China Exports Fall as Lower Demand, Strong Yuan Hurt Growth

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China's Premier Li Keqiang
Li Keqiang, China's premier, is seeking to find ways to stimulate growth without sharply increasing leverage and sparking more defaults. Photographer: Chris Ratcliffe/Bloomberg

China’s exports declined more than expected in July, hobbled by a strong yuan and lower demand in the European Union, and adding pressure on Premier Li Keqiang to stabilize growth.

Overseas shipments fell 8.3 percent from a year earlier in dollar terms, the customs administration said. The reading was well below the estimate for a 1.5 percent decline in a Bloomberg survey and compared with an increase of 2.8 percent in June. Imports dropped 8.1 percent, widening from a 6.6 percent decrease in June, leaving a trade surplus of $43 billion. It came despite a few bright spots, including the highest monthly steel exports since January.

Along with weak domestic investment, subdued global demand is putting China’s 2015 growth target of about 7 percent at risk. The government has rolled out fresh pro-expansion measures, including special bond sales to finance construction, but has held off weakening the yuan as China seeks reserve-currency status.

“Exports are no longer an engine for China growth -- no matter what the government does, it’s just impossible to see strong export growth as in the past,” said Bank of Communications economist Liu Xuezhi. “It means additional slowdown pressure, and it requires the government to be more aggressive in the domestic market.”

Liu said China is likely to accelerate infrastructure spending as fixed-asset investment is the “the most immediate and effective” way to stimulate growth.

E.U. Exports

China’s exports to the European Union fell 2.5 percent in the first seven months of 2015 from a year earlier, while shipments to Japan dropped 10.5 percent. One bright spot was exports to the U.S., which expanded 9.3 percent.

The slump in exports “compounds downward pressure on China’s economy and threatens to bring exchange rate depreciation onto the table as a tool to restore competitiveness,” Tom Orlik, chief Asia economist at Bloomberg Intelligence, wrote in a research note on Saturday.

The People’s Bank of China has adopted a vice-like grip on the yuan, allowing little movement of the currency in the onshore market. The currency’s closing levels in Shanghai this week matched the tightest range recorded since a fixed exchange rate ended a decade ago.

“On a trade weighted measure, China’s yuan appreciated sharply since 2014,” said Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong. “Meanwhile, external demand remains weak as also shown by the poor export turnout in Taiwan and South Korea.”

A yuan depreciation is not a policy option because of the government’s desire to make it an international reserve currency, Liu said. The government will be “more aggressive in easing monetary policy and lowering taxes,” he said.

Oil Imports

While Chinese imports declined in July, it was mainly caused by falling commodity prices. China’s crude oil imports, by volume, rose to a record on a monthly basis as small, private refineries purchased more from overseas amid low oil prices.

“Looking at the import volume data -- which strips out the impact of price movements -- oil purchases remain on trend,” Orlik said.

In a quarterly report published on Friday, the People’s Bank of China said it will let the market play a bigger role in setting exchange rates while keeping them “at a reasonable equilibrium level.”

Domestically, the government is stepping up efforts to help growth. China is planning at least 1 trillion yuan ($161 billion) in bonds, and potentially a multiple of that, to fund construction projects, people familiar with the matter said earlier. Authorities are also expanding policy banks’ lending capacity.

— With assistance by Xin Zhou

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