China’s Trading Marks

China’s trade surplus arrowed to $8.6bn in February from $19.5bn in January. The country’s export growth plunged to 6.5% YoY from 26.6% in January, while imports grew 35.1% YoY (from 27.5% in January) as commodity prices surged.
We have anticipated a slowdown in China’s export growth in 2008, but believe the severity of the slump in February was largely driven by two major one-off factors:
1. Export growth surged by 52% YoY in February 2007 as Chinese exporters rushed to beat widely anticipated cutes to VAT rebates. This in effect created a high base, from which the February 2008 growth rate was calculated.
2. Severe winter storms in opening months of the year have led to widespread power and transportation disruptions, which affected production and export levels.
We expect the export figures to rebound in March, but continue to anticipate a more moderate slowdown in export growth over the course of the year in response to the slowdown in the OECD economies (which take up two-thirds of China’s exports).While the demand for Chinese exports from emerging markets remains buoyant, we do not believe this will fully offset the moderation in developed markets.A slowdown in China’s export sector constitutes one of the key risks to economic growth in 2008. Total exports accounted for 36% of the overall economy in 2007, while the trade surplus accounts for about a fifth of China’s GDP growth.Meanwhile, soaring commodity prices continue to boost the value of imports – February marks the fifth month in a row that imports have grown faster than exports. Separately, China’s producer prices gained 6.6% in February from a year earlier – the fastest rate since December 2004. This again reflects rising cost pressures for a range of commodities and basic inputs.
China’s widening trade surplus has been a major source of excess liquidity. However, growth in the trade surplus is expected to ease in 2008 – impacted not only by weaker overseas demand, but also by the effect of a strengthening yuan, which makes exports more expensive but gives China more buying power abroad. This trend will be beneficial to China’s efforts to curb excess liquidity.

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