China trade continues sliding; surplus soars in May

Beijing

CHINA's trade continued to slide in May, putting more pressure on Beijing to further ease policies. Exports dipped 2.8 per cent, and imports fell 17.6 per cent in the seventh consecutive monthly drop, custom figures showed on Monday. This left a record trade surplus of US$59.49 billion for May alone.

Though the export data was above analysts' expectations, the severe drop in imports showed that domestic demand had yet to pick up, despite stimulus measures having been implemented over the past nine months. So far, the government has cut interest rates thrice and reserve-requirement ratios twice, to ease credit conditions for companies. It has also lowered minimum downpayment levels on second homes to support the sluggish real estate sector, one of the backbones of the economy.

More of such moves are expected in the next few months, as Beijing is keen to avoid a sharp slowdown of the economy. Julian Evans-Pritchard with Capital Economics said: "The May trade data suggests that both external and domestic demand remain weak. The weakness in import growth is disappointing, given that it dampens hopes that recent policy support may have driven a rebound in domestic demand."

Beijing has embarked China on profound structural changes and is betting that domestic demand can compensate for the end of its export-led growth model. This means putting quality before quantity and moving up the value-added chain. But today, China's leaders are faced with the dilemma of supporting growth as the economy braces itself for its slowest growth in 25 years or ploughing on with reforms.

Companies are dealing with debt and overcapacity, and exporters, with weak conditions overseas. In May, the value of imports was also affected by a sharp drop in commodity prices such as iron ore, which were much lower a year ago than currently. But the contraction in import volume in May from the month before also signalled sluggish domestic investment growth.

Looking ahead, analysts sid that a stabilisation of commodity prices should drive up imports in the next quarters. They add that imports should benefit from Beijing's easing policies during the rest of the year.

On the export front, China is facing a stronger currency, which is making its products less competitive. Though the drop in May was smaller than in April (-6.4 per cent), analysts said that it was too early to call a rebound and that the sector outlook remains weak, despite a stronger US economy.

Julia Wang, China economist with HSBC, said: "The improvement in exports was quite mild sequentially, and does not suggest a meaningful recovery ahead. We expect the export outlook to remain challenging in the coming months, partly due to a strong currency. We have downgraded our 2015 export growth forecasts from 7.1 per cent to 4.2 per cent."

China's trade grew 3.4 per cent in 2014, missing the government's growth target of 7.5 per cent. Beijing has lowered its growth target for 2015, with combined imports and exports expected to rise around 6 per cent.