Decline in China's export shows growth hinges on local demand

China's export slump deepened in February, highlighting the challenge for policy makers seeking to keep the economy humming at home while trade acts as a brake on growth.

The week-long Chinese new year holidays fell in February this year, closing factories and curbing shipments. That saw exports tumble 25.4 per cent in US dollar terms from a year earlier, the biggest decline since May 2009. Imports extended a streak of declines to 16 months, slumping 13.8 per cent, leaving a trade surplus of $32.6 billion.

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A slowdown in global trade is making it harder for China's leaders, who are gathered in Beijing this week to set the nation's economic plans, to keep growth at the targeted 6.5 per cent to seven per cent range. After early declines, China's benchmark stock index eked out a gain in the final minutes of trading amid speculation of buying by state-backed funds.

"Exports got pummelled again in February, highlighting the downturn in global demand," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "Hopes for a global rebound need to be tempered with numbers like these. It's easy to blame Chinese New Year distortions, but there is a much deeper malaise that is becoming apparent in the numbers."

Reflecting uncertainties over the global outlook, the government didn't set a specific target for trade at the annual congress meeting after it failed to meet the goal last year.

Clouding interpretation of February's reading is the week-long Chinese New Year holiday, which spurs manufacturers and importers to front-load or delay orders.

Much of the export slump is down to distortions from the holiday, said Julian Evans-Pritchard, a China economist at Capital Economics Ltd. "We really need the whole of first quarter data to work out what is underlying demand and what is seasonal impact," he said.

Shipments to all major trading partners declined, plunging more than 20 per cent to the US, Brazil, Canada, Germany, France, Hong Kong, Japan, and Asean nations.

The magnitude of declines - analysts had forecast a 14.5 per cent slide in shipments according to a survey by Bloomberg News - suggests a weaker yuan has yet to give exporters a sustained boost.

"It's another shocker," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. "More stimulus is likely to be needed on both the monetary and fiscal front, and that will argue against the yuan stability China craves."

Separate data also raised concern over domestic demand, with auto sales down 3.7 per cent in February from a year earlier.

Holiday effects explain some, but not all, of the weakness in the February trade data, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen.

"Stimulus appears slow to gain traction, with weak global demand compounding softness in China's domestic economy," they wrote in a note. While the outlook for exports remains weak, "China's real effective exchange rate has swung from marked appreciation in the middle of 2015 to basically flat in early 2016.

That means the exchange rate should cease to be a drag on sales."