Emerging Market FX: China Growth Data Disappoints
China Growth Data Disappoints – The first installment of China growth data for 2016 underwhelms markets as export/import data declines outweighed a better than expected headline trade balance. Export growth registered the most depressed reading since March of last year at -11.2%. A significant source of the depressed data was a reduction in exports to the majority of China’s trade partners. The poor data is the latest in a long line of data misses that will likely see markets expect Chinese policy makers to introduce stimulus to reinvigorate domestic demand in the form a of greater fiscal and monetary easing announcements.
Fundamental Flows
Research Analysts at HSBC note that the first trade data of 2016 was a disappointment, even though the headline trade surplus actually increased from December 2015. Exports fell, but imports fell at a faster pace as a result of a sharper deterioration in domestic demand. Exports to China’s major trade partners were in broad-based contraction, with shipments to ASEAN countries and EU seeing the biggest contractions.
The recent currency depreciation in a number of ASEAN economies may make Chinese exports a bit more expensive, but we believe the fundamental factor behind today’s disappointing figures is more to do with the overall lack of external demand rather than changes in exchange rates. This is consistent with the weaker-than expected export figures reported by other Asian economies such as Korea.
The Spring Festival was earlier this year compared with that in 2015 (early-February this year, late-February in 2015). There was potentially some pre-holiday front-loading of exports, which together with a low base effect should have worked in favour of exports. However, any boost was likely more than offset by challenging global demand conditions. Meanwhile, import remained in deep contraction at -18.8% y-o-y. While falling commodity prices continued to weigh import growth in value terms, sluggish domestic demand trends are also responsible for the weak reading. After a temporary stabilisation in the end of 2015, imports of major commodities worsened again in volume terms as well as nominal terms.
Today’s data showed little sign that external demand will be able to support growth in China. While the RMB exchange rate has been weaker over past month, it has not boosted export growth. Weak global demand and not exchange rate movements are still the main reasons for disappointing exports, and under such conditions it makes little sense for policy makers to use deliberate currency depreciation as a tool to stimulate growth. We believe a package of policy stimulus directed at boosting domestic demand, including more aggressive monetary and fiscal easing, will be more effective at stabilising growth and expectations in the coming months.
Technical and Trading Takeaway
Price breaks lower from the holiday consolidation pattern. I believe there will be an excellent risk reward with trend entry as price retests former spike highs and ascending channel support at the the 6.4900 level where I would be watching for intraday reversal patterns to venture long targeting the topside of the channel.