Not Exports, But Inflows

CHINA - Report 25 Jun 2013 by FAN Gang and HE Liping

Executive Summary

Defying expectations, export growth soared 18% in Q1, instead of the anticipated 10%. Yet a month later, those numbers had plunged, with exports rising just 1% in May.

Many analysts now think the big uptick was in fact the result of a disguised money inflow, attracted by speculation on interest rate differentials, and RMB revaluation. Starting in 2012, government regulators had relaxed inspections on trade-related financial transactions; but in May of this year, they retreated to their old position. Trade figures become a truer reflection of reality, and shrank. We suspect that the real export growth rate in earlier months was less than 10%,

China's trade surplus, at $80.8 billion in May, was far larger than in the same period in 2012 (when it was just $37.9 billion). Yes this year's surplus is likely to be smaller. The export growth slowdown will pose a new challenge for economic recovery, which has evidently been postponed until H2.

Encouragingly, retail sales of consumer goods have picked up, especially auto sales, and production has rebounded to 15%, from less than 10% in March. Retail sales rose 11.8% y/y, or 0.1 pps, from March, and 1.6 pps from February.

But industrial output and investment growth are still anemic. Industrial output grew 9.4% in the year to April, down 0.1 pps from March. Fixed asset investment grew 20.4%, down 0.3 pps. We expect both to stay weak in the near term.
If we define China's growth potential as being free of CPI inflation impacts, and by its potential for export growth, we estimate growth potential to be 8%-8.75% for 2000-2012. And if we see the current period as a correction, and adjustment, for earlier overheating, growth potential could be down by just over 1 pp. We still believe China's potential growth rate is about 8%.

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