Chinese Trade Plunges in September, Dragging the Aussie Dollar with It

If anyone is still under any illusions about the extent of China’s slowdown, yesterday’s trade data should put things in context. The Aussie dollar fell sharply on the news, down a full cent to US$0.72.

Chinese imports had a nightmare September, plunging 17.7% year on year. Exports fared slightly better, but the sector was still down 1.1%. Not only were the figures terrible, but it’s now three straight month in which China’s  trade terms have slipped.

However you cut it, these figures sum up where China is right now. More than that, they sum up where the world is too.

The slowdown in the global growth is stifling demand for goods the world over. China is merely a reference point for this. Though as far as reference points go, it’s the global benchmark.

The import data in particular gives you a good idea for where China’s economy stands. Consumption is tanking, and it’s putting China’s shift to a consumer driven economy at risk.

With domestic demand slowing then, how does China manage this transition successfully? Presumably, it will require more stimulus measures. More rate cuts and looser lending requirements. But there’s no guarantee it’ll work. If it can’t boost Chinese import demand now, what chance does it have in the future?

Granted, China produces a lot of consumer goods. More than its economy can consume on its own. It’s why it’s able to flood the world with competitive goods. But it also satisfies China’s consumption demand, especially when it comes to low end manufacturing and staple goods. So imports, while important, don’t tell the whole story about consumption.

But it’s not something we can dismiss as irrelevant either. Imports have been falling for 11 months straight now. So there’s a deeper problem with domestic consumption in China.

What’s more, it suggests industrial production, and fixed asset investment, will trend lower. In other words, you can expect to see Chinese construction slow even further. That’s a sign that Chinese housing and infrastructure investment is on the wane. And it supports recent reports suggesting China’s housing oversupply remains a problem.

But just as important are what the import figures say about the rest of the world too. Take Germany for one.

Its car industry is a big supplier of luxury vehicles to China’s wealthy and aspiring middle class. Yet Germany’s trade had a torrid month in August. Exports fell by €10 billion, to €72 billion. And its balance of trade is down from €25 billion to €15 billion.

Yet Germany is a developed nation. It’s more diversified than many emerging market economies. These are economies relying on strong Chinese demand to support their economies.

For example, Vietnam exports 30% of its goods to China. Up to 25% of Nigerian goods find their way to China. The Philippines, South Africa, Brazil, Thailand, South Korea, Indonesia, and Russia all send over 15% of exports to the Middle Kingdom.

Australia, for what’s worth, exports 20.5% of its goods to China.

You can appreciate then how important Chinese demand is to the health of the global economy.

As for exports, the 1.1% drop is telling too. Not that economists saw any reason to worry about the decline.  They saw the figure in positive terms. Why? Because ‘it could have been worse’. Setting low standards and overshooting them seems to be the only to spin good stories out of disasters.

Nonetheless the decline shows that slacking demand isn’t China’s problem to shoulder alone. It’s a widespread problem affecting the entire world. China’s trading partners need money to purchase Chinese goods. But if China isn’t buying their goods, it leaves less scope for any two way trade to take place. Otherwise, trade imbalances go up, and countries fall into deeper debt.

Ultimately, these trade figures suggest China’s economy will take a hit in the third quarter. Due out next week, economists expect GDP figures to fall well below China’s 7% target. ANZ economist Li-Gang Liu reckons growth will drop to 6.4%. That’s a disastrous result for a government targeting 7% by the end of this year. And it calls into question whether stimulus measures are working. Or if they’re merely delaying the inevitable.

In better news for Australia, Chinese iron ore imports rose 16.8% during September. Year on year however, iron ore imports were up just 1.7%. Coal imports were up 1.6% in September. But coal is still down 16% on this time last year.

Aussie dollar sinks on poor trade data

Not surprisingly, the Aussie dollar plummeted on the Chinese trade data. Having broken the US$0.73 barrier this week, the Aussie fell a full cent overnight. At 10:30am AEST, the Aussie was buying US$0.722. The Australian Financial Review reports:

Earlier, a global rally which began on September 29 was attributed to the unwinding of long positions in the US dollar, which had fallen in the wake of the US Federal Reserve’s decision to keep interest rates on hold as opposed to lift as expected. Traders had also bought into riskier assets including the Aussie dollar on renewed optimism that China’s economic growth was stabilising’.

Weak Chinese data has a good way of making markets stand up and take notice. It’s a timely reminder that the recent commodity-led rally was nothing but a blip. It single-handedly put an end to nine days of gains for the Aussie dollar. The dollar is likely to edge below the US$0.70 mark again before it tests US$0.75.

Mat Spasic,

Contributor, Markets and Money

China’s stock market correction between May and August was a wakeup call for many. The Shanghai Stock Exchange lost US$3 trillion in the space of a month. It was the first sign for many that things weren’t right with the Chinese economy. But the panic over China masked many of the problems facing Australia’s stock market.

The Aussie share market had its worst month since 2008 in August. The ASX lost 9% of its value, shedding more than $70 billion.

Markets and Money’s Vern Gowdie saw this coming. He predicted the current market correction at the beginning of the year. But Vern says we haven’t seen the worst of it yet.

He’s convinced the ASX will lose as much as 90% of its market cap in the coming months.

Vern is the award-winning Founder of the Gowdie Family Wealth and Gowdie Letter advisory service. He’s ranked as one of Australia’s Top 50 financial planners.

Vern wants to help you avoid this coming wealth destruction. That’s why he’s written this free report ‘Five Fatal Stocks You Must Sell Now’. As a bonus, Vern will show you which five blue chip Aussie companies could destroy your portfolio.  You almost certainly own one of them…

To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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