TRADE BALANCE DISSAPPIONTS
The world’s second largest economy may be in more trouble than we think. The Trade balance showed a surprising decline in Chinese exports in March falling to $3.1 billion from $43.4 billion. Exports tumbled 14.6% from on a year on year basis as a result of weak global demand and the effect of the lunar new year. Imports on the other hand declined by 12.3%, slightly worse than forecast of 11.7%. Thus putting the trade surplus at $3.08 billion as China’s economic decline continues.
It is no surprise at this point that the economic growth in the last quarter is the slowest since the last quarter in 2009. Inline with economists’ forecast, the GDP for the first quarter of 2015 came at 7%. Just like in the US, the output, investment and retail data pointing to a deepening slowdown. China’s leaders have expressed a level of tolerance for a slower expansion as they consider it a small price to pay in the time being as they seek to rein in debt risks, corruption and pollution.
INDUSTRIAL OUTPUT DECLINES
Industrial production also reflected the weakness in the economy. Data for the month of March showed industrial production rose at the weakest pace since November 2008. The figure came at 5.8%, below broad estimates of a 6.9% increase in change in the total inflation-adjusted value of output produced by manufacturers, mines, and utilities. Fixed-asset investment excluding rural areas grew by 13.5% in the first quarter, less than forecast of 13.9% and Retail sales climbed 10.2%, compared with the 10.9%median projection. The all round sluggishness in economic activity is becoming more and more obvious.
ADDITIONAL STIMULUS IMMINENT?
The slowdown in growth already prompted a bout of two interest rate cuts, relaxed home-purchasing rules and a reduction in the bank reserve requirements so as to boost lending. Recent data may require that policy makers consider an expansion of this stimulus. According to Bloomberg, an economy-wide inflation indicator turned negative for the first time since 2009, suggesting room for further monetary easing. The nation needs to be vigilant about deflation risks and policy makers have “room to act,” People’s Bank of China Governor Zhou Xiaochuan said last month. Broad deflation would escalate borrowers’ debt burdens.
Even with the bout of disappointing data, China insists on a strong Yuan, putting the country under widespread criticism and pressure. The artificial strength of the Yuan seems like an obvious attempt to make it expensive for China’s companies to export for reasons such as:
- To wean itself off its dependence on exports and move towards a more services-oriented economy.
- A sharp weakening of the Yuan against the dollar may create more political resistance to Yuan inclusion to the IMF’s Special Drawing Right (SDR). The Chinese government are lobbying for the currency to be included in the list international trade currencies with the likes of the Euro, the US dollar, The Yen and the Pounds sterling, making it one of the main global benchmark currencies.