World Economy

Sharp Fall in China Trade

Sharp Fall  in China TradeSharp Fall  in China Trade

Trade data from China on Tuesday showed a sharp drop in the value of imports and exports, amplifying concerns about ripple effects from the country’s economic slowdown into developed economies.

Decelerating economic growth not only means China is buying less from overseas but reaping less money from its shipments too, as prices fall and buyers in markets such as Europe and Japan curb purchases, Reuters reported.

The value of imports fell 14.3% year on year in renminbi terms in August, a steeper decline than July’s 8.6% fall, the 10th consecutive fall and the worst showing since May.

Exports dropped a more modest 6.1% from a year ago, against an 8.9% drop in July. As a result, the trade surplus jumped nearly 40% month on month to Rmb368 billion ($57.8 billion), just below the Rmb370 billion record set in February.

“The August data followed the trend set in July,” said Ma Guangyuan, an independent Chinese economist. “Now the global slowdown has very much become a reality.”

The mid-August devaluation of China’s currency has injected some controversy into the monthly trade figures. China issues the figures in both renminbi and dollars. According to its calculations, the trade slump in dollar terms is more benign, with exports dropping by 5.6% and imports also falling less drastically, by 13.9%.

China’s government has spent 1.5 trillion yuan ($236 billion) trying to shore up its stock market since a rout began three months ago, according to Goldman Sachs Group Inc, Bloomberg reported.

The “national team" expended about 600 billion yuan in August alone, with the total now equivalent in value to 9.2% of China’s freely-traded shares, strategists including Kinger Lau wrote in a report dated Monday. Investor concern about what will happen when the government starts to pare these holdings is overdone, they wrote, citing past experiences in Hong Kong and in the US.

The Shanghai Composite Index has tumbled 41% since its June high to erase $5 trillion in value from mainland bourses as leveraged investors fled amid signs of deepening weakness in the economy. To stop the plunge, officials armed a state agency with more than $400 billion to purchase stocks, banned selling by major shareholders and told state-owned companies to buy equities. The rout, coupled with a shock devaluation of the yuan, has roiled global markets.

Forex Reserves Plummet

One of the world's largest piles of cash is rapidly shrinking. In another sign of a new normal for the Chinese economy, and the world, China's central bank on Monday said its foreign-currency reserves fell a record $93.9 billion in August, a month when it intervened intensely in the currency market to prop up the yuan, Nasdaq reported.

The drop underlined the shifting role for a stockpile of money that had steadily accumulated since the mid-1990s as China bought dollars and other currencies from its exporters and one that had turned China into a gargantuan investor in US Treasury.

At $3.56 trillion as of the end of August, the currency reserves held by the People's Bank of China still account for nearly a third of all holdings by central banks worldwide, but the reserves have declined since a peak of nearly $4 trillion in June 2014 as more money leaves the country.

The outflows have speeded up since China devalued the yuan in mid-August, a move that has prompted the central bank to dip deep into the pile to defend the yuan from a free fall and too much money from leaving Chinese shores.

"It's a new normal for China's capital flows," said Larry Hu, an economist at Macquarie Group Ltd., a Sydney-based investment bank.

For years, companies and investors poured money into yuan assets in China, hoping to gain not only from investing in a rapidly growing economy, but also from a currency that was set for appreciation—rising over 30% in the last decade. Those bets have been upended both by China's yuan devaluation and signs of a deepening economic slowdown.