Falling exports add pressure to the yuan, pulling it down to a six-year low
China’s exports dropped the most since February 2016 after global demand remained tepid, adding pressure to the yuan and pulling it down to a six-year low, according to China’s General Administration of Customs and as reported by Bloomberg on October 13th, 2016. In September 2016, exports fell 10% Y-o-Y to $184.51 billion, following a 2.8% drop in August 2016 and more than market estimates of a 3% fall. In yuan-denominated terms, exports fell by 5.6% Y-o-Y for the first time since February 2016, following a 5.9% increase in August 2016.
The export data are consistent with the depressed volumes of global trade as predicted by the World Trade Organization (WTO). The WTO revised downwards its forecast for global trade growth in 2016 to 1.7% from the earlier estimate of 2.8% in April 2016, on September 27th, 2016. The downward revision is mainly on account of a slowdown in China and falling levels of US imports, marking the first time in 15 years that global trade is expected to lag behind global GDP growth. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.
During September 2016, Chinese exports to the EU fell 9.8%, UK by 10.8%, and US by 8.1%. Falling exports to the EU and the UK shows that China is yet to recover from the downside risks associated with the Brexit vote in June 2016. Crude oil imports rose to a record as a new strategic reserve site became operational. Steel exports shrank for a third month to the lowest since February 2016. China’s trade surplus at the end of September stood at $42 billion. Export growth has been a major factor supporting China’s rapid economic expansion. However, over the last two years, China’s exports declined due to weaker global demand, but China’s proportion of global exports rose to 13.8% in 2015 from 12.3% in 2014.
In September 2016, Chinese imports unexpectedly decreased by 1.9% Y-o-Y to $142.52 billion, compared to a 1.5% rise in August 2016 and versus market consensus of a 1.0% growth. In yuan-denominated terms, imports rose 2.2% Y-o-Y compared to a 10.8% growth in August 2016. The drop in import volumes is mainly due to a fall in imports of a number of key commodities, including iron ore and copper. A rebound in global commodity prices in recent months has helped temper China’s long export and import slump, but the country’s foreign trade still faces significant downward pressure.
Yuan weakens to lowest level in six years
China’s currency fell to a six-year low of 6.7282 yuan per dollar, extending its 2016 decline against the U.S. dollar to 3.4%, the biggest decline in Asia, and weakened 6.2% against a 13-currency trade-weighted index. The People’s Bank of China weakened the daily reference rate for the seventh day in a row, the longest weakening run since January 2016, on October 13th, 2016. Experts opine that the weaker yuan would not have a big impact on trade in the next two months, since the effect of depreciation on trade is diminishing.
The yuan has been trending downward for more than a year now as traders and investors eliminate bets on China. The currency’s decline would be much worse if China’s government had not stepped up its efforts to prop up the yuan’s value amid capital outflows.