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China's trade surplus up, RMB weaker

February 8, 2018
Bob Savage
Track Research

'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

February 8: China market moves 

TRADE

In January,
  • China's trade surplus fell to $20 billion from $50 billion, year-on-year, and
  • Imports skyrocketed 35 %, year-on-year, shocking market watchers.

RMB

The RMB ell over 1% today.
  • The most it's traded off since August of 2015 devaluation.
And the RMB has been trading below 6.30 now for over a week, even traded briefly at 6.25 
  • 'Many see 6.20 and 6.25 as very important levels because that's the August of 2015 devaluation - from there you had the  August 2015 2% devaluation that unsettled world markets,' according to Bob Savage of TRACK.
Why the weakening? Three reasons, Bob says: 
  1. 'The RMB did not like the trade data at all, and it weakened immediately.'
  2. 'The news overnight that HNA had a technical default.
  • 'The lenders to HNA - Deutsche Bank being probably one of the largest - were immediately under the scope.'
  • 'Deutsche Bank shares were hit overnight, and the euro was hit because the banking sector in Europe was under the gun.'

'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Specifically:
  1. China's falling trade surplus and
  2. The Renminbi's weakening on the trade news and on the news of HNA's credit technical default.
Part one: trade

'There's an obsession with watching what goes on with Chinese trade. China trade is a barometer for global demand for goods. Any change in that trade balance is an indication that something's changing there.'

'And, China's falling trade surplus shocked people. In January, China's trade surplus fell to $20 billion from $50 billion, and imports skyrocketed 35 %, year-on-year. There are two explanations for it.'

 'First is the more boring seasonal effect of the Chinese Lunar New Year holiday, where people realize they'll need goods over February and March but that they're going to be on holiday for a lot of February -  so, they better just get the stuff in in January. Some of the imported goods came that way.'

  • Interestingly, 'a lot of theses imports are in commodities and, strangely enough, that just means that Chinese inventory holdings of commodity goods went up.'
  • That turned commodities prices bearish today. 'People saw that the Chinese bought a lot of commodities in January, and it means that they're not going to buy a lot in February or probably March as they draw down those inventories.'
Second - and more important in the long run for its potential impact on China's current account - is this.
  • 'Overall there's been a 3-1/2% appreciation of the RMB against the dollar.' That's made imports cheaper.
  • 'And guess what the Chinese did? They imported more goods, because they felt richer.'
  • 'Now, the United States knows a lot about how when you make consumers feel richer with cheaper imports: they import more goods and the trade deficit gets worse.'
  • Why is this important? 'China wants to stoke domestic demand,' to become a consumer-driven economy.
  • But it succeeds, this 'has an implication for whether or not China continues to be a current account surplus country.'
  • If China is 'truly successful in creating domestic consumer demand - like that in Europe, Japan and the United States - then, it's probably going to start running a current account deficit, unless it actually targets trade.' 

1. Part one: why China's trade surplus is down

Image
‍I said trade surplus, not 'Trading Places'

'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Specifically:

China's falling trade surplus andThe Renminbi's weakening on the trade news and on the news of HNA's credit technical default.

Part one: trade

'There's an obsession with watching what goes on with Chinese trade. China trade is a barometer for global demand for goods. Any change in that trade balance is an indication that something's changing there.'

'And, China's falling trade surplus shocked people. In January, China's trade surplus fell to $20 billion from $50 billion, and imports skyrocketed 35 %, year-on-year. There are two explanations for it.'

'First is the more boring seasonal effect of the Chinese Lunar New Year holiday, where people realize they'll need goods over February and March but that they're going to be on holiday for a lot of February -  so, they better just get the stuff in in January. Some of the imported goods came that way.'

Interestingly, 'a lot of theses imports are in commodities and, strangely enough, that just means that Chinese inventory holdings of commodity goods went up.'That turned commodities prices bearish today. 'People saw that the Chinese bought a lot of commodities in January, and it means that they're not going to buy a lot in February or probably March as they draw down those inventories.'

Second and more important in the long run for its potential impact on China's current account - is this.

'Overall there's been a 3-1/2% appreciation of the RMB against the dollar.' That's made imports cheaper.'And guess what the Chinese did? They imported more goods, because they felt richer.''Now, the United States knows a lot about how when you make consumers feel richer with cheaper imports: they import more goods and the trade deficit gets worse.'Why is this important? 'China wants to stoke domestic demand,' to become a consumer-driven economy. But it succeeds, this 'has an implication for whether or not China continues to be a current account surplus country.'If China is 'truly successful in creating domestic consumer demand - like that in Europe, Japan and the United States - then, it's probably going to start running a current account deficit, unless it actually targets trade.' 

