China: September trade surplus points to commitment to balance trade; CNY appreciation pressures remain

China's September trade numbers came in line with expectations. Export growth slowed to 25.1% y/y from 34.4% previously (BarCap and market: 26%). Imports increased by 24.1%, compared with 35.2% in August (BarCap: 24%, market: 25%), with monthly import value rising to a record high (+7.4% m/m nsa). Moderate export growth and rapid import growth led to a narrowing in the trade surplus to a five-month low of USD16.9bn. YTD, the trade surplus has totalled USD121bn, 12% lower than the USD137bn recorded in the same period of 2009.

We continue to expect the y/y export growth rate to slow, on base effects as well as negative m/m growth momentum (as seen since July) owing to external weakness, but still expect full-year growth to reach 27-30%. We also look for y/y import growth to moderate over the remainder of 2010, though m/m growth to remain positive, particularly given recent government policy priority to balance external trade through increasing imports (see below). We forecast full-year imports to increase by 35% in 2010, reducing the annual trade surplus to 3.5% of GDP from 4% in 2009.

Increasing market expectations that the Fed will embark on QE2 in its November meeting has led to a broad-based sell-off in the USD, with the pace accelerating since mid-September. With many emerging market economies (also major recipients of capital inflows) recently announcing or contemplating variants of capital control measures to limit rapid currency appreciation and asset price inflation, the past two weeks have seen renewed pressure for a faster pace of CNY appreciation in Washington.

In our view, the still large balance of payment surplus and renewed non-FDI capital inflows point to continued appreciation pressures on the CNY. Official talks over the past week suggest that China will continue to allow gradual currency appreciation, and reform its exchange rate formation mechanism towards one with more flexibility with reference to a currency basket.



Jian Chang wrote in a Barclays Capital Research report.