On Thursday, Goldman suggested that the combination of soft commodity markets and the Chinese transition from investment to consumption will weigh on dry bulk trade — and by extension, on shipping rates — until at least 2020. This assessment served to validate a theme we’ve been pushing for quite some time. Namely, that although a global supply glut caused by overly optimistic assumptions about both China’s economy and about central banks’ collective ability to engineer a robust post-crisis recovery has without question weighed on shipping rates, the more fundamental problem lies on the demand side and you can’t mention sluggish demand without discussing China. Here is how we summarized the situation:
Meanwhile, we’ve exhaustively documented the laundry list of signs that point to dramtically decelerating economic growth in China, including falling metals demand, collapsing rail freightvolume, slumping exports, a war on pollution that may cost the country 40% in industrial production terms, and, most recently, a demographic shift that’s set to trigger a wholesale reversal of the factors which contributed to the country’s meteoric rise. All of this means that the world’s once-reliable engine of demand is set to stall in the years ahead.
Overnight, we got still more evidence of China’s hard landing when trade data for April missed estimates across the board as exports slumped more than 6% on the heels of March’s abysmal 15% decline and imports fell 16%. The data seems to point to lackluster demand both domestically and abroad, and as BNP notes, it’s not the yuan’s dollar link that’s weighing on trade — it’s demand.
The April external trade data disappointed market again. Exports growth remains in negative territory, despite the decline has to some extent narrowed. The market consensus had expected a moderate recovery of export in April, mainly due to the favourable base effect. The decline in imports growth has further deteriorated in April, which has mirrored the lacklustre domestic aggregate demand.
The export weakness was still broad based for almost all trading partners. Export to US increased by 3.1% y/y, compared to 8% decline in March. It might reflect the demand from US has slightly recovered after a soft growth Q1 momentum. The decline in export to EU narrowed to -10.4% y/y from -19% y/y in March; Exports to Japan and ASEAN countries decreased by -13.3% y/y and -6.6% y/y, respectively, from -24.8% and -9.3% in last months.
The decline in imports growth expanded to 16.1% y/y, from 12.3% drop in March. The soft international commodity prices continue to drag the import growth. In the first four months, crude oil import plunged by 43.1% y/y at value, despite the imported volume has increased by 7.8% y/y. Imports in iron ore and coal also plunged by 44.8% and 49.7%, respectively.
In first four months, the total external trade declined by -7.3% y/y, which has been significantly lower than the official external trade target for 2015 at 6%.
Net exports rose to USD 34.1bn, from an average of USD 21.1bn in the three months before.
It is clear that the correction in external trade cannot be easily explained by the CNY distortion factor. The exports would be more struggling from the soft demands from the major trade partners and deteriorating international competitiveness in the low end manufacturing sector.
And as we discussed in detail in “How Beijing Is Responding To A Soaring Dollar, And Why QE In China Is Now Inevitable”, it’s not as simple as devaluing the yuan to boost exports when you’ve witnessed $300 billion in capital outflows over the past four quarters alone and so we’ll leave you with the following which can be summed up as simply as “between a rock and a hard place.”
The government should already clearly realize the further downward pressure of the foreign trade. But we still maintain the view that the governments would be reluctant to allow an aggressive RMB depreciation to stimulate the export.