China risks fresh demand downturn, trade data shows
BEIJING (Reuters) - China risks a fresh downturn in demand for goods from its massive factory sector, with weaker than expected exports and stalling headline import growth signaling that government spending is the crucial factor keeping the economy moving.
Annual growth in imports in April was just 0.3 percent, far below forecasts of an 11 percent increase, while exports managed growth of just 4.9 percent versus expectations of 8.5 percent, customs data on Thursday showed.
Shipments to emerging economies experienced a drop alongside well-flagged European weakness.
"We know the external climate is not particularly conducive to strong export growth and digging into the data you can see primarily it is a euro zone story, which is to be expected," Alistair Thornton, China economist at IHS Global Insight in Beijing, told Reuters.
"But the headline number on import growth is less expected and more worrying. It does point to a real weakness in the domestic economy and shows that we have not yet turned the corner into a sustained recovery."
The risks to China's factory-focused economy of weakness in private sector final demand were underscored by a drop-off in shipments from Asian economies that feed China's export-oriented assembly lines, while robust imports from Australia and solid annual volume growth in raw material imports indicate that state-led infrastructure spending underpins economic activity.
Asian shares lost ground after the numbers and the Australian dollar, sensitive to expected demand from the biggest market for the country's commodities, pared gains made following strong local jobs data.
MORE STIMULUS NEEDED?
The question now being asked by investors is whether the Chinese government, which has ramped up spending on social housing and basic infrastructure as part of its pro-growth policy bias since the autumn of 2011, should take further steps.
"At the moment the evidence is not yet decisive enough to say that the government needs to do more," Wang Tao, China economist at UBS in Hong Kong, said.
Calendar-adjusted month-on-month export growth was 9.4 percent while imports rose 7.3 percent on the same basis. Year over year, the growth rates were 7.2 percent and 4.8 percent, respectively - a sign that demand at home and abroad might not be as bad as the headline data implies.
"We think government easing has already been coming through in social housing construction and infrastructure spending," Wang said, adding that the gathering consensus view that China's economy had bottomed out remained valid.
Other economists agreed that Thursday's data alone was insufficient to trigger fresh easing steps, such as a quick cut to the reserve ratio requirements (RRR) for banks that would give them more money to lend.
"It doesn't change much for monetary policy," Yao Wei, China economist at Societe Generale in Hong Kong, said.
"The PBOC is experimenting with a new approach to manage liquidity. Instead of using required reserve ratio cuts, they are conducting reverse repos, which gives them more flexibility. I don't think this report changes the outlook that much."
China has cut RRR by 100 basis points from a record high of 21.5 percent in two steps, the last a 50 bps cut in February. The market consensus is for 150 bps of more RRR cuts this year, according to the benchmark Reuters poll.
Arguing against an emergency RRR cut is that the slide in import growth was in part caused by a sharp year-on-year drop in commodity prices - the widely-tracked Thomson Reuters-Jefferies CRB index is down about 17.4 percent year on year - left a hefty trade surplus of $18.4 billion, which is a key component in money supply growth which is targeted at 14 percent in 2012.
China's policymakers, while keen to support growth, are equally determined to ensure that stimulative policies do not rekindle inflation that is back under control and below the official 4 percent target after a two-year tightening campaign.
Still, some analysts argued that more action may be needed.
"There is weakness in domestic demand and that should be a wake-up to policymakers to do more to stimulate domestic demand," Darius Kowalczyk, an economist at Credit Agricole-CIB in Hong Kong, said. "Domestic demand is weak and that means we could see GDP growth start to slow."
China is likely to see its slowest year of economic growth in a decade in 2012, according to the consensus forecast of 8.4 percent in a Reuters poll.
Trade was the first of a flurry of economic indicators to be released this week - inflation, producer prices, industrial output, fixed asset investment and retail sales are all due on Friday - which had been expected to show a month-on-month improvement in both foreign and domestic demand.
Trade figures from the second quarter tend to give a clearer picture of the emerging trend for the year, given the volatility in first-quarter numbers distorted annually by shifts in the Lunar New Year holidays.
But there are signs that the final numbers released on Thursday have caught policymakers wrong-footed.
"As recently as April 27, Premier Wen Jiabao said that China's export and import growth had picked up to 12.7 percent and 8.3 percent year-on-year for the period April 11-20. The full-month data released today is much weaker than that, putting further pressure on authorities to loosen policy," economists at Nomura said in a note to clients.
Hurt by a recession in Europe and a patchy economic recovery in the United States - China's two biggest trading partners -export growth has slumped to single-digit levels this year, a long way from growth of more than 20 percent seen in 2010.
The just-concluded Canton Fair, a bi-annual export trade fair widely considered a barometer of China's export growth, saw the value of signed export deals shrink 2.3 percent from a year ago, the first annual drop since the global financial crisis, which has fanned worries over the strength of world demand.
China's export sector dragged on the economy in the first quarter of 2012, with net exports subtracting 0.8 percentage points from GDP, which grew at its slowest annual rate in nearly three years at 8.1 percent.
China's manufacturers had shown signs of improvement in April, with export orders ticking up and output gathering pace among bigger plants in the country's vast factory sector, according to surveys of purchasing managers last week.
"What the PMI is definitely telling us is that things are getting better, but what the PMI never tells us is where things are getting better from," Thornton at IHS said.
"There's a lot of fluidity here. Whether you could draw a sharp line under Q1 and say it was the weakest is up for debate. I think Q1 and Q2 will be weaker than Q3 and Q4. We're just waiting to see how that plays out. We are at the bottom I think and things are looking like they will start to turn, but they clearly haven't turned that quickly."
(Editing by Alex Richardson)
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