A week of talking about ambitious plans for the Chinese economy was followed by a weekend of reality as key economic data were released. Journalists in Beijing flocked around a beleaguered spokesman whilst analysts elsewhere were cursing the interruption to their Saturday rest.
But the state of the economy as portrayed by export data, a vital reading in what is now the world’s largest trading nation, left observers asking if anything is real. Outbound shipments in February plunged 18.1% from a year earlier after gaining 10.1% in January. That was the sharpest monthly contraction since August 2009, the lowest export growth since August 2008 and not at all what the market was expecting.
Fears of a major slowdown in exports that could hurt the economy need to be kept in check – for now. Trade data for this year are so far volatile and uncertain; economists are more divided than usual on their interpretations. Moreover, there is evidence that the true numbers, when stripped of distortions, indicate export growth is continuing, albeit at a slower pace.
There is some agreement over why the data are so unpredictable. Seasonal factors, a reference to significant events that happen each year, as well as the lingering effects of fake data that messed up numbers this time last year have gotten a lot of attention.
The Chinese Lunar New Year landed across the two months, resulting in tainted readings for both January and February. Although the festival only lasts for seven days officially, in reality it causes three weeks of disruptions to work schedules. Factory bosses therefore rushed out February orders a few weeks early.
“Both January and February's export data were heavily distorted by the different timing of Chinese New Year this year,” UBS China economists wrote in a note.
Economists were also quick to acknowledge the effect of distorted data. In the first four months of 2013 export figures were heavily inflated as traders faked the value of their invoices to bring additional capital into China to take advantage of higher interest rates. Outbound shipments in January and February 2013 rocketed 25% and 21.8% from a year earlier, respectively. With those figures so high, it is no surprise that this year’s data look so unfavorable in comparison.
This year, over-invoicing has eased off. The difference between onshore and offshore yuan interest rates has narrowed, curbing enthusiasm for arbitrage. Investors who have been making a one-way bet on yuan appreciation have been shaken by the Chinese central bank’s recent aggressive moves to introduce volatility to the currency.
Combined, those reasons give some hope that export figures are not all bad. “Surely we recognize that some of these February trade data appear no good, but we believe the real situation is not that bad, and could be quite normal, by analyzing two distortions, namely the Lunar New Year and fabricated trades last year,” Bank of America Merrill Lynch economist Lu Ting wrote in a report on Sunday.
One common way of ironing out seasonal factors is to take the data for January and February together. In this way, based on the official data from China customs, real growth in exports for the two months was a negative 1.7%. Already an improvement, the underlying numbers look far stronger when seasonal factors and over-invoicing are scrutinized.
Economists’ calculations vary, but the trend is the same. Standard Chartered calculates that growth was 5%, as does UBS. Louis Kuijs at RBS in Hong Kong goes lower with 3.1% while Lu Ting estimated 7-8%. “Looking at the January and February data together … suggests that exports remain broadly unchanged on a year ago,” Singapore-based Julian Evans-Pritchard, China economist with Capital Economics, said in a note. A much better picture emerges.
Even so, demand for Chinese goods does appear to be weakening slightly. Most estimates for January and February show export growth below the 7.5% recorded in the fourth quarter. HSBC noted in a report that growth in shipments to the big three economic regions of Japan, Europe and the US eased last month; exports to emerging markets have already begun to ease.
Given the importance many observers attach to exports when feeling for the health of the economy, trade data in the early part of 2014 will not be very helpful. Last year’s export figures were visibly distorted until May. Wait a bit longer to get a clearer view of what’s going on.
