China’s Trade Blues

Chinese exports fell -3.1% (y/y) in June, renewing some investors’ long-standing Chinese economic jitters. The trade report isn’t great by any stretch, but a peek under the hood suggests investors needn’t fear a hard landing. Further growing pains might be in store, but global stocks should hold up fine.

June’s trade report was China’s first since authorities cracked down on some exporters’ false reporting. To help officials control the money supply, China has super-strict capital controls. To get around these and bring more investment capital into the country in recent months, some companies inflated export reports—either submitting customs bills for orders that didn’t exist or overstating transaction values. Chinese authorities believe this was widespread in Q1, resulting in wildly inflated trade data—China reported +18% y/y export growth in Q1, but after stripping out dirty data, estimates adjusted to about +5%. Still healthy by many standards, though. The State Administration of Foreign Exchange (SAFE) cracked down on false reporting in May, and June’s report was the first to reflect these adjustments. This could skew Chinese trade data for a few more months—officials have focused on exporters’ Q1 reporting shenanigans, but the data could be dirty much further back, which would distort the year-over-year comparisons. That’s a statistical quirk, not a sign of fundamental economic weakness.

That said, the data adjustment isn’t the sole reason for exports’ drop. Weaker exports likely also reflect weaker demand globally—not great news, but slowing economic growth has been pretty widely discussed for some time, limiting its market-moving power. This is especially true when you consider the regional breakdown. Exports to the eurozone declined -8.3% y/y—not surprising considering it’s still in a recession. Exports to Japan fell -5.1% y/y—as we’d expect, considering the weak yen’s impact on import prices and still-weak domestic demand. Exports to Emerging Markets, however, held up better—consistent with faster growth in that category. More importantly, none of this is forward looking. Monthly reports always fluctuate and demand for Chinese goods could very well pick up as the year progresses.

One aspect of June’s trade report does signal some bumpiness in China’s economy, though. Imports declined slightly (-0.7% y/y), signaling slightly weaker domestic demand. This isn’t necessarily a sign of a hard landing, but it does perhaps speak to slower growth in Q2—something Chinese officials have encouraged investors to prepare for. After the data were released, Premier Li Keqiang announced officials won’t implement more stimulus, as growth still seems on pace to hit this year’s +7.5% target. Instead, they’ll concentrate on implementing structural reforms to modernize the financial system, improve private firms’ access to credit and shift to a services- and consumption-driven economy.

With this shift in progress, China likely won’t return to the gangbusters, double-digit growth of yore—larger, service-based economies typically grow more slowly than smaller infrastructure- and export-driven nations. China’s growing up. But it doesn’t need astronomical growth in order to contribute mightily to global trade and GDP. Even if it falls a bit short of the +7.5% target, it likely adds more value than in years past since it’s growing off a much bigger base.

Nor is whopping Chinese growth necessary for global markets to keep rising. Or even for Chinese stocks to do fine—stocks aren’t solely a function of economic growth. Economic reform is an important driver, too. As long as Chinese policymakers continue laying the groundwork for a freer, more sustainable economic model, investors have every reason to shrug off slower growth.