As the USA and China continue to implement punitive duties, trade surplus records are occurring. China’s June surplus is estimated at USD 41.61 billion, its highest rate since the beginning of 2018, with exports slightly higher (+3.10%) and imports substantially lower (+6%; prior: +15.60%) than in May. The surplus with the US widened to USD 28.97 billion, its highest since 1999 periods. Chinese exports are mostly to Asia (about 46% in 2017), while the US accounts for 29% of total exports.
So, Chinese economic growth will not be primarily borne by exports but by domestic demand. Credit risk from households and non-financial firms remains large and the government recently implemented stricter regulations: these will drag private consumption and so Chinese growth. The People’s Bank of China is most probably planning to keep money loose for now, thus depreciating the yuan. USD/CNY trades at 6.6856 (year-to-date: +3%), its August 2017 level, and is headed to 6.70 in the short-term. Our year-end target for the pair is 6.80.
By Peter Rosenstreich