China's Trade with U.S. and CNY more vulnerable under Trump's administration

There is little doubt that a Trump presidency does not bode well for China’s trade prospects and is anything but CNY-supportive given his purported animosity towards free trade and China more generally.

The People's Bank of China (PBoC) has only let the CNY weaken against the USD by less than 0.5 percent in the aftermath of the US presidential election. And although uncertainty about Trump’s likely policies will persist – the rhetoric, half-baked populist dogma and sound bites will need to be translated into actionable and deliverable policies.

We still think that Mr Trump’s election reinforces our argument that the PBoC will continue to control the pace of CNY depreciation, allowing it to weaken against the USD as well as the currency basket but only relatively little because of the lingering fear of capital outflows accelerating further on expectations of CNY depreciation, which has prevented faster CNY depreciation, limiting it to a little over 6 percent since the introduction of the ‘managed float’ in August 2015.

Nonetheless, CNY depreciation expectations appear to have strengthened and to have become embedded because of the relenting albeit very mild pace of currency depreciation.

Still, the latest trade and reserves data this week indicated that capital outflows have picked up again although they are still much lower than the USD 100 billion monthly outflows at the start of the year. Thus, the official reserves (out on Monday) decreased more than expected in October, by USD 45.7 billion to USD 3.121 trillion, after they declined by USD 18.8 billion in September.

The CNY will also continue to weaken against the basket, against which it has already lost around 6 percent so far this year. We always saw the shift to a basket as yet another way of gradually weakening the CNY against the USD and still think this to be the case.

The trade data on Tues showed exports coming in at –7.3 percent y/y in October in USD terms (consensus was for –6.0 percent y/y) after –10.0 percent y/y in September with exports to the U.S. down 5.6 percent y/y in October after –8.1 percent y/y in September and exports to Japan down 3.3 percent y/y in October after –7.0 percent y/y in September.

But in CNY terms, overall exports again fell less, printing –3.2 percent y/y in October after –5.6 percent y/y in September. Imports declined by 1.4 percent y/y in October (consensus was for –1.0 percent y/y) after –1.9 percent y/y in September as imports from the U.S. fell by 6.9 percent y/y in October after –11.8 percent y/y in September while imports from Japan increased by 5.4 percent y/y in October after 6.3 percent y/y in September. And in CNY terms, imports rose by 3.2 percent y/y in October after 2.2 percent y/y in September. Consequently, the trade surplus widened to USD 49.1 billion in October (consensus was for USD 51.7 billion) from USD 42.0 billion in September.

The big monthly trade surpluses will continue to be CNY-supportive although there are ever-greater signs that exporters are not repatriating all their foreign currency earnings on expectations that the CNY will continue to weaken.

Finally, the latest inflation data on Weds were also hardly CNY-supportive, showing a pick-up in headline inflation, further dispelling any deflation concerns just in case anybody was still harbouring them.

Thus, the CPI came in at –0.1 percent m/m, +2.1 percent y/y in October (in line with consensus) after 0.7 percent m/m, 1.9 percent y/y in September, still well below well below its 3 percent target as food inflation rose to 3.7 percent y/y in October from 3.2 percent y/y in September and urban inflation edged up to 2.2 percent y/y in October from 2.0 percent y/y in September. Consumer goods prices increased by 1.9 percent y/y in October after 1.7 percent y/y in September while inflation in services edged up to 2.5 percent y/y in October from 2.4 percent y/y in September.

The price pipeline is also continuing to normalise with the PPI up 0.7 percent m/m, 1.2 percent y/y in October (consensus was for 1.0 percent y/y) after 0.5 percent m/m, 0.1 percent y/y in September as prices of raw materials were up 1.9 percent y/y in October after –0.2 percent y/y in September and prices of manufactured goods rose by 0.9 percent y/y in October after 0.1 percent y/y in September.