- China’s trade report for December was underwhelming to say the least.
- Imports and exports recorded the largest year-ended contraction since the second half of 2016.
- If Apple’s share price is any guide, the decline in Chinese exports is likely to get worse before it gets better.
- ANZ Bank says it’s now “likely” that China will experience a trade recession.
Even with low expectations heading into its release, China’s December trade report was a horror show.
From a year earlier, the value of exports and imports tumbled by 7.6% and 4.4% respectively in US dollar terms, coming in well below market expectations that were actually centred around a modest increase.
Underlining just how weak the result was, the year-ended percentage decline in both exports and imports was the largest since the second half of 2016, another period when concerns about the Chinese economy were acute.
To Raymond Yeung, Chief Economist for Greater China at ANZ Bank, the speed of the trade downturn, impacted not only by a reversal of front-loading of orders before US and Chinese tariffs kicked in but also a slowdown in both the Chinese and global economies, means the risk of a trade recession has increased.
“A trade recession is likely,” he says.
“The anecdotal reports of Chinese exporters front-loading their cargoes ahead of tariff hikes in 2019 may explain the strong exports seen in late 2018. However, in the months ahead, we are likely to see some payback of the earlier strength in exports.”
Apple’s share price, having tanked by over 35% from the record high of $233.47 back in October last year, is one factor that makes Yeung uncomfortable about what lies ahead for the trade-exposed parts of the Chinese economy.
“The share price of Apple remains our preferred gauge of China’s export outlook,” he says, pointing to the chart below.
“We believe the financial market provides the most accurate assessment of the global electronics industry as the share prices of market leaders reflect the views of industry experts on the life cycles of electronic products.
“Even though there are signs that the US and China may be able to reach a trade ‘deal’, the reality is that the US economy is slowing, hurting the demand for China’s products.”
And it’s not just Apple’s share price that has Yueng on alert for decline in exports over the first half of the year.
With the new export order component of China’s manufacturing PMI having fallen over in the second half of 2018, he says export volumes are likely to follow suit, pointing out the correlation between it and the PMI looking six months ahead is more than reasonable at 0.7.
“China’s new export orders sub-index in the manufacturing PMI leads monthly exports with the strongest correlation of six months,” Yeung says.
“The decline in China’s export orders data over the second half of 2018 therefore signals a downtrend in exports over the first half of 2019.”
Yeung is not the only economist to warn that Chinese exports are likely to get worse before they get better — even with the prospect of US-Sino trade deal being reached — should the leading indicators on global economic activity be right about a slowdown in the coming quarters.
“With global growth set to cool further this year, exports will remain weak even if China can clinch a trade deal that rows back Trump’s tariffs,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.
Julia Wang, Greater China Economist at HSBC, says China’s December trade report, along with dimming prospects for an export recovery in the near-term, may see policymakers roll out further stimulus measures to support economic activity despite the prospect of a trade deal.
“Signs of weaker global growth as well as trade policy uncertainty will continue to weigh on China’s external sector in 2019,” she says.
“Since the G20 meeting in December 2018, news on the trade talks between the US and China have become more encouraging. This should continue to drive some optimism that the hit from the tariff war, though not yet over, may eventually prove less than feared. And Chinese policy makers will no doubt continue to work hard at de-escalation.
“Policies to support domestic demand, especially tax cuts should be accelerated, in order to cushion the impact on business sentiment and activity.”
After a series of weak Chinese economic data releases for December, market attention will now turn to monthly readings on industrial output, retail sales and urban fixed asset investment that will be released on Monday, January 21, the same day as China’s Q4 GDP report.
If the early indicators are any guide, aside from fixed asset investment which is already starting to pickup thanks to previous stimulus measures, they too are unlikely to deliver good news on the momentum the Chinese economy was carrying heading into 2019.