2. Part 2: how far will will the RMB weaken?

Image

'Part two is about the Renminbi today and is the more important story today.'

'The RMB did not like the trade data at all, and it weakened immediately, falling more than 1% -  even though the official rate setting China does every morning suggested that the RMB would, instead, be slightly stronger today.'

'This is the most it's traded off since August of 2015. There are two other reasons for this, besides the trade numbers.'

'First, the news overnight that HNA had had a technical default.'

'The lenders to HNA - Deutsche Bank being probably one of the largest - were immediately under the scope.' Deutsche Bank shares were hit overnight, and the euro was hit because the banking sector in Europe was under the gun.'

Second, the Chinese were looking at where the renmimbi has traded - it's been below 6.30 now for over a week, and it looked like yesterday it was trading at 6.25 for a brief shining moment.'

'This is important because many see 6.20 and 6.25 as very critical levels.'Why? 'Because that's the August 2015 devaluation level -  and from there you had the 2% devaluation that unsettled the world.''It is also important because that's the also level where many thought that Chinese export competitiveness was under threat by a too strong RMB.'

'So, after the trade number and after the HNA default, which is emphasizes the need for cheap money for the rollover debt, the issue is that RMB weakness is now putting in a floor below 6.30 -  that something the market is going to really watch closely.'

'And, if we think that the RMB could go to 6.40 or 6.50 again, then that has implications for the rest of the foreign exchange world, particularly Korea and Europe.'

What to watch for. 'Today was an exciting day. I'm paying a lot of attention to see if 630 is the new bottom for the dollar-RMB relationship, and to see if there's going to be more concern about:

'Higher interest rates, and 'Debt rollover of some of the more leveraged corporations in China.'

Bob Savage

Bob Savage

Chief Executive Officer
Track Research
  • Chief Executive Officer, Editor-in-Chief and Head of Research of Track.com
  • Joined FX Concepts as COO and Chief Strategist when Track.com was acquired by FX Concepts in 2012.
Track Research

Track Research

Trackresearch.com is the global marketplace for research ideas. It is a place where qualified contributors can share their stock, commodity and macro ideas with a unique group of institutional investors, high net worth individuals and other thoughtful market participants.

We are an independent platform for investment research and market ideas. Our content is submitted by highly qualified professionals with proven track records and a developed understanding of what is required to produce thoughtful research. We offer our contributors a unique distribution channel to a growing base of institutional money managers in search of top-quality, real-time research, as well as the general public. We provide filtering, messaging and alerting tools so that our readers can access what they want as soon as it is available to them.

Our management team has over seventy years of experience in financial services at top tier firms.

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China's trade surplus up, RMB weaker

China's trade surplus up,  RMB weaker

'The RMB did not like the trade data at all, and it weakened immediately - over 1% today.' 'Overnight, the world has moved a little bit away from its U.S.-centric obsession about equity volatility in the United States and around the world to what's going on in China,' says Bob Savage, CEO of TRACK and member of the soon-to-be-launched China Analyst Network.

Bob Savage

Bob Savage

Chief Executive Officer
Track Research
  • Chief Executive Officer, Editor-in-Chief and Head of Research of Track.com
  • Joined FX Concepts as COO and Chief Strategist when Track.com was acquired by FX Concepts in 2012.
Track Research

Track Research

Trackresearch.com is the global marketplace for research ideas. It is a place where qualified contributors can share their stock, commodity and macro ideas with a unique group of institutional investors, high net worth individuals and other thoughtful market participants.

We are an independent platform for investment research and market ideas. Our content is submitted by highly qualified professionals with proven track records and a developed understanding of what is required to produce thoughtful research. We offer our contributors a unique distribution channel to a growing base of institutional money managers in search of top-quality, real-time research, as well as the general public. We provide filtering, messaging and alerting tools so that our readers can access what they want as soon as it is available to them.

Our management team has over seventy years of experience in financial services at top tier firms.

THE TRACK FREE TRIAL

THREE SUBSCRIPTIONS LEVELS,ONE TO SUIT YOUR NEEDS

With the TRACK FREE TRIAL you can try out our prestigious PREMIUM SUBSCRIPTION for 2 weeks and our BASIC SUBSCRIPTION for 1 week. Once the 3 week trial period is over, you will have limited access to TRACK for an unlimited time at the FREE REGISTRATION level.

SIGN UP TO START YOUR FREE TRIAL

Channels

AsiaStrat
Granite Peak Advisory
Track Research
Trivium China
Gao Feng
Real Estate Foresight
China Beige Book