Over the weekend, the world’s two biggest economies – the US and China respectively released closely watched data relating to payrolls and trade balance. While payrolls in the U.S rose more than forecasted, leading to another record high on the S&P 500, Chinese exports saw the biggest drop since 2009. It remains to be seen how Chinese and Asian indices will react to the release of these two important data over the weekend.
 
On China’s unexpected export decline, Macquarie Equities Research (MER) released a note this morning stating that it is not as bad as it looks. Here’s why:
 
Export growth in Feb came in much weaker than expected, slumping to -18.1% year-on-year (yoy) from 10.6% in January (consensus: 7.5%). Import growth accelerated slightly to 10.1% from 10.0%. Trade balance turned into a deficit of US$23.0bn from a surplus of US$31.9bn. Although export growth in February is way below consensus, the slump is largely due to the very high base last year. Jan-Feb combined export data suggest external demand could recover modestly in 2014, but it is unlikely single-handedly to turn the Chinese economy around in 2014.
 
Negative to market sentiment, but actually not that bad: The fall of export growth in February could be partially attributed to the Chinese New Year distortion, as big swings in trade growth at the year-beginning have happened quite often in the past. Some might argue that Jan-Feb combined export growth also fell to -1.7% yoy from 7.4% in 4Q13. But note that the comparison base is distorted as exports grew 24% in Jan-Feb 2013 on faked trade data. By assuming exports in Jan-Feb 2013 to grow 8% (annual export growth in 2013) instead of 24%, exports in Jan-Feb 2014 would grow 12.5% instead of -1.7%.
 
Doubts on imports, not on exports: With February trade data, doubts on faked exports could largely settle, as exports to HK, the main destination for that purpose, plunged 34% yoy in Jan-Feb. Meanwhile, exports to US and European Union only dropped 13% and 10%. However, iron ore imports, traditionally being used by analysts as a gauge of domestic demand, surprisingly rose 21.4% yoy in Jan-Feb. Considering surging iron ore inventory at harbours and falling iron ore/steel prices, high import growth of iron ore is quite unusual. One possible explanation is some of these imports are for trade-financing deals, in order to provide much-needed funding to mills and trading firms.
 
Export growth would accelerate modestly in 2014: Given the strength of external demand in Jan and Feb, MER is comfortable with their forecast of 10.0% export growth in 2014, compared with 7.9% in 2013. External demand seems unlikely to be the magic bullet in 2014 as some might expect, although it will be not a major growth drag as well. As consumption growth tends to be stable and investment growth could fall in 2014 on Beijing’s deleveraging drive, China’s growth in 2014 will most likely fall in the range between 7.0% and 7.5%, compared with the actual growth of 7.7% in 2013.
 
Liquidity condition to normalize soon: Liquidity condition has been fairly easy so far this year, largely thanks to the huge amount of capital inflows, evidenced by the surging new FX purchase position in January. But given the sharp contraction of trade surplus in February, capital inflows have already started falling. The recent Renminbi depreciation, largely engineered by the PBoC, could further lessen capital inflows by breaking the one-way appreciation expectation. As such, MER expects liquidity condition to normalize soon: 7-Day repo, the key gauge of interbank rates, will likely climb up 4% in late March from 2.4% as of March 7.
 
Here are this week’s key economic reports scheduled for release, summarised below:
 
Mon 10 Mar: Japan Annualised GDP (4Q), China Money Supply (Feb)
Tue 11 Mar:Japan Machine Orders (Feb), Bank of Japan Monetary Base Target
Wed 12 Mar:Japan Domestic CPI (Feb), Eurozone Industrial Production (Jan), US MBA Mortgage Application for the week,
Thu 13 Mar: China Retail Sales Year-to-date, Industrial Production & Foreign Direct Investment (Feb), US Advance Retail Sales (Feb)
Fri 14 Mar:Eurozone Employment (4Q), US Univ. of Michigan Confidence (Mar)