Now everyone can see the true colour of China’s exports. The decline of both exports and imports in June surprised the market, but to some observers, the news perhaps is perhaps less shocking: it’s been a bad year for quite a while after all.
The 3.1 per cent fell in exports in June from a year earlier, the worst data since October 2009, has worsened the export growth collapse that started in May. After the regulatory changes towards hot money inflows through fake trading and over-invoicing, exports growth in May slumped to 1 per cent from 14.7 per cent in April.
The change of trade data between mainland China and Hong Kong is dramatic. The export growth from China to Hong Kong was as high as 92 per cent in March, 57 per cent in April, and then 7.7 per cent in May, and a sudden minus 7 per cent in June.
There are three ways for hot money to embed itself in inflated exports and create an arbitrage between the differences in interest rates in and out of China, as listed by Bank of America Merrill Lynch. They are exports to Hong Kong; exports to bonded areas; and exports of high unit-value goods such as IT products. All of them slowed down sharply in May after the tackle on fake trading.
Many media reports showed how the fake exports and arbitrage works, according to Zheng Yuesheng, spokesperson for General Administration of China Customs at a press conference on Wednesday in Beijing. He said the export data from mainland to Hong Kong has returned to a normal level since May, and the current statistics reflected the real trade situation.
With the roundtrip mask off, the weakness of true external demand has been revealed. Exports to Europe, US and Japan decreased 8.3 per cent, 5.4 per cent and 5.1 per cent, continuing the decline in the first half of this year, which was buried in the “strong” Hong Kong export data.
A German trade agent based in Hong Kong told beyondbrics that demand from Europe is particularly sluggish this year, “it’s even worse than 2008 financial crisis, for us and others, generally orders have dropped 20 per cent.”
He said that more European clients are asking Chinese factories to strictly comply the EU’s Reach (Registration, Evaluation, Authorisation and Restriction of Chemicals) standards, which creates extra costs in factory lab tests but is essential to pass the European customs.
And after the Bangladesh factory collapse at Rana Plaza earlier this year, more clients are being asked to do social audits in factories. Typically an inspector will go to check the factory’s working environment and interview its workers, using external companies to do complete the audit. The trade agent noted the irony that “companies that conduct social audits are doing very good business these days”.
The agent also said that many European clients are turning to suppliers in east Europe such as Poland instead of China. Aside from regional manufacturing rivals Vietnam, Bangladesh and Indonesia, the competition is widening.
The strong renminbi and increase in labour costs has also made Chinese exporters’ business more difficult, Zheng Yuesheng said. The Chinese currency has appreciated 5.6 per cent to the dollar to the end of May, and more cities in China have lifted their minimum wage standards.
Zheng said he’s not optimistic about exports in the third quarter, as the orders are still declining. A survey of 2000 companies conducted by the customs in the end of June showed that 49 per cent said the volume of newly added orders is decreasing; 44 per cent are pessimistic about the exports; and 69 per cent said the general costs are increasing.
What will change if policy retains the status quo? Some economists forecast a halt to the currency’s appreciation. And in a speech by Premier Li Keqiang on July 9 and published on Wednesday, current growth is still predicted to be within the acceptable range.
The Q2 GDP figure will be very interesting.
China faces tug-of-war over growth strategy, FT
China: who’s buying?, beyondbrics
China trade numbers suggest deeper slowdown, FT
Why China will not buy the world, FT
China exports: doing the rounds, bb