China will report its August trade balance on Monday, with markets closely scrutinising the data for insight into the trade war and whether Beijing will step up stimulus measures. The data is particularly important to currencies from countries that export to China amid global trade disruption. Australia’s surprise Q2 GDP growth has left interest rates in limbo, making the AUD more vulnerable to external factors.
The consensus among economists is that China’s trade will decelerate in the August report as it faces a hard comparable last year, and a fade of the trade truce bump seen in June and July. Shipments to the US are expected to be weaker. Additionally, the threat of higher US duties on China-sourced goods being rerouted could also weigh on the data results.
What the Market is Looking For?
China’s August trade surplus is expected to increase to $98.2 billion from $91.0 billion a month earlier. However, that change is likely to be driven by relative differences in imports and exports. Total trade among is projected to increase, but at a slower pace than in July, which saw an extraordinary boost from the US and China agreeing on a trade truce.
Exports from China are expected to have grown 5.0% in August, which is slower than the 7.2% in July. But the prior number also beat forecasts at the time. Imports, meanwhile, are projected to grow at 3.0%, which is lower than the 4.1% growth rate reported a month earlier. Slower demand for raw materials to feed the construction sector amid the property downturn is seen as the main driver of the slower demand. That could pose a bit of a challenge for the AUD, as iron ore is the primary import material for construction.
Negotiations Are Ongoing
Back on August 11, China and the US agreed to extend their tariff truce by another 90 days. That kept US duties on Chinese goods at 30% and Chinese levies on US goods at 10%. However, there seems to have been little progress in securing a more permanent deal. Trump has occasionally threatened new tariffs, arguing that China is not living up to its export agreement concerning rare earth magnets. Senior Chinese trade negotiator Li Chenggang was in Washington late last month, with little of substance coming from the meetings.
Economists suggest that tariffs of over 35% on China make costs prohibitively high for Chinese exporters. Many have attempted to mitigate the impact of tariffs by increasing exports to other economies, such as those in Europe, which may help alleviate some inflationary pressure. However, sluggish export growth implies slower import growth, and could drag on economies that rely on selling to China, including Japan, Australia and Germany.
And Stimulus?
Markets could be in a “good news is bad news” mode concerning trade, as China’s central government has been trying to prop up the economy with massive spending programs. Those include the expected rate cut from the PBOC. But if the data is solid, then those stimulus programs might be delayed, and the market might react negatively to it.
Overall, however, markets might be focused primarily on signs of global growth and the impact of tariffs. If exports decline more than expected, it could signal depressed economic demand outside of the US, and weigh on commodity currencies.
