China's economic health flagged as August imports sink

Shanghai

CHINA'S imports tumbled in August, raising concerns about the health of the world's second-largest economy and its contribution to global growth.

The data will add to the pressure on Beijing policymakers trying to ensure the country's economy avoids a hard landing, though they will take some comfort that their efforts to steady the country's stock markets were rewarded with a late rally on Tuesday.

Imports dived 13.8 per cent from a year earlier, far more than analysts had forecast, and registered a 10th consecutive monthly drop, reflecting both lower global commodity prices and sluggish demand.

A surprise devaluation in the yuan early last month combined with slowing consumer demand will dent the prospects of imports picking up significantly anytime soon.

Much of China's imports are commodities and other raw materials going into factories that turn them into goods for sale overseas, so the fall could be an ominous sign for exports in the coming months.

Exports fell less than forecast, sliding 5.5 per cent, but analysts were still doubtful that China can now achieve its year-end trade growth target of 6 per cent. Li Jian, head of foreign trade research at the Chinese Academy of International Trade and Economic Cooperation, the Commerce Ministry's think-tank, said: "The yuan devaluation will have limited impact on exports, which are falling because demand is weak, not because the price is not good."

China's foreign exchange reserves posted their biggest monthly fall in August, reflecting Beijing's efforts to stabilise the yuan following its devaluation.

Chinese policymakers have been trying to reassure financial markets that their currency is stable and that the recent stock market turbulence is easing.

Stocks have fallen around 40 per cent since mid-June, with the Shanghai Composite Index hovering around the 3,000 point level, having been above 5,000 less than three months ago.

Shares initially declined on Tuesday, but rallied later in the day to finish almost 3 per cent higher - though trading volumes in both stocks and futures were down sharply.

The CSI300 index of the biggest stocks listed in Shanghai and Shenzhen closed up 2.57 per cent, while Shanghai was up 2.93 per cent.

Volume in the Shanghai market was the lowest since February, a month when trading is usually thin due to the Chinese New Year Festival.

The stock futures market was hit by an abrupt reversal in policy that caused trading volumes to collapse. Last Wednesday, China raised the margin requirements for futures not being used for hedging purposes to 40 per cent of the contract's value, from 30 per cent.

The futures contract for the CSI300 index maturing in September has seen volumes dive, logging 28,957 transactions on Tuesday, down almost 100 per cent from a week ago. On Aug 25, when markets were in a major sell-off, the contract saw 2.43 million transactions.

The Chinese authorities have rolled out a series of measures to bring a sense of calm back to their stock markets and to reduce short-term speculation.

On Monday, the finance ministry dangled incentives to encourage longer-term investments, saying it would remove personal income tax on dividends from shares held for more than a year, and halve it on those held for between a month and a year.

That announcement came hours after regulators and exchanges proposed introducing a "circuit breaker" on the CSI300 index to steady the market.

Analysts said these measures are unlikely to encourage many investors to come back into the market for stocks in either mainland China, known as A-shares, or Hong Kong, given the longer-term economic concerns hanging over the market. Analysts at Nomura wrote in a client note: "While investors see value in Hong Kong-listed Chinese equities, they're concerned about an inevitable US Federal Reserve rate hike and Beijing's ability to manage A-shares, growth, capital flight and its currency." REUTERS

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