China: external sectors recover faster than expected
Chinese foreign trade data for June came in above expectations, with both imports and exports returning to positive growth.
Exports (in USD terms) rose by 0.5% y-o-y in June, up from -3.3% in May. Chinese imports rose by 2.7% y-o-y, up from -16.7% in May. The latest manufacturing purchasing manager indexes (PMI) released at the end of last month had already hinted at the improvement in the external sector, with both new export orders and imports sub-indices rising. However, the magnitude of the recovery, especially on the import side, is still impressive.
The recovery in exports benefited from the re-opening of economies in many parts of the world. With the coronavirus continuing to spread rapidly in the US and some major EM countries, and some governments starting to reimpose the social distancing measures they had recently relaxed, the outlook for Chinese exports remains uncertain. However, there seems to be more visibility surrounding Chinese domestic demand, thanks to the effective control of the virus situation within China.
The strong recovery in Chinese imports points to solid improvement in Chinese domestic demand. The surge in imports of some key industrial commodities in recent months reinforces our view that a solid industrial recovery is underway in China, supported by the turnaround in fixed-asset investment, especially in the infrastructure and property space.
Our current central forecast is for the Chinese economy to expand by +0.3% y-o-y (and +8.8% q-o-q, not annualised) in Q2 and by +1.2% in full-year 2020. Recent data could mean these forecasts are subject to some upside risk. A surge of covid- 19 infections in some countries and fears of a ‘second wave’ of the virus mean the outlook for the global economy is still highly uncertain. Nevertheless, there is a good chance that Chinese growth beats our expectations.