China’s exports came in weal in July, likely to face headwinds in H2

China’s July trade data released this morning was not quite impressive. The country’s exports rose 2.9 percent in CNY terms in July. But it fell 4.4 percent in USD terms, as compared with June’s decline of 4.8 percent. This indicates that momentum in exports has not picked up. On the other hand, imports shrank 5.7 percent in CNY terms and 12.5 percent in USD terms, as compared with June’s -2.3 percent in CNY terms and -8.4 percent in USD terms.

In the second half of this year, exports are likely to see solid headwinds, particularly from Europe, said ANZ in a research note. In the USD terms, exports to the EU, US and Japan shrank 3.2 percent, 2 percent and 5.2 percent respectively last month. In the second half of 2016, sluggish growth in Japan and Europe is expected to weigh on China’s exports. UK’s exit from the EU will further be a drag on the exports to the EU, noted ANZ.

“Together, the EU and Japan make up over a fifth of China’s total exports, thus, we expect to see a challenging second half of the year for China’s export sector,” added ANZ.

Fiscal policy is still the main method for steadying aggregate demand. Even if domestic consumption continues to be strong, with retail sales year to date growing 10.3 percent in the first half, sluggish exports continue to be a drag on the demand side. Hence, solid fiscal policy might be required for China to attain its growth target.

In July, China’s trade surplus widened to USD 52.3 billion. But despite the widening, the Chinese yuan is likely to witness modest depreciation pressures in the near term. Balance of payment data implies that current account surplus in the recent years has narrowed, while the services deficit has broadened.

In the second quarter of 2016, current account surplus reached USD 59.4 billion, more than the first quarter’s USD 39.3 billion. However, it is much lower than the quarterly average of USD 82.7 billion in 2015. The non-reserve financial account also recorded a major deficit of USD 93.9 billion in the second quarter from first quarter’s USD 123.4 billion. This suggests that capital outflow pressures continue to be there; however, the pressure seems to be easing slightly.