Flash Comment – Strong Exports Due To Front Loading Ahead Of Potential Tariff Inc

Foreign sales in China rose 15.6% y/y in October (estimate 11.7% y/y), pointing to still robust sales. However, it is likely this was due to front-loading of US imports from China ahead of the possible rise in tariffs from 10% currently to 25% from 1 January 2019. Hence, the impact of the trade war is probably strong Q4 exports but a big plunge in Q1. SCMP published a good article earlier this week. The PMI export orders index released last week pointed to a big fall in orders (see chart below). This supports the picture that overall exports are taking a hit but some orders been brought forward.

The picture is similar for imports. They were stronger than expected but it is likely this was due to high import content in exports, which means stronger exports automatically lead to higher imports as well. However, if tariffs do increase, the decline is likely to be even bigger. Overall, we look for more short-term weakness in China but a bottom in Q1/Q2, as stimulus kicks in further and expected trade talks possibly lead to less pessimism among households and companies.

We see a 60% probability of a ceasefire in the trade war when Xi Jinping and Donald Trump meet on 1 December. If there is a ceasefire, we expect the tariff rate to stay at 10% rather than increasing to 25%. However, the decline in exports is likely to come anyway, because the current front-loading would still leave an air pocket in Q1.

The short-term economic weakness is likely to put continued downward pressure on the CNY, not least in Q1, when the slowdown is set to intensify. We continue to look for to move to 7.20 in 12 months, partly because we expect the Fed to keep hiking.

To read the entire report Please click on the pdf File Below..

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.