China’s export growth slows to 8-month low of 15.9%

China's exports growth slowed to an eight-month low of 15.9% y-o-y in October compared to 17.1%y-o-y in September, in line with market and our expectation (16%). This translated into a 1.4% m-o-m decrease (seasonally adjusted), relative to an increase of 1.6% m-o-m in September.

The slowdown was detected across most markets. By destination, exports to developed markets slowed to 12.1% y-o-y in October from 12.5% y-o-y in September. Exports growth to the EU led the slowdown, at 7.5% y-o-y in October compared with 9.8% y-o-y in September. Shipment growth to Japan also slowed but remained elevated 19.6% y-o-y in October from 21.6%y-o-y in September, thanks to the country's ongoing post-quake recovery. Shipment growth to the US rebounded to 13.9% y-o-y in October from 11.6% y-o-y in September. Exports growth to non-G3 markets slowed to 19% y-o-y in October from 20.9%y-o-y in September.

By product, exports of electronic and machinery products, which accounted for 57% of total export for the Jan-Oct period, moderated to a growth rate of 12.6% y-o-y in October from 13.3%y-o-y in September. A slowdown was also recorded for exports of major labor-intensive products: exports of clothing slowed to a pace of 6% y-o-y in October from 13.9%y-o-y in September, growth of shoe exports dropped to 6.1% y-o-y in October from 10.6%y-o-y in September and growth of toys declined to 5.3% y-o-y in October from 6.9% y-o-y in September. Growth of textiles exports stood out however, accelerating to 18.4% y-o-y in October from 16.7%y-o-y in September.

China's import surged unexpectedly to 28.7% y-o-y in October, significantly higher than the 20.9%y-o-y rate recorded in September and market expectations for 22.2%. In seasonally adjusted terms, import growth rose 3.2% m-o-m in October, slowing from 8% m-o-m in September. Ordinary trade imports accelerated to 39.8% y-o-y in October from 31.5%y-o-y in September, although processing imports rose by only 8.9%y-o-y in October.

Imports of major commodities were generally resilient in volume terms. Growth of iron ore imports slowed to 9.2% y-o-y in October from 15.2%y-o-y in September; growth of steel products imports accelerated to 5.3% y-o-y in October from 0.8% y-o-y in September; growth of crude oil jumped to 26.9% y-o-y in October reversing a decline of 12.2% y-o-y in September, while growth of unwrought copper surged 40.2% y-o-y in October, up from 3.3% y-o-y in September.

As a result, China's trade surplus widened to USD17bn in October from USD 14.5bn in September. The total trade surplus for the first ten months this year contracted by 15.4% y-o-y from the same period last year.

Implications
External demand will likely weaken further to weigh on China's exports in the coming months, posing the top near term risk to China's growth.

The autumn session of China Import and Exports Fair (aka, Canton Fair) provided clues to exports growth in coming months. The growth of contracted exports value cooled to 8.8% y-o-y, down from 14.5% y-o-y in 2010's autumn session. By destination, the growth of contracted exports value to European and US markets decelerated, although those to emerging markets stayed relatively upbeat.

That said, we are expecting a continued moderation, not total collapse, of China's exports. Despite a gloomy outlook for European demand and a slower global recovery, our base case scenario is not for a re-run of 2008. HSBC global economics team still expect around 2.5-2.6% global growth this and next year. Moreover, given that China's exports are more diversified with emerging markets representing 56% of total exports, resilient demand from emerging markets should lend some support to China's exports. The recent rebound of the new exports orders component of HSBC's China PMI also reduces any concerns for a sharp deceleration of Mainland export growth.

October's much stronger than expected imports growth, of ordinary as opposed to processing goods in particular, underlines the strength of China's domestic demand. To an extent, softening global commodities prices also likely triggered higher raw material imports in October.

We expect the country's domestic demand to receive further support from Beijing's selective easing policies, which coupled with slowing inflation, should help secure a soft landing for China.

Bottom line: Exports are likely to slow further, but unlikely collapse. China's still resilient domestic demand, coupled with selective easing, should support a 8.5-9% GDP growth rate in the coming quarters.