China’s exports fell by 3.1% in June from June 2012. It’s the first drop in exports since the beginning of 2012 and the biggest monthly drop since October 2009.
Imports fell by 0.7% in June after dropping by 0.7% in May.
Economists had expected both imports and exports to rise. Economists surveyed by Bloomberg had forecast a 3.7% gain in exports and a 6% pick up in imports.
The drop in both imports and exports raised new fears that China’s economy would slow from the 7.7% annualized growth rate reported in the first quarter. Consensus expectations are for a drop to 7.5% in second quarter GDP numbers scheduled to be reported on Monday, July 15. But there are increasing fears that first quarter growth will come in below 7.5% and that would be a significant shortfall since the government’s target for economic growth in 2013 is 7.5%. Since China’s economic figures are widely regarded as subject to government “adjustment,” a drop below the 7.5% target would be a signal from China’s leaders that they are willing to sacrifice growth in order to fix problems with excessive credit growth in the shadow banking sector, to keep inflation under control, and to shift the economy from export-led growth to domestic consumption.
Those policies would be seriously disruptive to China’s domestic economy because they would overturn long-standing assumptions among investors, traders, and speculators about the government’s willingness to sacrifice just about everything else to growth.
Although we’ll have to wait and see what Monday brings in the way of news on GDP growth, today’s numbers are themselves significant movers for China’s trading partners. Exports to the United States and the European Union fell in June for a fourth straight month. Germany is by far the developed economy with the most exposure. Deutsche Bank calculates that German exports to China in the first quarter fell by enough, compared to the first quarter of 2012, to equal 0.5% of German GDP. The Financial Times has reported that about 15% to 20% of the earnings of the companies in Germany’s DAX index are “related” to China. So any further drop in China’s economy would be more bad news for a German economy that is already struggling.
There is some possibility that the situation for exports and imports isn’t as dire as the figures suggest. In May China’s regulators cracked down on fake trade invoices used to disguise illegal currency transfers. But given other numbers being reported from the Chinese economy and the likelihood that appreciation in the yuan is making Chinese goods less competitive, I think the downward direction in these numbers, if not the exact magnitude of the drop, is real.
Today’s data also makes yesterday’s cut by the International Monetary Fund in its forecast for Chinese economic growth look rather optimistic. The IMF cut its forecast for 2013 to 7.75% GDP growth from an earlier forecast of 8%. That still leaves the forecast above what looks to be the trend in the export and import numbers.
And it’s that difference between expectations and actual results that poses the biggest danger to the price of Chinese financial assets and to global markets outside China.
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