China export surge heightens risk of trade friction

China exports surged in June, widening a trade surplus that critics say fuels global imbalances and increasing the risk of trade friction with the US.

Exports grew 43.9% year-on-year in June, on top of a breathtaking 48.5% growth in May; at the same time, import growth slowed to 34.1% y-o-y from 48.3% in May. As a result, China’s trade surplus widened to $20 billion in June, against $19.5 in May.

Some economists believe the latest trade data is bad news for the prescribed effort to rebalance global economic growth and trade balances. “China’s strong export data adds to global imbalances,” points out RBS chief China economist Ben Simpfendorfer. “The fact that both China’s exports to the US and its exports of steel are accelerating is a recipe for worsening trade protectionism, especially ahead of US mid-term elections.” It would additionally fuel criticism of China’s management of its currency, the renminbi.

The weaker import data will “harden fears that China’s slowing economy is providing less support to the global economy,” adds Simpfendorfer. Imports of base materials from the Asean bloc of countries and from North Asia are weakening the fastest, he reckons, “consistent with China’s weaker investment demand.” Imports of equipment and electronics, typically used in export processing, are relatively firm.

The size of China’s trade surplus means that international pressure on China to allow a faster pace of yuan appreciation will remain, says Moody’s Economy.com economist Alaistair Chan. But in his opinion, the gains in the currency that the Chinese government will allow will be limited, particularly because the recent removal of export subsidies in 406 product categories will slow exports in the coming months.

Barclays Capital analyst Peng Wensheng, in fact, reasons that the strength of China’s exports in June may partly be associated with the removal of export tax rebate for the 406 commodities, which takes effect on July 15. “Exporters may have moved forward shipments before the new policy starts to take effect,” adds Peng.

Not everyone sees China’s export surge in June as sustainable. “Given the moderation in US growth and the expected double-dip recession in Europe, China’s exports are likely to slow in the coming months,” says Chan.

Barclays Capital’s Peng too believes that export growth will “likely slow in the second half of the year, in view of base effects, effective exchange rate appreciation during the past few months and downside risks in the global economy.”

UBS economist Duncan Wooldridge, in fact, notes that Asian exporters are “experiencing a Wile E Coyote moment” — as in the Roadrunner cartoons, where the coyote runs off a cliff and remains suspended in gravity for a while, but inevitably falls. “Asian exporters are set for a tumble,” he adds, pointing to the minus 0.1% fall in the G7 leading indicator index at the OECD as a sign that it is “flirting with a recession signal.”

“This implies excess capacity for global manufacturing, which could pressure Asian exporters to cut prices over the next year or two, once demand slows again,” reasons Wooldridge. In his estimation, fiscal policy is set to go “in the opposite direction” in the advanced countries, and monetary policy is “about to get as loose as it can get in the G7”. Dramatically weaker G7 currencies could help, he reckons, “but that comes at the expense of Asian exporters.”