Chinese trade tantrum

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Chinese trade rebounded in June, but from a very low base and overall Asian exports remain depressed. The temptation is to think that Chinese policy-makers will sacrifice a robust renminbi in order to spur economic growth but I expect the PBoC to favour a stable currency while the government focuses on pump-priming domestic demand.

Chinese merchandise exports and imports rebounded in June, a mild positive for China’s main trading partners including Australia (see Figure 1). Exports in other large Asian economies in June were mixed, rebounding strongly in Korea but falling to a three-and-a-half year low in Taiwan according to my estimates.

The bigger picture remains one of depressed Chinese exports – partly a function of soft global demand and a strong renminbi – and imports at four year lows – a reflection of both the slowdown in domestic growth and weaker commodity prices. This picture is broadly replicated across Non-Japan Asia with exports struggling to rebound, even accounting for the stronger US dollar (see Figure 2).


Figure 1: Chinese exports and imports rebounded in June…but from a very low base Figure 2: Asian exports continued to fall in Q2
 Olivier Desbarres Fig 1    Olivier Desbarres Fig 2
Source:,    Source:, World Trade Organisation, national statistical offices, Note:  Latest data point is for May 2015;  Non-Japan Asia includes China, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam;  USD-value of seasonally exports is adjusted using a weighted currency basket of NJA currencies vs the US dollar


The robustness of the Chinese trade surplus, which seasonally adjusted has remained above $100bn per quarter in the past year, is likely to have cushioned the slowdown in economic growth. The consensus forecast is that Q2 2015 GDP data – due out Wednesday (03.00 London time) – will show that growth slowed only marginally to 6.8% year-on-year in Q2 2015 from 7.0% yoy in Q1. The market’s reaction to the data may be tempered by the Greek parliamentary vote, due that same day, on the package of reforms which the Troika and Greek government agreed on overnight.

Ultimately the accumulation of large trade surpluses is a clear departure from the period of modest surpluses recorded from 2010 to mid-2014. I have argued that Chinese policy-makers were gradually shifting the economic growth model to one driven by high value-added exports and consumer demand, rather than low-tech exports and investment and that a stronger currency was a key instrument to achieve this medium-term goal.

While this transition has clearly hit a roadblock as the government grapples with slowing Chinese credit growth, investment and construction and gyrations in Chinese equities, the central bank (PBoC) has so far resisted the temptation to weaken the renminbi in a bid to spur exports. As I argued in Asian currencies still on the straight and narrow (15 May 2015), the PBoC seemingly favours a stable nominal effective exchange rate (NEER) near multi-year highs (see Figure 3). This keeps the structural transformation of the economy on the cards and importantly helps slow capital flight from China. Should the euro – estimated to have a 20% weight in the renmimbi NEER – rebound later this week on positive Greek news, I would expect the risk to be biased towards PBoC modestly weakening the renminbi versus the US dollar.


Figure 3: Renminbi NEER is near multi-year highs Figure 4: Renminbi NEER is up month-on-month, as it has been for long periods of time
 Olivier Desbarres Fig 3    Olivier Desbarres Fig 4
Source:,    Source:,


Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.

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