Reviewing China’s Trade Balance Data

The Chinese Trade Balance was released during the early morning hours today, showing some mixed data. However, the impact has been muted as it’s the election day in the US; therefore, today’s economic releases are more likely to be overshadowed by the election developments.

Definitions

• Trade Balance: This figure calculates the difference in value between imported and exported goods during the previous month

• Imports: Import is a good or service brought into one country from another. The word “import” is derived from the word “port,” since goods are often shipped via boat from foreign countries.

• Exports: An export is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade. The sale of such goods adds to the producing nation’s gross output. If used for trade, exports are exchanged for other products or services in other countries.

Why Is This Important?

Export demand and currency demand are directly linked because foreigners usually buy the domestic currency to pay for the nation’s exports. Export demand also impacts production and prices at domestic manufacturers.

What Does This Mean For PBoC

The Peoples Bank of China has been controlling the currency for the past few years. The bank devalued the Chinese yuan to support exports. The Chinese Yuan, therefore, lost more than 13% since the devaluation began back in 2014. Since then, the USD-Dominated Trade Balance returned from a deficit of $-22.56B to a surplus of more than $50B, which means that the devaluation is working (generally speaking).

Despite the devaluation and the surplus in the trade balance, the numbers give us a different story. Chinese Imports have been declining for 23 of the last 24 months (falling 1.4% YoY in USD terms) and for 18 of the last 20 months. Also, despite a devaluing yuan, exports have declined YoY (-7.3% YoY in October).

What Does This Mean For The Global Economy?

Well, today’s trade data can be considered a disappointment across the board, which suggests that the global economy is far from stabilizing. The recent GDP and PMI data suggest that as well.

What Does It Mean For The Fed?

Here, traders need to be very careful. If China’s domestic economic weakness spills over the rest of the world as it did in 2015, the Federal Reserve is more likely to hold back again and keep the rates on hold. But they have to come up with convincing excuses to keep the market happy.

More Devaluation?

There is no other option. As noted before, devaluing the Yuan did help the Chinese economy show some sort of stabilization. The GDP for the past three-quarters came in with the same growth rate of 6.7%. Yet, despite the surplus in the trade deficit, the government would like to see higher exports again. How? Most probably through further devaluation of the national currency. The CNH is trading around 6.77, which is almost near the lowest level in more than 6 years. What’s next? 6.80-6.85 is not far away from the current levels.