China: Weaker trade growth ahead
- Exports growth fell to 14.7% in Mar from 16.3% YoY in Jan-Feb.
- Yet, the double-digit growth was largely a result of high export price effect amid COVID outbreak.
- Imports recorded the first YoY drop of 0.1% since Aug20.
- Both CPI and PPI will accelerate amid the supply chain disruption.
- Implications for investors: The PBOC will likely cut the 1Y MLF rate from 2.85% to 2.75% tomorrow.
The slower export growth of 14.7% YoY in Mar from 16.3% YoY in Jan-Feb has not fully reflected the impact of the renewed COVID outbreak since mid-March. Outward shipment dropped by 52.3% in volume terms, contradicting high-value terms distorted by soaring logistic costs. Reportedly, major automobile MNCs are temporarily shutting down production plants and warehouses. Truck drivers entering other provinces/ports must be tested again upon arrival. Exports from Shenzhen and Shanghai, respectively, account for 76.9% and 30.5% of GDP. Should the COVID situation remains, outward shipment will likely decline further in the months ahead.
Leading indicators also pointed to weak production capacity. Manufacturing PMI fell to the contraction zone in Mar. Sub-indicators such as the new export order PMI stayed below the contraction zone for the 11th consecutive month. Suppliers' delivery time PMI hit the lowest level since Mar 20, at 46.5. Oil refinery run rate also fell to a 2-year low of 49.4% by early Apr.
Analyzing exports destinations, outward shipment growth to EU and ASEAN decreased slightly from 24.0% YoY and 13.3% in Jan-Feb to 21.4% and 10.4% in Mar respectively. Meanwhile, exports to the US accelerated from 13.7% to 22.4% amid stronger economic recovery momentum. Yet, global demand may weaken on the back of rising US rates. We project the Fed Funds Rate reaching 2.50% by the end of this year.
In June, the European Central Bank might announce the end of net purchases in 3Q22 and pave the way for rate hikes. Conflicts between Russia and Ukraine also dampen Europe’s economy and demand for Chinese products. The World Trade Organization also recently downgraded the global merchandise trade growth of 2022 from 4.7% to 3.0%.
Supply chain disruption led to a 0.1% YoY drop (the first since Aug20) in imports in Mar after growing 15.5% growth in Jan-Feb. Inward shipment shrank across the broad. Agricultural products such as meat saw a more noticeable decline at 27.7%. Soybeans imports growth slowed to 1.4% from 13.9% (dropped by 18.3% in volume terms). On the industrial front, auto-parts imports and hi-tech products fell 20.4% and 4.0% respectively, pointing to weaker production ahead.
Energy imports such as coal (6.7%), oil (36.0%), and natural gas (37.0%) recorded YoY growth this month on the back of soaring energy prices. In volume terms, imports of these products fell 39.9%, 14.0% and 8.5% respectively. The divergence between the value and volume of energy products imports will likely remain.
Higher prices and accommodative monetary policies
The supply chain disruption will likely translate into stronger inflationary pressure. CPI accelerated to 1.5% YoY from 0.9% in March. The decline in food prices narrowed from 3.9% in Jan-Feb to 1.5% in Mar. The Producer Price Inflation rate stayed elevated at 8.3%. Inflation at the producer and consumer levels will likely charge ahead.
As a result, the government must push forward infrastructure investment to arrest the decline of economic activities. Projects (in RMB terms) approved by the NDRC rose by 77.6% YoY in 1Q. Local governments also have front-loaded special bonds issuance to support these projects.
As such, China needs a more accommodative monetary policy. M2 growth bounced back to 9.7% YoY in Mar from 9.2% in Feb, compared to the average of 8.5% in 2H21. Aggregate financing growth went up from 10.2% to 10.6%. We expect the authority to cut the 1Y MLF rate from 2.85% to 2.75% tomorrow and lower the 1Y-LPR by 10 bps next week.
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