China Jan trade better than feared but CNY holiday likely skewed data

Beijing

CHINA'S exports unexpectedly returned to growth in January after a shock decline the previous month, while imports fell much less than expected, but analysts said the strength was likely due to seasonal factors and predicted renewed trade weakness ahead.

Investors and policymakers are closely watching to see how quickly activity in China is cooling, or if support measures announced last year are starting to take hold, which could lift some of the gloom hanging over the global economy.

But data on Thursday left many China-watchers none the wiser about the current state of the world's second-largest economy, as a March 1 deadline looms for Beijing and Washington to de-escalate their bitter trade war.

January exports rose 9.1 per cent from a year earlier, customs data showed, defying economists' expectations for a 3.2 per cent drop and a marked turnaround from December's 4.4 per cent decline.

Imports fell 1.5 per cent, much better than forecasts for a 10 per cent slide and narrowing from December's 7.6 per cent drop.

That left the country with a trade surplus of US$39.16 billion for the month.

While the readings appeared positive at first glance, analysts warned that data from China early in the year must be treated with caution due to business distortions caused by the long Chinese New Year holidays, which started on Feb 4 this year.

Many companies rush out shipments or replenish their inventories of raw materials ahead of the holidays.

"Clearly, the numbers surprised the market on the upside. But given the deceleration of global (factory readings) and weak Korean trade data, it might be premature to conclude that the trade prospect has improved based on the January number alone," said Tommy Xie, China economist at OCBC Bank in Singapore.

"I suspect that the recovery may be partially due to the Chinese New Year effect as this year it is slightly earlier as compared to last year."

Economists had widely tipped that China would see weaker exports early this year.

Factories have reported shrinking overseas orders for months and warehouses in America are packed to the rafters with Chinese goods that retailers stockpiled last year in anticipation of more US tariffs.

Trade has also been faltering globally amid rising protectionism and a loss of momentum in some major economies, most notably in Europe.

Net exports actually dragged on China's growth by 8.6 per cent last year, according to Reuters calculations.

Factory surveys have also show weakening domestic orders, and broader economic weakness is taking a toll on both business and consumer confidence.

Retail sales during the Chinese New Year holiday rose 8.5 per cent from a year earlier, still solid but the slowest pace since at least 2011.

China's economic growth slowed to 6.6 per cent in 2018, weighed down by rising borrowing costs and a clampdown on riskier lending that starved smaller, private companies of capital and stifled investment.

Pressure on China's economy could spike if Beijing and Washington do not reach a deal soon to end their year-long trade dispute, which is estimated to have cost both countries billions of dollars already and is taking a growing toll on other export-reliant economies from Asia to Europe.

The US is set to sharply raise tariffs on US$200 billion worth of Chinese imports in early March, though President Donald Trump said this week he could let the deadline "slide for a little while" if a deal appears close.

A US delegation led by Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin are in Beijing to hammer out a trade agreement.

China's trade surplus with the United States narrowed to US$27.3 billion in January, the lowest since May 2018, Thursday's data showed.

Exports to the US declined 2.4 per cent on-year, while imports fell 41.2 per cent.

"Based on the positive signals regarding the US-China trade negotiations, we think it is likely that further tariff hikes will be suspended," Louis Kuijs, head of Asia economics at Oxford Economics, said in a research note.

"An agreement and prolonged tariff suspension would be an obvious plus and imply an upside risk to growth of China's exports and economy more generally."

While a trade deal would boost business confidence and financial markets globally, analysts say it would be no magic bullet for China's broader economic woes.

Some economists predict China's growth rate could drop below 6 per cent in the first half of this year before a series of policy measures start to stabilise activity around mid-year.

The latest quarterly business survey by consultancy Oxford Economics showed 38 per cent of respondents thought a hard landing in China was a very significant risk to the global economy, almost double the level in the previous poll.

Policymakers have been fast-tracking road and rail projects, cutting import tariffs and urging banks to keep lending to cash-strapped private companies to rekindle domestic demand.

Many analysts also expect sweeping corporate tax cuts to be announced after the annual meeting of Parliament in March, but all of the moves will take time to kick in.

Top officials have repeatedly said they will not resort to massive stimulus like that deployed in past downturns, though some analysts believe interest rate cuts are possible if conditions continue to deteriorate and job losses mount. REUTERS