China's trade sees rosy start, caution remains

Stronger-than-expected growth in China's foreign trade last month has surprised the market and prompted many analysts to look for further hints of underlying economic strength.

China's foreign trade volume climbed 10.3 percent year on year in January to 382.4 billion U.S. dollars, marking a strong beginning for the year, according to customs data released Wednesday.

Exports rose 10.6 percent from a year earlier to 207.13 billion U.S. dollars, while imports increased 10 percent to 175.27 billion U.S. dollars, the General Administration of Customs (GAC) said in a statement.

The trade surplus stood at 31.86 billion U.S. dollars last month, up 14 percent from a year ago and 24.25 percent from December.

STRONG UPSIDE SURPRISE

Chang Jian, chief China economist at Barclays, called the January figures "surprisingly strong," as the institution expected weak January trade performance based on weak PMI export orders, a high base from last year, and holiday distortions.

According to the National Bureau of Statistics, the index for new exports orders fell 0.5 point in January to 49.3, under the boom-bust line of 50 for a second month in a row.

"Today's strong export report could have been boosted by a rush of shipments ahead of the Chinese New Year holiday," Chang said.

The Spring Festival, or China's lunar new year, fell on Jan. 31 this year, marking the start of a week-long holiday for Chinese workers. The holiday began on Feb. 10 in 2013, and last year's additional working days contributed to its high base of comparison.

Overall, the data suggest that the underlying strength of Chinese exports is probably better than we expected, Chang said.

His views were echoed by Lu Ting, chief China economists with Bank of America Merrill Lynch.

The strong trade growth will be positive to markets even if the quality of January data was significantly affected by the lunar new year holiday, said Lu.

"We may still claim that these readings are quite encouraging and might point to stable economic growth in the first quarter," Lu said.

CAUTION REMAINS

New data showed that trade with the European Union, China's largest trade partner, surged 14.6 percent to 341.19 billion yuan, while trade with the United States, its second-biggest trade partner, rose 8.8 percent to 299.23 billion yuan.

China's trade with the Association of Southeast Asian Nations, its third-largest trading partner, rose 11.3 percent year on year to 259.06 billion yuan, and trade with Japan rose 7.8 percent to 170.05 billion yuan.

Based on the breakdown information, Lu said the strong exports were driven by demand from the EU and the U.S., while the strong import growth was driven by China's commodity demand, especially iron ore and copper.

Zhang Yansheng, secretary general of the Academic Committee at the National Development and Reform Commission, said the market was generally optimistic about economic prospects of major economies, including the EU, U.S. and Japan, and about steady growth in emerging markets.

China's export growth will be quite strong this year on the back of recovering external demand, Zhang said.

However, Chang said he remained cautious about exports this year.

"But we will watch closely for upside surprises that suggest underlying growth," he added.

"Our conservative export growth forecast of 9.3 percent this year assumes that the high base from last year matters," said Chang.

Zhang Zhiwei, chief China economist with Japan's Nomura Securities, said in a research note that it is unclear to what extent the strong export data reflect true strength in the economy.

"The data on industrial production for January and February will be released on March 13 and should help to confirm the actual strength of export growth," Zhang said.

YUAN PROMINENCE

Wednesday's data release by the General Administration of Customs (GAC) broke the mould in its use of the yuan denomination, rather than following the tradition of talking purely in terms of U.S. dollars.

In the yuan-denominated version, foreign trade volume last month was 2.34 trillion yuan, up 7.3 percent from January 2013.

The yuan-to-dollar conversion is based on exchange rate figures released monthly by the country's forex regulator.

Exports and imports in yuan grew 7.6 percent and 7 percent respectively, both 3 percentage points lower than the dollar-denominated paces.

The disparity represents a remarkable appreciation of the yuan in 2013.

The central parity rate of the yuan against the U.S. dollar grew by 3.09 percent last year, central bank data showed.

Last February, the GAC started using the yuan to calculate some trade figures, including exports, imports and trade surplus, to promote the international use of the Chinese currency.

However, growth rate figures were not specified in last February's yuan-denominated table, as previous data had all been dollar-denominated.

In the new statement, the GAC also began releasing most figures in yuan instead of in dollars as in previous statements.