10 Nov, 2011, 02.12PM IST, Reuters
China well placed should Europe derail: Clyde Russell
SINGAPORE: It's becoming very hard to sustain a bearish view of China's economy with data showing solid demand in commodity imports offsetting some weakness in manufactured exports.
The main takeaway from Thursday's trade numbers is that the Chinese economy appears to be successfully balancing away from export-led growth to a more sustainable path based on domestic investment and consumption.
But let's be honest, the unfolding train wreck that is Europe is currently drowning out any positive news from Asia, and the new concern for the world's main economic bright spot is that it will be unable to escape the fallout from a potential messy break up of the euro currency bloc.
It would be silly to pretend that a prolonged crisis in Europe won't impact China, so the question becomes how well-placed is the world's largest commodity user to handle the increasing likelihood of a renewed recession in its largest trading partner.
Firstly, Chinese exports to Europe won't drop off a cliff in all but the doomsday scenario.
What is likely is that the growth in exports will decline, as indicated by the October trade figures, where shipments to Europe increased by 7.5 percent year-on-year, the lowest since February and well below the overall rate of 15.9 percent for all exports.
That overall rate was also possibly a disappointment, coming in shy of the forecast gain of 16.5 percent and the 17.1 percent jump recorded in September.
But imports surged in October, jumping 28.7 percent on the year, comfortably beating the forecast for a 23 percent jump and September's 20.9 percent increase.
What the trade balance numbers show is exports are still increasing, but at a declining pace, while imports, particularly of commodities, are growing at a cracking pace.
The import growth in commodities is particularly impressive, with China buying 36.7 percent more from major producer Australia in annual terms in October.
This jump from Australia came despite a 17.5 percent drop in overall iron ore imports in October from September as lower demand for steel caused mills to curtail purchases.
Cheaper prices for iron ore, which have dropped more than 36 percent since September, may lead to higher imports in November, although much will depend on whether steel demand picks up again.
Copper imports gained 0.8 percent in October from September, reaching a 17-month high, most likely as Chinese buyers took advantage of recent price declines to build inventories.
How much of the copper is destined for actual consumption may be a moot point, as the metal can be used as collateral for bank loans, a way for Chinese investors to circumvent tighter lending requirements.
Nonetheless, copper import demand will likely remain robust as long as prices remain low, and its hard to see any sustained rally as long as Europe tops the list of investor concerns.
Crude oil imports were once again a touch disappointing, dropping 1.6 percent from September in barrels a day terms. The huge 27 percent jump from October last year can be ignored, as that was an exceptional figure well out of the trend.
However, while crude imports remained sluggish amid lower refinery throughput in October, net imports of oil products rose the most since July, showing that refiners switched to buying fuels rather than processing crude.
This left China's apparent demand, calculated by adding net imports to refinery throughput but excluding changes in inventories, at about 9.04 million barrels a day, a modest gain of 1.5 percent from October last year.
It seems that the growth in China's commodity imports is mainly to sustain domestic demand, especially with the external sector weakening.
Lower prices for copper, iron ore and oil have led China to buy more in the past and this may well prove the case again.
Cheaper input costs will also help manufacturers keep prices from rising, which in turn could help hold up exports.
With data on Wednesday showing October industrial output rising 13.2 percent, retail sales 17.2 percent and fixed-asset investment by 24.9 percent in annual terms, the picture emerges of a still robust domestic economy.
Inflation is also on a downward path, rising 5.5 percent in annual terms in October, still too high for the authorities, but trending lower and probably providing some ability for policy responses should Europe's malaise worsen.
But it should also be remembered that China's economy expanded 9.1 percent in annual terms in the third quarter, a figure achieved despite a weak external sector.
Government data show that net exports stripped 0.1 percentage points off GDP growth in the first nine months of the year, showing China is already less dependent on shipping goods to the rest of the world than what may analysts assume.
If the desired outcome of a soft economic landing for China means maintaining GDP growth above 8.5 percent, this may be possible assuming the Europeans can find a solution that the financial markets can live with.
But it's also worth noting that a hard landing for China is said to be annual GDP growth of around 7 percent, a level said to equate to zero growth in developed economies.
This means the cushion for China isn't that big, although it is probably better placed to withstand a European meltdown than it was for the global financial crisis of 2008.
