China warns of "grim" trade outlook after weak exports surprise

BEIJING Wed Jul 10, 2013 2:05pm IST

A man walks next to a subway entrance as the Oriental Pearl Tower is seen reflected on a window at the financial district of Pudong, in Shanghai July 8, 2013. REUTERS/Carlos Barria

A man walks next to a subway entrance as the Oriental Pearl Tower is seen reflected on a window at the financial district of Pudong, in Shanghai July 8, 2013.

Credit: Reuters/Carlos Barria

BEIJING (Reuters) - China warned on Wednesday of a "grim" outlook for trade after a surprise fall in June exports, raising fresh concerns about the extent of the slowdown in the world's second-largest economy and increasing the pressure on the government to act.

China's reform-minded new leaders have shown a tolerance for slower growth, while pressing ahead with efforts to revamp the economy for the longer term, but any continued slide in economic performance could test their resolve.

Complaints about the strong yuan currency and the possibility of job losses up the ante for China's Premier, Li Keqiang, who said on Tuesday he was aware of the risks to economy.

"Macro-economic control should be based on present conditions and with an eye to the future to ensure the economic growth rate and employment levels do not slide below lower limits and consumer prices do not surpass the upper limit," he was quoted by the official Xinhua news agency as saying during a visit to southern Guangxi Province.

"We must put more effort into structural adjustment, reforms and promote economic transformation and upgrading."

Exports fell 3.1 percent in June against forecasts for a rise of 4 percent, casting a shadow over second-quarter growth figures due on Monday that are already set to show a slowdown to 7.5 percent as weak demand dents factory output and investment growth.

"The weak trade data pose further downside risks to the June and Q2 growth numbers and help reinforce our concern over risks in H2," said Zhiwei Zhang, China chief economist at Nomura in Hong Kong.

"As macro data weaken further, next week will be a testing time for the government in revealing just how much of a growth slowdown it is willing to tolerate," he said in a note.

The fall in exports was the first since January 2012. Imports fell 0.7 percent versus expectations for an 8 percent rise, while China had a trade surplus of $27.1 billion, the customs administration said, in line with the $27.0 billion expected.

The Australian dollar briefly fell about a third of a cent after the data, reflecting worries about Chinese demand for Australia's commodities, such as iron ore and coal.

The MSCI Asia-Pacific ex-Japan index recovered to stand up 0.77 percent in late trade after dipping on the trade figures from a one-week high just before they came out.

The June export figures followed a government crackdown on the use of fake invoicing that had exaggerated exports earlier this year, and may now reflect the true trade picture, customs officials said.

However the external environment remains weak and rising labour costs and a stronger yuan currency were discouraging exporters, customs said.

"China faces relatively stern challenges in trade currently," customs spokesman Zheng Yuesheng told a news briefing. "Exports in the third quarter look grim."

Exports to the United States, China's biggest export market, fell 5.4 percent in June, while exports to the European Union dropped 8.3 percent.

EXPORTERS GRIN AND BEAR IT

Most economists have cut their forecasts for 2013 growth, but see the government's target of 7.5 percent being met.

Exporters, meanwhile, said that they are feeling some pain, but are muddling through.

"Business is still difficult. Things will not worsen a lot in the second half, but neither will they improve a lot," said Ye Lianghua, vice head of trading company Ningbo Cixi Export Import Co Ltd, in China's prosperous eastern Zhejiang province.

"Now is definitely better than 2008 and last year. But please, no more yuan appreciation."

Others noted rising labour costs, which could lead to layoffs, a worry for the government that fears social instability if there is large-scale unemployment.

"We still have difficulties in finding skilled workers," said You Zhongguang, vice manager of Ningbo Xingwei Plastic Products Co., one of China's biggest exporters of cutters and knives.

"The average wage is around 4,000 yuan (per month) now. Our wages have climbed 10 percent so far this year. Our business is relatively good, but the situation is not good for all companies. Many workers have left factories because the export market is weak."

For now, some economists say, growth is likely to meet the government's target, but the road ahead will be challenging.

"The 2013 GDP growth forecast of 7.5 percent is consistent with zero exports growth, so yes, my sense is that the target can still be met," said Tim Condon, economist at ING Bank in Singapore.

"But the risks are tilting to the downside."

(Additional reporting by China economics team; Writing by Jonathan Standing; Editing by Eric Meijer)

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