Chinese trade surplus ahead of market estimates

<p>We fail to see how a US$31.7bn trade surplus points to Chinese weakness. The number was way ahead of market estimates which pointed to a […]</p>

We fail to see how a US$31.7bn trade surplus points to Chinese weakness. The number was way ahead of market estimates which pointed to a figure near US$21bn. We spent a good amount of time digging around to make sure we didn’t miss anything fundamental, but after pondering, we sit trying to figure out how such a healthy trade surplus is a weak number.

The composition may have missed market estimate, sure imports were up only 6.3% compared to a forecast of 12.7% but how is this exactly a bad thing or a sign of weakness? China is the world’s largest manufacturer and six months ago the fear in the market was that with European problems worsening, the export market will dry up which will lead to huge structural problems.

But this hasn’t occurred, exports were up 11.3% for the month compared to the same period last year. Keep in mind we aren’t cycling off weak numbers, last year was a solid result.

Has China completely stopped buying foreign goods? Not at all. Iron ore imports grew 9.7%, crude up 11% and copper up a whopping 47%. Copper is not a source of energy, you consume it when your economy is producing – laying electricity infrastructure, manufacturing electronics etc.

Yesterday’s inflation data points to a rate which this time last year would have been a dream. In summary, we have the world’s second largest economy growing its exports by 11.3%, booking a trade surplus in excess of US$31bn and all this with an inflation reading of 2.2% and somehow the market is disappointed? So be it.

We actually think today’s numbers, despite the initial market reaction, are a slap in the face of those who dismissed China’s ability to continue growing its exports in 2012. You don’t continue importing copper and iron ore if your economy is on the brink of collapse.

Perhaps the Chinese are starting to consume more of their own goods and perhaps consumption as a proportion of total GDP is increasing from what was previously a very low base.

If that’s the case, one should have a close look at recent presentations by companies leverage to an increase in this consumption. Today’s presentation by ASX listed IAG makes for a very interesting read.

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