The Biggest Story Of The Day: Chinese Trade Disappointment

We’re not entirely sure why anyone is surprised to see these numbers anymore and it’s not like they weren’t telegraphed earlier this week, but whatever the case, Wall Street isn’t liking the latest trade data out of China.

The breakdown is pretty simple. It missed. All of it. Here’s the long and - more appropriately - the “short” of it, via Bloomberg:

  • China’s Sept. Exports Fall 10% Y/y in Dollar; Est. -3.3%

  • China customs administration announces data in dollar terms in statement; median est. 3.3% fall y/y (range 6.2% fall to 4.8% rise, 37 economists).

  • Sept. imports dropped 1.9% y/y; median est. 0.6% rise (range 4.4% fall to 7.0% rise, 36 economists)

  • Sept. trade surplus $42b; median est. $53b surplus (range $40b-$60.6b surplus, 34 economists)

Again, you might have known this was coming. Why? Because of this:

They’re fighting two simultaneous, yet inextricably linked battles here. They need to buoy exports and they need to maintain a delicate balancing act between preserving a pseudo-dollar peg while managing a “controlled” devaluation.

The problem - as we’ve delineated countless times previous - is that the more talk there is of a Fed hike while the BoJ and the ECB remain in lunatic easing mode, the more pinched China finds itself in terms of trade as the stronger dollar drags the RMB higher.

Of course no one wants to be seen as a currency manipulator (especially when you’ve just gained inclusion into the IMFs SDR basket), so the goal for the PBoC has been to keep the yuan steady against the dollar but allow it to depreciate against a trade-weighted basket.

That’s worked out well since March when, in the wake of the so-called “Shanghai Accord”, Janet Yellen appears to have begrudgingly agreed to keep the Fed on hold (and thus keep the dollar relatively weak) in the interest of global financial stability. Have a look at the trade-weighted basket:

(Chart: Bloomberg)

So that’s actually back to around early 2014 levels but have a look at the following which shows the complex calculus that goes into keeping it that way if the dollar starts appreciating against other currencies:

(Chart: Deutsche Bank)

As you can see, if the USD jumps even 5% against its global counterparts, the CNY will have to dive ~%15 against the dollar just to keep the trade-weighted basket “stable.” You can begin to see why this has become so damn complicated for everyone involved.

But the effort to keep a lid on dollar strength is becoming strained as “data-dependent” excuses for holding off on another rate hike are diminishing by the day. With the US economy close to full employment, it won’t be long before the only excuse for not hiking rates in the Eccles Building is “international financial concerns.”

So when you look at the first chart above and ask yourself what gives, consider this chart:

So that’s over the same period. Exactly what was portended in the Deutsche Bank diagram shown above is playing out. As the broad dollar appreciates, China has to push back, setting the CNY fixing lower, or risk strengthening in the trade-weighted RMB which is in turn bad for the export-driven economy.


To round things out, here’s a bit of color from Citi:


“The sharp fall in export growth and trade surplus does raise concerns on whether the current weakness in the RMB exchange rate will continue. We believe it is still too premature to extrapolate one month data into a trend. Given China's trade surplus remains large so far this year, we don't believe the RMB exchange is overvalued much. In addition, the depreciation pressure of CNY will be gradually mitigated as the RMB is formally included in the SDR basket and China's bond market is open for foreign participation. In Sep, RMB appreciated by 0.1% against the USD, and the CEFTS index declined by 0.28%, amid a 0.6% depreciation in DXY index. The tightened capital control measures have lowered speculative capital outflow, and the RMB depreciation expectation has moderated somewhat. Meanwhile, the RMB's inclusion in the SDR currency basket and China's bond market opening for foreign institutional investors will potentially lead to renewed capital inflow. Despite the DXY surge led CNYUSD weakness in the first two weeks in October, we do not think the RMB will experience another bout of large depreciation. This, however, does not mean the authorities won't take the advantage of the opportunity to enhance the flexibility of the RMB exchange rate. We thus continue to maintain our forecast that the RMB exchange rate will trade at 6.75 by year end and at around 6.8 in 2017.”

(Chart: Citi)

Draw your own conclusions, but know this: the CNY is front and center in Janet Yellen’s mind.

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