China’s trade surplus contracts in December, trade surplus unlikely to counter fall in FX reserves this year

China’s exports in USD terms declined 6.1 percent year-on-year in December, as compared with the fall of 1.6 percent in November and market expectation of a fall of 4 percent. Meanwhile, imports in USD terms rose 3.1 percent, as compared with the rise of 4.7 percent and consensus projection of a rise of 3 percent.

China’s trade balance in USD terms came in at a surplus of USD 40.8 billion, contracting from a surplus of USD 44.2 billion. Consensus expectations were for a surplus of USD 47.6 billion. In CNY terms, the trade balance came in at a surplus of CNY 246.8 billion, a contraction from CNY 298.1 billion in November.

Export data for December shows that China lags behind the recent rebound seen in Asian exports and therefore the country’s trade outlook would continue to challenging this year. Weak global demand and anti-globalisation sentiment would continue to cloud the outlook of Asia’s export, including China’s.

“We expect commodity prices to be a swing factor for China’s imports in 2017, although stabilised domestic demand will provide some support”, said ANZ in a research report.

The main concern is that U.S. President Donald Trump’s stance towards China’s trade might bring long-term structural weakness in exports of China. Trump’s trade policy would possibly prompt U.S. businesses to shift their production facilities away from China, although China’s attempts in promoting high-end manufacturing might counter part of the loss.

China’s trade surplus in 2016 was not able to counter the fall in FX reserves, a trend that might continue this year. In the past decade, China’s trade surplus has been a major contributor to its foreign exchange reserves. But this began changing in the second half of 2014 when RMB’s one-way appreciation trend reversed.

Foreign exchange reserves fell from the peak of USD 4 trillion in mid-2014 to USD 3 trillion at the end of 2016. China’s annual trade surplus contracted to USD 510 billion in 2016 from USD 594 billion in 2015. If it contracts further this year, it might reduce China’s capability to counter capital outflow pressures.