China well placed should Europe derail: Clyde Russell
SINGAPORE: It's becoming very hard to sustain a bearish view of China's economy with data showing solid demand in commodity imports offsetting some weakness in manufactured exports.
The main takeaway from Thursday's trade numbers is that the Chinese economy appears to be successfully balancing away from export-led growth to a more sustainable path based on domestic investment and consumption.
But let's be honest, the unfolding train wreck that is Europe is currently drowning out any positive news from Asia, and the new concern for the world's main economic bright spot is that it will be unable to escape the fallout from a potential messy break up of the euro currency bloc.
It would be silly to pretend that a prolonged crisis in Europe won't impact China, so the question becomes how well-placed is the world's largest commodity user to handle the increasing likelihood of a renewed recession in its largest trading partner.
Firstly, Chinese exports to Europe won't drop off a cliff in all but the doomsday scenario.
What is likely is that the growth in exports will decline, as indicated by the October trade figures, where shipments to Europe increased by 7.5 percent year-on-year, the lowest since February and well below the overall rate of 15.9 percent for all exports.
That overall rate was also possibly a disappointment, coming in shy of the forecast gain of 16.5 percent and the 17.1 percent jump recorded in September.
But imports surged in October, jumping 28.7 percent on the year, comfortably beating the forecast for a 23 percent jump and September's 20.9 percent increase.
What the trade balance numbers show is exports are still increasing, but at a declining pace, while imports, particularly of commodities, are growing at a cracking pace.
The import growth in commodities is particularly impressive, with China buying 36.7 percent more from major producer Australia in annual terms in October.
This jump from Australia came despite a 17.5 percent drop in overall iron ore imports in October from September as lower demand for steel caused mills to curtail purchases.
Cheaper prices for iron ore, which have dropped more than 36 percent since September, may lead to higher imports in November, although much will depend on whether steel demand picks up again.
Copper imports gained 0.8 percent in October from September, reaching a 17-month high, most likely as Chinese buyers took advantage of recent price declines to build inventories.
How much of the copper is destined for actual consumption may be a moot point, as the metal can be used as collateral for bank loans, a way for Chinese investors to circumvent tighter lending requirements.
Nonetheless, copper import demand will likely remain robust as long as prices remain low, and its hard to see any sustained rally as long as Europe tops the list of investor concerns.
Crude oil imports were once again a touch disappointing, dropping 1.6 percent from September in barrels a day terms. The huge 27 percent jump from October last year can be ignored, as that was an exceptional figure well out of the trend.
However, while crude imports remained sluggish amid lower refinery throughput in October, net imports of oil products rose the most since July, showing that refiners switched to buying fuels rather than processing crude.
This left China's apparent demand, calculated by adding net imports to refinery throughput but excluding changes in inventories, at about 9.04 million barrels a day, a modest gain of 1.5 percent from October last year.
It seems that the growth in China's commodity imports is mainly to sustain domestic demand, especially with the external sector weakening.
Lower prices for copper, iron ore and oil have led China to buy more in the past and this may well prove the case again.
Cheaper input costs will also help manufacturers keep prices from rising, which in turn could help hold up exports.
With data on Wednesday showing October industrial output rising 13.2 percent, retail sales 17.2 percent and fixed-asset investment by 24.9 percent in annual terms, the picture emerges of a still robust domestic economy.
Inflation is also on a downward path, rising 5.5 percent in annual terms in October, still too high for the authorities, but trending lower and probably providing some ability for policy responses should Europe's malaise worsen.
But it should also be remembered that China's economy expanded 9.1 percent in annual terms in the third quarter, a figure achieved despite a weak external sector.
Government data show that net exports stripped 0.1 percentage points off GDP growth in the first nine months of the year, showing China is already less dependent on shipping goods to the rest of the world than what may analysts assume.
If the desired outcome of a soft economic landing for China means maintaining GDP growth above 8.5 percent, this may be possible assuming the Europeans can find a solution that the financial markets can live with.
But it's also worth noting that a hard landing for China is said to be annual GDP growth of around 7 percent, a level said to equate to zero growth in developed economies.
This means the cushion for China isn't that big, although it is probably better placed to withstand a European meltdown than it was for the global financial crisis of 2008.
