China’s trade surplus reaches six-month high in June, domestic demand likely to drive import growth in H2

Chinese trade surplus reached a six-month high in June, owing to a considerable deceleration in import growth. Import growth eased to 14.1 percent year-on-year in June from May’s 26 percent. The growth in imports of mechanical and electrical products, which account for over 40 percent of Chinese total imports, deceleration to 5 percent year-on-year in June compared with 23.6 percent in May. This lowers its contribution to overall import growth to 2.2 percentage point in June from 10.7 percentage point in the earlier month. The imports of high-tech products decelerated to 9.4 percent year-on-year in June, ending its above 20 percent growth in the prior three months.

But it is unlikely that China will continue to enjoy a high trade surplus in the second half of this year, considering the effect of the ongoing trade tensions. The trade surplus rose to USD 41.6 billion in June from USD 24.2 billion prior. But, such trend is unsustainable, according to an ANZ in a research report.

Chinese exports are facing higher downside risks in the second half as the U.S. began imposing tariffs on Chinese products from 6 July with the likelihood of expanding the tariff list in the future. This might limit China’s export growth in the quarters ahead. Following the release of June’s trade data, China’s Customs Authority stated that they will closely monitor the trade performance going forward.

Policymakers of China might be under pressure to stimulate domestic demand, which might drive import growth in the second half of this year. The boost in domestic demand might help in countering the potential negative effect of the U.S. – China trade tensions, which indicate few signs of ending soon. Furthermore, Chinese policymakers might also consider measures to stimulate private consumption in the near future, with investment another likely option. All these might avert China’s import growth from a rapid deceleration, depleting the trade surplus, stated ANZ.

At 13:00 GMT the FxWirePro's Hourly Strength Index of Chinese Yuan was highly bearish at -139.494, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at 31.2975. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex