China Export Dip Tempts Policy Makers to Keep Weakening Yuan

  • Weaker returns on property may intensify capital outflows
  • Government intensifying measures to rein in corporate debt

China Exports Fall Most in 7 Months

China’s renewed export weakness is coinciding with a clampdown on surging home prices and corporate debt, stoking expectations policy makers will allow further yuan depreciation to buffer the economy.

Exports in September dropped the most since February amid anemic global demand, while imports declined 1.9 percent, leaving a $42 billion trade surplus. Analysts at Bank of America Corp., RBC Capital Markets and Capital Economics Ltd. estimate further depreciation for the yuan, already near a six-year low.

With S&P Global Ratings and the International Monetary Fund among those warning about the threats from rapid credit expansion, policy makers risk cooling the economy with new property restrictions. But their plan for economic growth of at least 6.5 percent this year leaves little room for maneuver. The upshot: a weaker yuan is needed to support an industrial sector that’s returning to profitability as it emerges from four years of deflation.

"China is running out of options and letting the yuan go is the lowest-cost option for them," said Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong. "We’ve seen them move in this direction. There’s more work to do."

The yuan is headed for the biggest weekly decline since January as mainland markets returned from holiday to face intensified depreciation pressures from a rising dollar. The yuan has dropped 3.4 percent against the dollar this year, the biggest decline in Asia.

While depreciation’s not helping exporters in dollar terms, it cushions the blow when their shipments are counted in local currency terms, underpinning a recovery in industrial profits.

The yuan will weaken 17 percent over the next two years as government efforts to cool the housing market, easier monetary policy and higher U.S. borrowing costs spur capital outflows, according to a report from Deutsche Bank AG.

China’s currency will end 2017 and 2018 at 7.4 to the dollar and 8.1, respectively, compared with current levels of around 6.7, economists Zhang Zhiwei and Li Zeng wrote in a report Thursday. The nation’s economic growth will probably slow to 6.2 percent next quarter, while outflows will intensify in the next few months, they wrote.

September’s export drop snapped a six-month rising streak with a 9.8 percent fall in shipments to the EU and an 8.1 percent decline to the U.S. The trade surplus fell to $42 billion from $52 billion a month earlier.

Room to Fall

"The September data will stoke concerns that China’s currency has further room to fall," Bloomberg Intelligence economists Fielding Chen and Tom Orlik wrote in a report. "The fall in exports occurred despite favorable moves in China’s exchange rate, which should have boosted competitiveness."

Third-quarter growth still probably held up at 6.7 percent for a third straight quarter, according to a Bloomberg survey of 32 economists before the official report due Oct. 19.

September’s trade setback coincides with new measures to rein in the nation’s bubble-prone property market. At least 21 cities have introduced purchase restrictions and toughened mortgage lending since late September, reversing two years of easing to support buyers.

Goldman Sachs Group Inc. says more tightening is likely to follow if prices keep soaring, while Citigroup Inc. estimates shrinking demand may lead sales volume to contract in the fourth quarter.

China’s currency outflows may already be bigger than they look, with Goldman Sachs warning earlier this week that a rising amount of capital is exiting the country in yuan rather than in dollars.

Debt Fight

The State Council, China’s cabinet, stepped up its fight again excessive leverage this week when it issued guidelines to reduce corporate debt and said it won’t bear final responsibility for borrowing by companies. Officials from the central bank and other regulators held a briefing at which they described corporate leverage as high among major global economies.

China’s total debt grew 465 percent over the past decade, according to Bloomberg Intelligence. Total debt rose to 247 percent of gross domestic product in 2015, from 160 percent in 2005, with corporate debt jumping to 165 percent of GDP from 105 percent.

"China is still being kept afloat by a housing bubble and massive state stimulus," said Michael Every, head of financial markets research at Rabobank in Hong Kong. "The export backdrop merely underlines some of the downside risks to GDP growth ahead. Expect the yuan to move down with it."

— With assistance by Kevin Hamlin

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