The Chinese economic rebound appears to be gaining momentum. A strong rise in exports and some core strength in import levels builds on other recent favourable news on retail spending, industrial production and rising share prices to suggest the Chinese economy is on the improve after almost three years of slowing GDP growth.
The Chinese international trade data revealed a pick-up in global trade and is important for a number of other reasons.
The export data presents clear evidence about how the rest of the world economy is performing. A weak world means weak Chinese exports, a pick-up in global demand will show up in stronger exports. Exports rose a solid 14.1 per cent in the year to December, a sharp lift after annual growth almost stalled a few months earlier.
This is undoubtedly why the export rise was greeted with such optimism. It provides a further hint to support the better economic news from the US and Japan and the consolidation of the eurozone, albeit at deep recessionary levels. The slowdown in China through the course of 2012, where annual GDP growth eased from over 10 per cent to around 7.5 per cent, was triggered in large part from faltering export demand as the economic weakness or recession in many major industrialised countries crimped export demand.
The import side of the trade data is a good guide to the momentum in the domestic economy in China. Predominantly raw materials, Chinese import growth is well linked to domestic infrastructure and construction spending, and the stronger than expected import levels point to a stronger pace of demand growth in China than was feared just a few months ago.
Further support for the Chinese economic pick-up scenario is evident in the recent jump in the stock market. The Shanghai Composite Index has risen a touch over 16 per cent from the December lows and while stock prices are still well below the peak levels in 2007 and 2008, the increase in the last six weeks is a positive trend.
In a sign of things to come, the Chinese trade data had a bigger influence on Australian and global financial markets than some recent US or eurozone news. The export strength and import rebound pushed the Australian dollar over 0.5 US cents higher just minutes after the news hit the wires – similarly, stock prices got a shot in the arm on the news that the Chinese economy is recovering from the 2012 slowdown. The Australian dollar strength has persisted and is now around $US1.0580, three-quarters of a cent above the pre-Chinese trade data levels.
That positive tone was also evident in the US markets this morning where stocks were trading positively, bond yields are higher, the US dollar was weaker and commodity prices are also higher.
The one missing link in the Chinese growth recovery story is a broadly based and sustained rise in commodity prices, not withstanding the uptick overnight. Apart from the stellar rebound in iron ore prices – from a low of $US87 a tonne in October to around $US160 a tonne now, the broader commodity price indices are still relatively flat. Any small rises that have occurred in oil or copper prices, for example, reflect in large part the depreciation of the US dollar. At the same time, coal prices are weak. A commodity price rebound would round out the building evidence of better news in China and indeed, in the global economy.
The critically important news from China continues today with the release of two sets of inflation data – the producer price index and the more important consumer price index.
For the best part of a decade, China’s incredible productivity surge and explosion of low-cost production has "exported” deflation to the rest of the world. In other words, a key reason why global inflation has been held stunningly low for the past decade was often falling prices for many manufactured items, which were lagged up by western consumers and business alike.
CPI inflation in China has decelerated appreciably through 2012, from a peak of 6 per cent to a low of 1.7 per cent in the year to October. The October reading appears to be the low point for inflation in the current cycle, annual inflation edged up to 2.0 per cent in November and is forecast to lift to 2.3 per cent with today’s data.
If this forecast is correct, it should be seen as generally positive news. It will add to already compelling evidence of a more broadly based pick-up in China and will signal demand pressures are on the improve.
It might also be another increasingly common occurrence where economic news out of China will drive global financial markets.