China exports grow despite US tariffs, but import slump most in nearly three years

BEIJING (Reuters): China’s exports unexpectedly returned to growth in May despite higher US tariffs, but imports fell the most in nearly three years in a further sign of weak domestic demand that could prompt Beijing to step up stimulus measures.

Some analysts suspected Chinese exporters may have rushed out shipments to the United States to avoid new tariffs on $ 300 billion of goods that President Donald Trump is threatening to impose in a rapidly escalating trade dispute.

But Monday’s better-than-expected export data is unlikely to ease fears that a longer and costlier US-China trade war may no longer be avoidable, pushing the global economy towards recession.

China’s May exports rose 1.1% from a year earlier, compared with market expectations for a modest decline, customs data showed.

“We expect export growth to remain positive in June, likely supported by continued front-loading of US-bound exports, but it should then tumble in the third quarter, when we expect the threatened tariffs to be imposed,” economists at Nomura said in a note to clients.

“Therefore, we believe Beijing will likely step up its stimulus measures to stabilise financial markets and growth.”

Business distortions related to April’s cut in the value-added tax (VAT) may also have eased, helping export readings, Nomura added.

Analysts polled by Reuters had expected May shipments from the world’s largest exporter to have fallen 3.8% from a year earlier, after a contraction of 2.7% in April.

While China is not as dependent on exports as in the past, they still account for nearly a fifth of its gross domestic product.

Trade tensions between Washington and Beijing escalated sharply last month after the Trump administration accused China of having “reneged” on promises to make structural changes to its economic practices.

Trump on May 10 slapped higher tariffs of up to 25% on $ 200 billion of Chinese goods and then took steps to levy duties on all remaining $ 300 billion Chinese imports. Beijing retaliated with tariff hikes on US goods.

Trump has said he expects to hold a meeting with Chinese President Xi Jinping at a G20 leaders’ summit late this month, but analysts such as Capital Economics believe the chances of a lasting trade deal are receding as both sides appear to be digging in for a long battle.

Trade sanctions are spreading from goods to services, Capital Economics noted last week, with China issuing a warning to citizens about risks of travelling in the United States and US lawmakers pushing to tighten visas for Chinese students.

Damage from the trade war along with a broader softening in global demand will make 2019 the worst year for trade since the financial crisis a decade ago, with only 0.2% growth, according to economists at ING.

China’s trade surplus with the United States, a major irritant for Washington, widened to a four-month high of $ 26.89 billion in May, from $ 21.01 billion in April, Monday’s data showed.

Exports to the US fell at a more moderate pace of 4.2% after dropping 13.2% in April, while China’s imports of US goods declined 26.8% from a year earlier.

Imports fall worst in almost 3 years

China’s May imports were much weaker than expected, falling 8.5%, the sharpest drop since July 2016. That left the country with a trade surplus of $ 41.65 billion for the month.

Analysts had forecast imports would fall 3.8%, reversing an expansion of 4% in April, which some had suspected was related to the reduction in the VAT.

Highlighting sluggish demand, imports of copper fell. The red metal is widely used in construction, electrical goods and manufacturing and is considered a bellwether for the health of an economy.

For January-May, China’s total exports rose just 0.4% from a year earlier, while imports declined 3.7%.

More support measures expected

As trade pressures intensify, analysts believe China will loosen policy further in months ahead to shore up economic growth.Investors are also watching to see how much Beijing allows the yuan to weaken to offset higher US tariffs. The tightly-managed currency has depreciated nearly 3% against the dollar since trade tensions flared in early May and is nearing a closely watched support level.