China Faces Grim Trade Outlook

Both import and export figures in the second-largest economy in the world fell in June. Exports fell 3.1% from the previous year, while imports dropped 0.7%. Trade figures were expected to rise. The fall in imports and exports follow a government crackdown on the use of fake invoicing that had exaggerated exports earlier this year. The figures raise fresh concerns about the slowdown in China and global demand. A spokesman for the Chinese customs authority stressed that China faces stern challenges and “exports in the third quarter look grim”.

The customs agency said exporters are losing confidence since they're faced with weak overseas demand, rising labor costs and a strong yuan currency. The Australian dollar fell immediately in the trade figures, reflecting worries about Chinese demand for Australian commodities, such as iron and coal. In spite of the weaker figures, China had a trade surplus of USD 27.1 billion in June, in line with the USD 27.0 billion forecast. Economic growth in China in 2013 is still expected to be 7.5 %.

The grim trading figures created expectations that the Chinese Central Bank might ease policy to boost growth. These expectations made Chinese shares rise sharply. The major Chinese index gained 2.2 % on the easing talk. The MSCI-index for Asia Pacific also gained 0.7% boosted as well by Wall Streets optimism for US company earnings. Copper prices added 0.5 % and both Brent crude and the New York NYMEX, trade higher on USD 108 and 104 a barrel respectively.

Concerns over China pulled the Dollar Index (DXY) down from a three-year high against a basket of major currencies. The dollar fell 0.6% to 100.52 Yen. The stronger Yen impacted the Nikkei index which fell 0.4 %. Investors are betting on further dollar gains as the US Federal Reserve (Fed) prepares to scale back on its USD 85 billion a month stimulus program. The minutes from Fed’s June meeting will be published later today, accompanied by a statement from Chairman Ben Bernanke which is expected to give the dollar a further boost.