China December Trade Data Cheered Then Queried - Analysis

Risk sentiment got a jolt of adrenalin Wednesday from Chinese trade data for December, showing that both imports and exports fell less than expected.

Market players cheered the trade data initially, but analysts soon began querying the release, finding potentially less positive elements. The trade data provided tentative evidence that the China's economy is stabilizing, but also was seen as a reflection of the impact of a weaker yuan.

Exports fell 1.4% in U.S. dollar terms in December from a year earlier, compared to MNI's median of -8.0% and imports fell 7.6% year-on-year versus MNI's median of -12.0%. The December trade surplus of $60.09 billion was just below October's record $61.64 billion, and took the total excess for the year to $594.5 billion, the most on record and 55% higher than in 2014.

The December figure suggests China faced heavy capital outflows last month - the country's foreign exchange reserves fell $107.9 billion in December, and stripping out the surplus indicates the drop would have been far greater. See MNI Main Wire story at 3:39 a.m. ET for further details.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, noted China's trade data is presented in yuan and dollar terms. "In yuan terms, the surplus jumped to CNY382.05 from CNY343.10. The consensus had expected a small decline. The record large trade surplus was recorded in October at CNY393.20 billion."

In U.S. dollar terms, the trade surplus widened to $60.09 billion from $54.1 billion, which was "the fifth largest for 2015," Chandler said.

BBH was skeptical that the improved trade figures were underpinned by "an almost 4% yuan depreciation last August against the dollar."

Chandler pointed out that "more than half" of the yuan decline seen in August "was recouped in September and October" and that "the BIS nominal and real effective exchange rates for China made record highs in November."

One problem is that China includes trade "with its Special Administrative Region, Hong Kong, as part of its foreign trade," he said.

"This is really internal trade, like goods shipped from Bavaria to Berlin, or from New York to New Jersey," he said. "China's exports to HK last month surpassed its exports to the U.S. and Europe," with the 10.8% jump the highest in three years.

"Seasonal influences? Perhaps, but it was the most exports for December in more than a decade," he said.

BBH saw two possible explanations. "The first is a rekindling of the fictitious invoicing problem that skewed the data a few years ago," Chandler said.

The other explanation, "which may not be completely separate, has to do some of the trade being a way to capitalize on the wide gap between the onshore and offshore yuan," he said.

Bob Sinche, global strategist at Amherst Pierpont Securities, also homed in on the the "surge of imports to and exports from Hong Kong," which "may signal 'phantom' trade designed to disguise large capital flows."

In contrast, "the improvement in exports to India and the EU appear more reliable," he said.

Nevertheless, "with a record trade surplus of over $600 billion for calendar 2015, 57% larger than the prior record in 2014, combined with a large surplus on over $3 trillion in foreign reserves, the recent weakening of the CNY comes in the face of a huge Current Account surplus, suggesting the capital outflows from China must be massive to overwhelm that surplus and push the CNY weaker," Sinche said.

Patrick Bennett, currency strategist at CIBC World Markets, said China's import number, taken "'at face value,'" is "difficult to validate against data from trade partner countries, and the absolute number of $164.1 billion for the month, while lower y-o-y, is up by some margin from November's $143.1 billion and is surely inconsistent with lower commodity prices and of the slower domestic activity that has been witnessed through the last months."

At the same time, "December imports are very often strong, though this latest number is once again likely to raise questions around the accuracy of data," he said.

One explanation "is that Chinese companies are dabbling in over-invoicing, this time of imports, mirroring the over-invoicing of exports a couple of years ago, at that time to get money on-shore," Bennett said.

As evidence, China's imports from Hong Kong were up 64.5% year-on-year last month and up 18.9% year-on-year in November, he said.

The invoicing question presents double-sided implications for the market.

"Over invoicing imports may be a way to get money offshore, though we don't know if this is instead of other forms of outflow or merely another avenue," Bennett said.

"Lower imports of course would mean a wider surplus, in that case suggesting CNY demand," he said.

CIBCWM favored buying larger dips in USDCNH (dollar versus the off-shore yuan), with an entry around CNH6.5300.

Their first target for the pair would be CNH6.75, "which would put the NEER back to levels around the time the USD began its appreciation against all other major economies in October 2014."

The offshore yuan held near CNH6.5730 versus the dollar in afternoon action Wednesday, after trading in a CNH6.5604 to CNH6.5828 range.

USDCNH topped out at CNH6.7618 January 7 at the peak of China stock and currency weakness. Last Thursday's CNH low versus the dollar was the lowest level seen since Sept. 2010. China allowed the yuan to be bought and sold outside the mainland earlier in 2010.

The People's Bank of China intervened Tuesday to help narrow the spread between the on-shore and off-shore yuan.

Last week, the spread widened to over 1,400 pips, as speculators entered into CNH short positions versus the dollar on expectations of a higher USDCNY.

This forced the PBOC to intervene, as one of the conditions of the yuan's entry into the IMF's SDR basket was to close the gap. The (USDCNY vs USDCNH) spread at today's 23:30 local time CFETS close was around 55 pips, but in the CNH's favor rather than the CNYs.