China’s exports fall more than expectations in October, external demand continues to be weak

China’s exports continued to decline in October, falling by more than consensus expectations in the month. Exports fell 7.3 percent in dollar terms, as compared with the consensus forecast of a drop of 6 percent. In September, the nation’s exports had declined 10 percent. Meanwhile, imports fell 1.4 percent in October, as compared with the consensus expectations of a decline of 1 percent. China’s trade balance in USD terms came in at a surplus of USD 49.06 billion, as compared with September’s surplus of USD 41.99 billion. Consensus expectations were for a surplus of USD 51.70 billion.

It is evident by looking at the October trade report that domestic forces are driving China’s economy and not external ones. External demand has continued to stay weak; however, it has not deteriorated considerably. But both imports and exports have dropped below expectations. The trade data is in line with the recent PMI figures that have indicated a divergence between domestic and export orders, noted Nordea Bank in a research note.

Trade balance of China has started diverging from its foreign reserves. Several exporters are keeping the USD proceeds from their exports instead of selling the USD to banks because of hovering expectations of additional CNY depreciation, noted ANZ in a research note. Meanwhile, net outflows of cross-border payments are greatly denominated in RMB. This has eased the pressure on foreign exchange purchases by merchandise traders onshore.

China also published its foreign exchange reserves for October yesterday that indicated a greater fall than the market projection. China’s FX reserves for October dropped USD 46 billion, mainly because of the USD strength. By taking a look at the net capital outflows, it appears that the pressure is quite small. But the gross outflows have been comparatively large; however, to a greater degree were countered by capital inflows into the growing bond markets, in particular after the SDR inclusion, said Nordea Bank.

The People’s Bank of China is expected to increase the use of medium-term lending facilities in order to counter the pressure of capital outflows on onshore market liquidity, according to ANZ.