Resilient trade balance likely to alleviate China's capital outflows

Data released earlier today showed that China's August trade data surprised the market slightly on the upside. Chinese surplus balance for Aug missed expectations, but both exports and imports came in much stronger-than expected. Details of the report:

China Trade Balance: USD 52.0 Bln (expected USD 58.85 Bln, previous USD 52.31 Bln)

China Exports USD (YoY): -2.8 percent (expected -4 percent, previous -4.4 percent)

China Imports USD (YoY): +1.5 percent (expected -5.4 percent, previous -12.5 percent)

Import growth was the biggest surprise in today's data release with domestic demand and lift from the electronics cycle seen as the main contributors. The underlying trend of import growth, and ultimately the trajectory of domestic demand will still depend on the pace of fiscal expansion.

Exports fell another 2.8 per cent after the 4.4 percent contraction in July, pointing to ongoing weakness in regional trade. However, the drop in exports was better than the anticipated 4 per cent fall and showed some promise that global trade may be experiencing some renewed vigour.

"We expect fiscal expansion to continue in 2H 2016. We also think there is an increasing likelihood that fiscal policy in 2017 will become more expansionary. Despite the smaller than expected contraction in export growth, we remain relatively wary of external demand in 2016 and 2017." said HSBC Global Research in a report.

Without the trade surplus, the net outflow would deteriorate further because of services deficit and portfolio outflows. In the first half of 2016, China recorded net capital and financial outflows of USD 217.4 billion. The solid trade surpluses in July and August might help ease the capital outflow pressures.