Weak Chinese Trade Data a Sign that Economy is Faltering?

 

Weak Chinese trade data released Monday sent stocks, emerging market (EM) equities and commodities falling and once again spurred talk that the world’s second-largest economy may be slowing down.

Customs data showed that China’s exports surprisingly dropped last month, falling 18.1% from January 2013.

Upon the news, China’s CSI300 share index dropped 3.3% to its lowest level in about nine months. In the US, the Dow Jones industrial average fell 0.43%, the S&P 500 dropped 0.27%, and the Nasdaq Composite dipped 0.26%.  

The MSCI Emerging Market Index dropped 1.2%, the most in a week. The Shanghai Composite Index fell 2.9%.

Donna Kwok, a Hong Kong-based senior China economist at UBS AG, told Bloomberg that China is “moderating but only very modestly” and advised that “ultimately you need to wait for March data to really get a true sense of the underlying outlook.”

Copper and Other Commodities

London copper hit an eight month low Monday. Three-month copper on the London Metal Exchange fell to its lowest price since June of last year, trading at US$6,608 per metric tonne. Copper had already dipped last week after news broke that Shanghai Chaori Solar Energy Science & Technology became the first company to default on China’s corporate bond market.

China is the world’s largest consumer of copper, accounting for 40% of global consumption. Any uncertainty over Chinese economic growth could seriously hinder demand for the metal, the Wall Street Journal noted.

Additionally, many Chinese companies are reportedly importing copper and using it as collateral for bank loans. This is an inherently risk method of funding given that it hinges on the price of copper.

“The copper plunge is tied to the growing use of the commodity as financing collateral in China – there are fears there that, with many asset valuations marked to copper prices, a continued selloff could bankrupt those holding too much copper on their balance sheets,” wrote Scott Schuberg, chief executive (CEO) of Rivkin Securities, in a report.

Daniel Belchers, commodities fund manager at Threadneedle Investments, told WSJ that he is “increasingly worried” about the price of copper. His biggest concern is that so much copper is being used for financing purposes. “As the shadow banking system is hit harder, and the Chinese government cracks down on liquidity, it will try to eliminate this type of borrowing activity…so these stocks which people were assuming were being used will come back on to the market.”

According to Belchers, Threadneedle has been reducing its copper holdings since the beginning of the year. The company will likely reduce holdings further if copper prices continue to decline.

Chinese steel and iron ore futures fell to their lowest levels ever. Lead and zinc also diminished.  

As for oil, Brent crude traded 97 cents down at US$108.03 per barrel. US oil fell US$1.33 to US$101.25 per barrel.

Effects on FX

Currencies heavily sensitive to commodities also declined in value. The Australian dollar (AUD) fell 0.4% to US$0.9031, and the Canadian dollar (CAD) dropped 0.2% to US$1.1104.

“The Chinese export numbers are the main driver this morning – you can see that the Aussie and Canadian dollars are both under pressure,” Alvin Tann, strategist with French bank Societe Generale in London, told Reuters.

The People’s Bank of China (PBOC) weakened the renminbi’s (RMB) reference rate by 0.18%. The RMB declined 0.2%, according to China Foreign Exchange Trade Systems (CFETS), the interbank trading and FX division of China’s central bank.

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