Li Target Challenged by China Exports, Producer Prices

China’s biggest drop in exports since 2009 and deepening factory-gate deflation highlight the challenges for Premier Li Keqiang in achieving this year’s economic-growth target of 7.5 percent.

Overseas shipments unexpectedly declined 18.1 percent in February from a year earlier, customs data showed March 8, compared with analysts’ median estimate for a 7.5 percent increase. Producer prices fell 2 percent, the most since July, according to a statistics bureau report yesterday, extending the longest decline since 1999.

Asian stocks fell and metals including copper declined as the data stoked concern over the outlook for the world’s second-biggest economy, while the central bank weakened the yuan’s reference rate by the most since 2012. Distortions from the Lunar New Year holiday and false invoices that inflated trade numbers last year, along with larger-than-projected imports, make it harder to assess the true picture.

“There is an intrinsic inconsistency in their policy target and the reality of the economy,” Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a phone interview. Growth below 7.5 percent in the first half may spur the government to use fiscal stimulus, and “they do have room to do that but by doing so it will compromise China’s economic reform agenda,” he said.

Stock Indexes

The MSCI Asia Pacific Index of stocks dropped 0.9 percent as of 10:03 a.m. in Shanghai, headed for the first decline in five days, while China’s benchmark Shanghai Composite Index was down 1.3 percent. The yuan weakened 0.26 percent to 6.1440 against the dollar after the central bank cut the reference rate by 0.18 percent.

Premier Li announced the goal for 2014 gross domestic product growth last week at the opening of the annual meeting of the National People’s Congress in Beijing, a pace unchanged from last year. He also set a target for consumer inflation of about 3.5 percent this year, the same as in 2013, and a goal of 7.5 percent for growth in foreign trade.

The consumer price index rose 2 percent in February from a year earlier, a 13-month low, data from the National Bureau of Statistics showed yesterday.

The yuan last week posted its largest weekly increase since October, following the biggest monthly decline since the government unified official and market exchange rates at the end of 1993.

Policy Push

The cut in the yuan fixing “is significant, coming on the heels of poor trade data, and suggests a possible policy push to weaken the yuan to help exporters,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB.

The yuan’s 1.4 percent drop in February may have helped spur the disappearance of over-invoicing, a practice used to disguise capital inflows that plagued trade data in the first four months of last year. Under-invoicing of exports may have occurred in the second half of February to facilitate money outflows, Louis Kuijs, chief China economist at Royal Bank of Scotland Group Plc in Hong Kong, said in a note.

Imports rose 10.1 percent in February from a year earlier, more than projected, leaving a trade deficit of $23 billion, the biggest in two years, according to customs data.

Debt Risks

Any weakening of global demand as well as falling prices for manufacturers may complicate plans by Li and President Xi Jinping to carry out the broadest economic-policy shifts since the 1990s while clamping down on debt risks and pollution.

Shanghai Chaori Solar Energy Science & Technology Co., a maker of solar cells, on March 7 became the first company to default in China’s onshore bond market after failing to pay full interest due.

The coal industry in northern Shanxi province suffered gravely because of a slump in prices last year, Governor Li Xiaopeng said March 6 in Beijing.

In a more positive sign, growth this year at Hangzhou Wahaha Group Co., the largest Chinese beverage maker, is “not too bad” and sales are likely to increase about 20 percent, Chairman Zong Qinghou said yesterday at the NPC meeting.

Customs data showed overseas shipments fell 1.6 percent in the first two months from a year earlier. China’s exports to Hong Kong, which diverged last year from the city’s data on imports from the mainland, fell 21 percent, compared with a 61 percent increase in the January-February period of 2013. Chinese regulators in May started a crackdown on practices that inflated trade data.

Data Adjustment

Economists from UBS AG, RBS and Bank of America Corp. estimate exports for January and February combined did expand after taking into account inflated data last year.

UBS sees underlying export growth of about 6 percent, while RBS estimates 3.1 percent and Bank of America put the figure at around 7 percent to 8 percent.

“In terms of the underlying momentum, we expect export growth in 2014 to continue to develop favorably,” wrote RBS’s Kuijs, a former World Bank economist. At the same time, the “global recovery is not a steep one and disappointments are possible,” he said.

Investors will this week get more details on the economy’s performance as well as the outlook from senior leaders. The statistics bureau will provide data on January-February industrial production, retail sales and fixed-asset investment on March 13. The central bank will publish figures for February credit and money supply by March 15.

Press Briefings

People’s Bank of China Governor Zhou Xiaochuan will give a briefing on March 11 and Premier Li will hold a press conference on March 13.

Subdued inflation below the government’s 2014 target will give the central bank more room to ease liquidity and maintain lower money-market interest rates, said Lu Ting, head of Greater China economics at Bank of America in Hong Kong.

China’s seven-day repurchase rate, a gauge of funding availability in the banking system, averaged 3 percent last week, down from 4.98 percent at the end of January.

“The low CPI inflation could be good news for markets as monetary tightening is definitely not justified,” Lu said in a note yesterday. “Lower and more stable interbank rates should be supportive of delivering a stable GDP growth.”