Trade figures out of China today failed to quell fears that the slowdown in the world’s second largest economy could be getting deeper. Chinese exports to the rest of the world slumped by 25.4% year-on-year in February, far worse than estimates of a 12.5% drop. This was the fastest decline since 2009 at the height of the financial crisis. Imports also continued to shrink, declining by 13.8% year on-year against estimates of a 10% decrease. The trade balance halved from the previous month to $32.6 billion in February.
However, the picture may not be as bad as the figures portray as the main reason for February’s slump was due to distortions from the Lunar New Year holidays. In 2015, the holidays fell at the end of the month so a lot of the disruption to trade last year occurred in March.
Chinese export and import growth have been on a steady downtrend since 2010 and saw negative growth for much of 2015. Apart from a weak global recovery since the financial crisis, a rising yuan during this period may have also contributed to the country’s deteriorating trade position. The People’s Bank of China caused market panic when it unexpectedly devalued the yuan in August 2015. The subsequent market turbulence that followed made it difficult for the central bank to let the currency depreciate even more and has since been intervening heavily in the foreign exchange markets to keep the yuan steady.
The yuan is currently around 5% weaker against the US dollar since before August’s devaluation and this may provide some boost to exports in the coming months. Government efforts to stimulate the economy have so far failed to reverse a slowing economy.
At a meeting of the National People’s Congress (NPC) over the weekend, the government set a target of economic growth of between 6.5-7% for 2016. In 2015, annual growth hit a 25-year low of 6.9%. The government also pledged to increase state spending by raising the fiscal deficit target to 3% of GDP this year from 2.3% in 2015. At the NPC session, the government announced a series of measures to revive growth and reform the economy, including to create 10 million new jobs, speed-up supply side reforms and resolve overcapacity issues.
China’s main stock indices closed higher today and the yuan was steady around 6.50 per dollar. The muted reaction to today’s and recent negative data may be a sign that markets have now adjusted their expectations that growth in China is not about to return to pre-crisis levels anytime soon. It could also mean that traders are becoming more confident about Chinese authorities’ ability to stabilize the economy.
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