May's trade numbers released this morning showed a sharp drop in China's imports, reflecting weak domestic demand. Imports slumped 17.6% y/y from -16.2% previously and more pertinently, it contracted by double-digits for the 5th consecutive month.
On a 3mma trend basis, it fell for the 6th consecutive month to -15.5% with few signs of a turnaround as yet. Exports contracted for the third straight month at -2.5% y/y vs -6.4% in April. On a 3mma trend basis, it slipped to -8% from 9% previously after the near 50% jump in February due to the Lunar New Year distortions dropped out, notes Comerzbank.
The trade surplus subsequently widened to USD59.5bn from USD34.1bn in April. Overall, the trade figures highlight sustained weakness in domestic demand, namely manufacturing. This is despite the two rate cuts this year and suggests that monetary policy is having a muted or reduced impact on production. This could be attributed to
- 1) weak loans demand - the new economy sectors eg technology and healthcare, are not short of liquidity. At the same time, the old economy sectors eg property and infrastructure, which have greater demand are not receiving new loans
- 2) liquidity is finding its way into the stockmarket rather than the real economy. Near term, industrial production and growth overall may slow further as big ticket infrastructure projects stall, due to slow approval rates and influenced in part by the anti-corruption campaign.
"Stability in USD-CNY is probably the main goal for policy makers near term ahead of IMF's announcement on whether to include CNY into the SDR basket. It is due by year-end and could be announced sometime in Q3", says Commerzbank.
