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China’s May Export Numbers Signal Growth Is On Track

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China’s export data should offer a much clearer picture of trade fundamentals in the coming months, because last year’s heavy over-invoicing activity has effectively faded. Leading indicators from the U.S. and Europe suggest that China’s export growth remains on track to meet 7.5% this year, according to a new report by China economist at UBS Securities Wang Tao.

UBS is forecasting that China’s export growth will be 7.5% for 2014.

China’s May export growth picked up from 0.9% year-on-year to 7%, largely in line with market expectations of around 6.7%. Largely reflecting the fading impact of over-invoicing in early 2013, May exports to Hong Kong, Taiwan and ASEAN rebounded visibly. The same base effect and solid demand also led to firmer growth of processing exports, especially exports of high-tech and mechanical, electrical products.

China’s imports surprisingly declined by 1.5% year-on-year in May, compared with a market expectation of 6% growth. Stripping out over-invoicing distortions and price effects, May’s import volume shrank as well, reversing April’s increase of 5.4% to a decline of 3.5%.

Commodity-related ordinary imports pushed May’s import growth into the red, pointing to still weak domestic demand and perhaps a waning of March-April’s restocking purchases. As a result of weak demand as well as commodity prices, import value of raw materials and commodities, such as iron ore, copper, crude oil, steel product and plastic all weakened.

UBS expects this modest export recovery and the government’s "mini-stimulus" measures to offer a partial counterbalance to the ongoing property downturn, and to help defend the government’s "around 7.5% GDP floor" for this year. UBS has already incorporated these factors in its own 7.3% GDP growth forecast for 2014.

In addition, UBS says that despite a disappointing reading in May, China’s imports of investment goods should firm up in the coming months on the back of the government’s accelerated project approvals and construction of key infrastructure projects.

Any upside to 2014’s import growth print will however be capped by the ongoing slowdown of property activity, UBS warns. This should result in a likely expansion of China’s trade surplus, which will limit any downside pressures on the RMB exchange rate. The bank is forecasting a 6.25 exchange rate of the RMB against the U.S. dollar at the end of 2014.

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