The overall mood in the markets will likely remain tentative after Thursday’s soft data out of China raising fresh doubts about that country’s growth outlook.
China’s exports fell -6.6% in March from the same period last year, missing expectations of positive growth; imports fell -11.3% in March. This follows the -18% drop in exports February. This is bad news, but interpreting Chinese economic data is never straight forward.
The widespread perception among economists who closely follow the Chinese economy is that the export data from the year-earlier period was artificially boosted by over-invoicing, an illegal practice that Chinese exporters use to dodge tough capital controls and bring capital into the country.
Stripping out exports to Taiwan and Hong Kong, two destinations the most distorted by over-invoicing issues, exports were up to the rest of the world in March.
Issues related to the reliability of the export data notwithstanding, there is plenty of other corroborating data that is showing the growth momentum faltering this year. Industrial production in the first two months of the year grew at its slowest pace in two years and retails sales have also been coming down as well. The Chinese authorities recently announced a stimulus package in response to this slowdown. But the perception is that it may not be enough to nudge growth higher as long as bank lending remained restricted.
The Chinese authorities tightened bank lending rules to clamp down on speculative activities in the shadow banking sector. It isn’t clear if they will be willing to prioritize growth over policy discipline, but the central bank’s liquidity injection today, the first in more than two months, may be indicative that they are easing up. We will find out in the next few days as March bank lending data comes out.
Director of Research