China’s trade surplus narrows in September

It was only a matter of time before the turmoil in the U.S. and eurozone fed into China’s trade data, noted two IHS Global Insight China economists today.

Indeed, the PMI sub-index for new export orders and micro data from Guangdong have given supply chain managers “fair warning,” IHS said.

According to IHS Global Insight China Economists Alistair Thornton, and Xianfang Ren in Beijing, a deteriorating economic picture in developed markets is dragging on export growth, while domestic tightening – still in place for the time being – is weighing on imports.

This brings China’s surplus for the quarter to $64 billion, up from Q2’s $47 billion. IHS added that it is important to note that September is traditionally a poor month for trade, but whether this month – like September 2008 – marks the start of a sharp decline depends largely on developments in the eurozone.

Both economists said that the shrinking surplus, however, “will provide little respite against the more aggressive voices in Congress, who are once again posturing for domestic audiences with a trade bill targeted at China’s currency.”

They said that the renminbi will, as always, continue its gradual appreciation path. Only a repeat of 2008 would stop the renminbi in its tracks, while a depreciation against the dollar, as suggested by recent movements in the NDF market, remains extremely unlikely.

This will provide additional weight for a loosening of policy, said the economists. China’s economy will be getting less support from the external sector going forward, and with softer commodity prices helping to calm inflationary pressure, the start of an official loosening could be close.

In an interview with SCMR, Thornton said that the shrinking surplus is reflection of weakening growth in advanced economies, and as such MNC activity will suffer as a consequence.

“Moreover, the policy-driven slowdown in China is dragging on growth, which will also weigh on opportunities for MNCs,” he added. “To a large extent, the next year of China growth will be dictated by realities in the U.S. and Eurozone. Should those economies double-dip, China will follow.”

Finally, Thornton observed, unlike 2008, China only has “limited ammunition” to fight off a dramatic slowdown.

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