China's Exports Surge, But Headwinds Gather
China's trade accounts continue to defy expectations of a slowdown, with exports in January surging by an impressive 10.6% year-on-year (y-o-y) versus consensus expectations of a substantially weaker 0.1% performance. The jump in shipments sent the 3-month rolling sum of the country's trade surplus to a five-year high of US$91.3bn.
As we wrote in December (see 'Regional Export Weakness Still Expected In 2014 In Spite Of China's Surge', December 18 2013), however, such figures should be taken with a grain of salt in consideration of the myriad distortive factors at play. In particular, we continue to note that the widespread over-invoicing of exports, as evidenced by the widening discrepancy between Hong Kong's reported imports from China and China's own figures, is likely to be exaggerating the acceleration in Chinese exports.
Indeed, December figures indicate that the discrepancy between Hong Kong's reported imports from China (US$22.7bn) and China's reported exports to Hong Kong (US$38.5bn) grew to a staggering US$15.8bn, the third-highest gap on record. Such a substantial difference indicates to us that Chinese exporters have been pumping up their export invoices in order to either skirt Beijing's strict capital controls (by shifting foreign capital into the mainland) or take advantage of tax rebates offered by the government to those who make shipments from the country's special economic zones (SEZs). That said, the largest gap on record (US$27.8bn) was notched in March of last year, suggesting that high base effects could begin to undermine y-o-y export growth figures over the coming months.
Double-Digit Pace Unlikely To Continue
Beyond these distortive effects, we reiterate that we find it unlikely that Chinese exports will continue to achieve double-digit growth over the remainder of 2014, and, we are therefore comfortable to retain our 2014 nominal export growth forecast of 8.0%. This outlook has been corroborated by recent leading indicators, such as the HSBC Flash PMI (purchasing managers' index), which fell into contraction territory (49.6) in January following a 50.5 print in December.
Likewise, official PMI figures have also reflected a slowdown in manufacturing activity, as January's 50.5 performance was the lowest such result since July 2013. Coupled with the strong Chinese yuan, as well as our middling economic growth outlook for the rest of Asia in 2014 (where a rapidly rising share of Chinese exports have been destined over recent years), we note that the balance of forces is firmly to the downside.