number yet, but most likely outflows – just as they were in Q1). But larger current account surpluses can partially compensate for these negatives, reducing the depreciation pressure on the renminbi and stabilizing the currency. Stay tuned!
Chart at a Glance: China Trade Surplus – Historic High Gets Higher
Source: Bloomberg LP
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
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Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.