beyondbrics

Chinese trade data for July came as something of a disappointment for the markets. The growing trade surplus could also see pressure on China’s currency policy return. But perhaps more worrying is what the numbers say about China’s domestic demand. As usual, the jury’s out. But the bear’s are sharpening their claws.

Long-term China bear Diana Choyleva at Lombard Research sees the latest figures as further evidence of serious trouble ahead.

China’s cyclical story is turning from boom to bust, with negative implications for the rest of the world… Our estimates of China’s real GDP currently show that real domestic demand was flat in Q2 as the economy hit its cyclical constraints. The trade data for July, out today, not only confirm this picture, but suggest that domestic demand may already have started to slump in Q3.

The last time imports contracted in China was around the time of the Lehman collapse, and lasted for 3 full quarters. The outlook, says Choyleva, looks increasingly bleak, not just for China, but for everyone:

China’s cycle has become much shorter and more volatile. The economy seems to have already turned down, with the growth correction necessary to get rid of the existing overheating likely to be sharp. Prepare for a gloomy autumn and hope for it not to turn into China’s winter of discontent.

For those who don’t like scary stories, Morgan Stanley’s Qing Wang, a China bull, offers some relief. He explains the bigger than expected drop in imports as follows:

We estimate that this shortfall can almost entirely be explained by a sharp decline in the growth rate of crude oil imports (82.3% yoy in June vs. 7.9% yoy in July). In another word, if contribution of crude oil imports to growth in July were to remain the same as in June and everything else equal, the import growth in July would be about 30% yoy, exactly in line with the consensus forecast.

In June China imported a record amount of oil, and even the softer July figures suggest that China’s appetite for crude looks robust. Today oil and metals prices softened, but failed to show any signs of real concern on the back of the trade data.

Goldilocks and the bears will just have to keep slugging it out.

Related reading:

China trade surplus widens further – FT

Do Chinese equities lead the world? – beyondbrics

UBS: China’s export surge won’t last – beyondbrics

China – In depth – FT