China’s trade report for April came in well below expectations, reigniting calls for further stimulus from Beijing. Exports fell 6.4% y/y last month, completely missing an expected 1.6% gain, and imports fell 16.2%, also missing expectations. While the market is no stranger to soft trade numbers out of China, this time around it cannot blame the numbers on Chinese New Year.
In Fact, the numbers highlight a problem for the PBoC, the yuan. While exports to the US remain solid, it’s exports to Japan and Europe that are suffering due to a strong yuan against their respective currencies. Both Europe and Japan are engaging is some form of QE which is making their respective currencies unattractive. The PBoC would ideally like a weaker yuan to support its struggling export sector, but if it weakens the currency it risks increasing the amount of capital leaving China.
If the PBoC can’t join the global currency war, what can it do?
The PBoC is expected to continue to loosen monetary policy to support the economy. The bank has already cut interest rates and the RRR, but it still has a lot of room to loosen policy further. The problem is that this easing isn’t finding its way in to the real economy because banks remain cautious and unwilling to lend. The solution therefore, may have to come from the fiscal side of the equation, although we aren’t expecting anything like the massive stimulus injections that followed the GFC.
China’s disappointing trade numbers resulted in a small sell-off in Asia’s main commodity currencies, NZD and AUD. However, the market is used to soft trade numbers out of China and it’s already expecting further stimulus, thus we aren’t surprised of the soft reaction in the FX market. However, the reaction of the PBoC will be very closely watched by the market.