Strong RMB Has Eroded China’s Export Competitiveness

The author is ANZ Greater China chief economist Li-Gang Liu

China’s September trade growth slowed largely due to festival effects. The mid-Autumn holidays fell in the middle of the month this year, whereas it fell on the last day of the month in 2012.

While the market speculated that the slowdown in September was because export over-invoicing had artificially pushed up base volumes, our preliminary comparison showed that the port throughput indeed slowed in major wharfs last month.

As the port throughput data, as well as onshore commodity prices, softened in September, we would like to highlight that downside risks to China’s economy remains.

We also think the strong RMB has eroded China’s export competitiveness as well.

We still maintain our forecast that China’s economy is likely to grow 7.6% to 7.7% in the third quarter, and believe that the economy will gain 7.6% this year.

In the meantime, China’s trade surplus declined sharply in September, indicating a downside risk to RMB exchange rate in the short term.

While the PBoC intervened in the spot market (buying USD and selling RMB) frequently, the market turned to selling USD/CNY in the FX forward market, resulting in a flattening forward curve.

As a result, onshore USD liquidity started to tighten although RMB liquidity conditions have eased.

(The article has been edited for clarity)

 
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