China trade data may overstate recovery

China’s January export growth was likely its strongest in 11 months, though a 17 per cent year-on-year surge forecast in a Reuters poll may owe as much to trade cycles and Lunar New Year holiday base effects as a recovery in foreign demand.

The median forecast of 16 economists polled by Reuters would put export growth at its highest since February last year and be in sharp contrast to January last year’s 0.5 per cent annual fall in exports that signalled the start of China’s most volatile year for trade since the global financial crisis.

A similar effect is anticipated in import data when trade figures are released on Friday, undermining confidence that a 23.3 per cent median forecast for the year-on-year pick-up in goods ordered by China is indicative of either a sustainable jump domestic demand or a restocking of inventories.

“We estimate that export and import growth may have jumped to 17.3 per cent and 22.8 per cent in January due to a low base last year. As a result, we may see a trade surplus of $25.3 billion. Year-on-year trade growth may stagnate or even turn negative in February with a sizeable deficit,” analysts at Citi said in a note to clients.

The view from Citi highlights the volatility inherent in the data at this time of year, when Lunar New Year holidays in either January or February badly skew reported numbers. Many factories shut for at least a week during the holidays and often longer.

Analysts at UBS have an above consensus forecast for January trade growth of 19 per cent and a trade surplus call of US$40.8 billion - the highest among 15 responses to the trade balance question that delivered a median expectation of US$22.0 billion.

But UBS believes the strength of the January numbers likely overstates the strength of the recovery in China, which suffered its slowest full year of growth last year for 13 years at 7.8 per cent.

“We think the timing of the Chinese New Year and last year’s base affects all of the readings and the underlying momentum is likely much less strong,” UBS said in a client note.

A Reuters poll last month showed that China’s economic growth is likely to edge up to 8.1 per cent this year.

The latest surveys of purchasing managers in China’s manufacturing and services sectors both indicate that the world’s second-largest economy is on a modest recovery track.

The trade sector is a key component of the Chinese growth engine, with export-oriented factories, foreign funded firms and joint ventures supporting an estimated 200 million jobs.