Another disappointing set of Chinese trade figures has sent the Chinese yuan (CNY) lower, but later it regained some of its losses as expectations for further stimulus have increased.
China’s imports and exports fell much faster than expected in July, according to data released on Tuesday. Imports fell 12.4% from a year earlier while exports shrank by 14.5%, demonstrating that the Chinese economic recovery is failing.
Weak trade data
Exports experienced the worst decline since February 2020, while imports also contracted significantly, both figures being worse than what was expected by economists. The fall in imports “is a reflection of weak domestic demand,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.
China’s economic recovery was anticipated to be lifted by strong domestic demand, but construction was hit by a housing market drop, and consumption growth slowed down. In tomorrow’s data, consumer prices are expected to have declined in July, adding to further evidence that demand has weakened.
One of the reasons for the fall in imports was the drop of commodity prices, as Chinese factories bought materials at lower prices. The value of crude oil imports fell more than 12% in the first seven months of 2023 compared to a year ago, but by volume crude oil increased by around 12% in the same period.
Weaker yuan to support exports
China’s central bank set the yuan fixing at the weakest level in almost a month on Tuesday which led to yuan selloffs in the foreign exchange market. However, economists note that a weaker currency may provide support for exports, and some volatility will benefit the economy.
Reaction to data: Chinese yuan (CNY), Renminbi (RMB) and Commodity currencies fall
The yuan and the Australian and New Zealand dollars dropped initially reacting to the numbers, but later regained some of those losses on expectations that the weak data will strengthen the case for further stimulus measures from Beijing. They were last lower on the day, weighed down by a stronger dollar.
The offshore yuan fell to a more than two-week low against the dollar, while the onshore Renminbi bottomed at a more than two-week low against the dollar. The Aussie (AUD) weakened 0.38%, while the kiwi (NZD) fell 0.55%. The two commodity currencies are often used as currency alternatives to the Chinese yuan, as China is their biggest trading partner.
Currency strategist at Commonwealth Bank of Australia noted: “Those weaker exports and imports figures just underscore the weak external and domestic demand in the Chinese economy. I think markets have grown increasingly insensitive to disappointing Chinese economic figures … We’ve got to a point where weak data will just reinforce calls for further policy support.”
Did you know?
Have you ever wondered why China has 2 currencies? Well, the Chinese economy relies on its two-currency system to set the exchange rate and control foreign investments. The Chinese Renminbi (RMB) is used for domestic transactions within Mainland China, while the Chinese Yuan (CNY) is used for international transactions outside the mainland.