Anyone awaiting a Chinese construction boom after July’s big increase in iron ore imports may be waiting longer than expected. Source: Guang Niu/Getty Images.
China’s July imports and exports rebounded big time from a disappointing June, and investors seemingly breathed a collective sigh of relief. Some even went so far to claim this signals “the end to worries over China for this year.” Which would be nice, but it seems a big stretch. Trade, though important, is only a piece of the whole economic puzzle. Better-than-expected results might lift investor sentiment a bit, but one piece of economic data isn’t a huge market driver. Other fundamentals likely hold more sway over stocks in China and globally.
On the surface, Chinese trade looked rosy—exports rose +5.1% y/y, and imports jumped +10.9% y/y. But a deeper look reveals a more mixed outlook. Increased exports to the US and Europe helped boost Chinese exports in July, but foreign demand often varies from month to month. Imports, meanwhile, rose primarily on iron ore last month—a point many observers cheered given weaker Materials imports in recent months. Iron ore, a key steel component, is considered a key indicator of Chinese construction growth looking forward. But July’s increase doesn’t necessarily herald a construction boom. For one, most new projects are left over from last year’s stimulus push—long known to investors. Less clear are the government’s forward-looking plans. Plus, higher iron imports appear tied more to inventory restocking after recent drawdowns. Iron ore prices also rose some in July, which may have given the imports figure another small, likely temporary boost—the quantity imported didn’t increase quite as much as folks seem to think. In the end, it seems July’s data just were—and likely doesn’t indicate much for China looking forward. And that’s just in line with most monthly data: They’re short-lived and volatile.
But monthly numbers aren’t useless for investors! How headlines interpret the data can yield fresh insight into investor sentiment. Only last month, investors got jittery when China’s June exports fell -3.1% y/y and imports -0.7% y/y, and their expectations fell. Now, they’re surprised by the quick rebound—expectations were just too dour. That’s broadly true in many segments of the global economy, and it’s a good sign this bull has room to run.
And maybe this round of better-than-expected data yields a small sentiment pop—at least in the near term. This may boost markets, but also just in the near term. Longer-term, one month’s data aren’t that weighty. And if sentiment gets too detached from reality on the positive end—possible, based on some of the more enthusiastic headlines—investors could be disappointed down the road if trade weakens again. But it’s all short-term noise. In the mid to longer term, fundamentals far outweigh wild shifts in data and sentiment. Case in point, China still expects 7.5% y/y growth in 2013, despite the pretty drastic changes in trade data from June to July. Short-term data volatility averages out.
Not that investors should be pessimistic about China’s future economic prospects. While many would lament 7.5% growth as relatively slow for the Middle Kingdom, we’d remind readers of a couple things: First, economic growth isn’t the only driver of global stocks—it can help! But stocks longer-term are more impacted by earnings and earnings expectations. Earnings and GDP are two quite separate things. Further, 7.5% growth in any other country would be considered pretty darn strong, even if it isn’t double-digits like in the past. And as China hasn’t contracted in around 20 years, the base off of which the country grows hits a new high every year. So even though the percentage growth rate might slow, in dollar terms, China likely still contributes vastly to overall global output and trade—which has proven rather resilient lately. That should aid corporate profitability—and stocks—worldwide.