China Do We Have A Problem?

A number of surprisingly softer economic data released over the weekend from the world’s second-largest economy is sucking life out of Capital Markets. Friday’s market buoyancy provided by a decent US monthly payroll number took a hit in Asia. Up to this point investors had been rater resilient when it came to some borderline fundamental releases. But with proof that China may be officially coming off the boil (especially their high standards) has global investors a tad more worried. Up until this point, China has been relied upon for consistency, a powerhouse that pulled the perfect economic release when the rest of the world needed it so. If it was not foreign demand, then its domestic demand that is supposed to pull economic growth towards +7.3-7.5% target this year. This weekend of economic releases is proof that China’s economic dominance cannot be taken for granted – it will not appear in a straight line.

China’s February terms of trade saw the powerhouse economy’s first contraction in nearly a year and also the biggest deficit in 2-years, as exports surprisingly fell -18.1% (-$23.0b vs. +$14.5b – the 2nd largest deficit on record). Shipments of good to the to US, Euro-zone, and Japan were all down “double digits” and this despite the expectations of rising demand from improving economic conditions in those three regions. Global growth at best can be described as fickle, demand not even convincingly long lasting, but tenuous at best and this adds to fears of a deeper slowdown in China despite the Lunar New Year holidays being blamed for the slide. The sharp drop in last month’s exports numbers follows “hot on the heels” a series of this years factory surveys that suggests a deeper weakness in economic activity as demand falters globally. With exports falling -18.1% and imports rising +10.1% has yielded a trade deficit of -$23b vs. a surplus of +$32b in January.

Any Chinese economic doubts will obviously fuel Emerging Market jitters and perhaps reignite investor worries over a few EM currency pairs. Currently, various commodity currencies (AUD, NZD and CAD) are leaning more on their back foot after the Beijing released data. Australasian bourses have seen red, while various fixed income benchmark yields have also fallen. How will the second tier European data fear this morning? Even the CNY has managed to slides after the disappointing export numbers – fueling easing talk by the PBoC. Chinese policy makers have been active of late, weakening their own currency to penalize the one directional speculator who has assumed that they would have an easy ride through the USD/CNY psychological 6.0000 handles. However, Stats bureau was quick to attribute the deficit to the distortions caused by the timing around the Lunar New Year, so the jury on China trade as a gauge of global demand may still be out until next month figures.

Certainly not helping was Chinese inflation numbers. China CPI also came in surprisingly tame, with annual CPI hitting a 13-month low of +2.0% vs. +2.1%, y/y; 0.5% v 1.0% prior. Analysts are beginning to suggest that last months data may begin to pressurize the Government into a fiscal “stability policy.” A weaker Chinese economy should have policy makers concerned. It may convince the increasingly-hawkish PBoC to “decelerate its mopping up of excess liquidity to forestall the risk of deflation.” Which happens to be more of a curse to more central bankers. Obviously the disappointing weekend data has Chinese government bonds on the rise – one and five year product has fallen 3-5bp respectively. Risk aversion is very much on the rise in the region, even more so now after the first default of a Chinese corporate entity in history (Shanghai Chaori Solar Energy).

The land of the “Rising Sun” does not get away scot-free. Japan’s economy expanded less than estimated in the fourth quarter and the current-account deficit widened to a record in January, highlighting risks to Abenomics as a sales-tax increase looms. Japan revised its Q4 GDP to a final figure of +0.2% from +0.3%, q/q and +0.7% on annualized basis vs. +1.0% preliminary. Weaker data is raising further questions over the efficacy of Abenomics and its glaring need of “3rd arrow” structural reform. Analysts are also expressing concerns about Japan’s rising trade deficits, potentially forcing the BoJ into action sooner than expected. BoJ concludes its 2-day meeting with a formal statement on monetary policy this evening. While no change is expected one cannot say, “never.” Traders will tune in for Governor Kuroda’s accompanying statement this evening for his insight into the latest disappointing round of data.

Prime Minister Shinzo Abe’s task is to steer the nation through a projected contraction in the April-June period. Expect the prime minister to give detailed growth measures for June. They must act, but will they? Japanese Policy makers need to ease monetary policy to keep the world’s third-biggest economy on track for a +2% inflation target. Yen pairs are under modest pressure given the overall risk aversion in the equity markets after the soft China data.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell