WASHINGTON: The Shanghai Composite rose 42.99 points, or 1.42 percent in Wednesday’s trading to close at 3,066.44. It was a good day for Asian markets in general: The Shenzhen Composite rose 1.39 percent and the Nikkei was up 2.84 percent. The Hang Seng was up strongly, rising 3.19 percent and the Australian S&P/ASX 200 rose 1.59 percent. The Kospi was closed today due to a Korean holiday. The Shanghai Composite has been rallying for the last two months, after a dismal late 2015 and January.
Driving the bull move in China was some sparkling trade data that showed that exports had increased 18.7 percent in March (in Renminbi terms) compared to the year-ago period. That news ended eight straight months of declines – and kicked the snot out of the 8.5 percent increase that economists had forecast.
Imports were down 1.7 percent over the year-ago period. Converted to dollar terms, that translates to an 11.5 percent increase in exports and a 7.6 percent decline for imports. In both cases, the actual numbers were much better than analysts had been predicting. Trade surplus figures came in at $29.86 billion for the month – just shy of the $30.85 bullion forecast.
Why are China’s export numbers improving despite a slowing global economy and increasing competition from Thailand, Vietnam and other low-labor cost manufacturing outlets? Chinese manufacturers are adjusting to their position higher up on the value chain. Factories are finding ways to improve methods, leverage technology and find other ways to profitability and competitiveness besides being the world’s low-cost labor resource.
An increasingly prosperous Chinese consumer is also buying some of these goods, allowing manufacturers, who sell to Chinese and foreign markets to benefit from economies of scale. And so despite stubbornly slow overall growth numbers, Chinese manufacturers have been successful in picking off export market share from those of other countries.
China steel exports were up by 30 percent, and their first quarter exports of 27.83 million tons of steel keeps them on the pace set by the record-setting 2015 steel exports of 112 million tons.
The steel industry desperately needed that good news. China has been going through the painful process of reducing steel production capacity to meet reduced demand. But that involves laying off hundreds of thousands of workers and risking labor unrest in the areas most affected.
There’s a lot riding on the steel issue, though. China is working to gain formal market economy status from the European Union. China wants this in order to buttress itself against accusations that it has been dumping steel on the global market at below-market prices. This has been a flash point for labor groups and politicians in steel-producing areas in Europe and the United States.
Foreign exchange reserves increased $10.3 billion last month – the first monthly increase in five months. China now sits on $3.2 trillion in reserves. Moody’s recently downgraded their outlook for Chinese sovereign debt, citing the decline in reserves over the last year, but a widening trade surplus appears to have reversed that trend for the time being.
Yesterday’s announcement from the International Monetary Fund that they were cutting their global growth forecast turned out to be a non-starter for Asian investors, although they did project a higher growth rate in China than they had predicted at the beginning of this year – increasing their prediction from 6.3 to 6.5 percent. However, the IMF reiterated its concern that the improvements in China’s economic numbers were built on unsustainable stimulatory measures that would eventually worsen China’s debt situation.
Case in point: The IMF’s report points out that 14 percent of China’s $1.3 trillion in corporate debt is owed by companies that don’t earn enough each year even to cover interest payments. That trend has been worsening over the last five years. If banks had to write all the distressed debt off tomorrow, it would wipe out nearly a year of economic growth.
Meanwhile state-owned enterprises are defaulting on loans in greater numbers, reportedly making it more difficult for others to borrow money. According to reporting from the Financial Times:
In the first 12 days of April, at least 18 bond issues worth a combined Rmb17.8bn ($2.8bn) have been cancelled, according to a tally of public filings by China Business News. That follows 62 cancellations worth Rmb44.8bn in March. In total, 12 publicly issued bonds have defaulted since 2014, according to Haitong Securities.
In other news, the reported incidence of Chinese cyberspying on U.S. corporations is way down. None of the 22 state sponsored hacking units that U.S. officials have already identified are still actively hacking American companies. So the Chinese are at least being less obvious about it.
