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Strong China January trade data sparks cheers, doubts

Containers are seen at a port of Shanghai Free Trade Zone, February 11, 2014. REUTERS/Aly Song
Containers are seen at a port of Shanghai Free Trade Zone, February 11, 2014. REUTERS/Aly Song

BEIJING (Reuters) - China surprised markets with a thumping trade performance in January as import growth hit a six-month high, drawing some skepticism about the data but still allaying fears of a deepening economic malaise.

Analysts who had expected the long Lunar New Year holiday to drag on January's trade warned that the figures may be inflated by fake trade transactions, where traders forge deals to sneak cash into the country past capital controls.

The value of China's total exports climbed 10.6 percent in January from a year earlier, the Customs Administration said on Wednesday, more than five times market forecasts for a 2 percent rise.

The value of imports also jumped 10 percent from a year ago as China bought record volumes of iron ore, crude oil and copper. That lifted import growth to its highest level since July, handily beating predictions for a 3 percent gain.

The country's trade surplus rose to $31.9 billion, well above forecasts of $23.7 billion and December's $25.6 billion.

"We find this strong level of export growth puzzling," said Zhang Zhiwei, an economist at Nomura. "It is unclear to what extent the strong export data reflects the true strength in the economy."

A run of underwhelming economic data from China in recent weeks had steeled investors for another disappointment on Wednesday, as markets braced themselves for more signs that the world's second-largest economy is losing momentum.

Fears that China may be slipping into a sharper-than-expected slowdown were believed to have fed a fierce selloff in global financial markets in January, with emerging markets hit particularly hard.

As the Lunar New Year falls in January in some years and in February in others, distorting trends early in the year, it may be months before investors see data which offers more reliable clues on the economy's true direction.

Still, Asian investors welcomed the trade data and pushed stock prices higher for the fourth straight session. An optimistic economic outlook from new Federal Reserve Chair Janet Yellen also cheered markets.

A resilient Chinese economy is good news for the world, particularly for major commodity exporters such as Australia.

Already the world's biggest exporter, China may overtake the United States to be the world's largest importer this year, HSBC Bank has predicted.

Economists expect China's economy to grow at its slackest pace in 14 years this year at 7.4 percent. But even then, it is still expected to add twice as much demand to the world economy than the United States, HSBC said.

"Looking ahead, improving conditions in developed economies should continue to support Chinese exports," said Julian Evans-Pritchard, an economist at Capital Markets in Singapore.

SCEPTICISM

But not all economists were so upbeat. Many struggled to explain the unexpectedly buoyant trade figures, especially since Taiwan and South Korea both saw export sales slump in January, when the Lunar New Year holiday reduced the number of working days.

Four separate purchasing managers' indices also showed China's factory and services sectors sliding to multi-month or multi-year lows in January as export and domestic orders fell.

Even arguments that China's export growth in January was artificially lifted by bogus trade deals were not supported by data at face value.

Export growth to Hong Kong, whose close proximity to China has made it a favorite destination for fake transactions in the past, fell 18 percent in January, compared to December's 2.3 percent rise.

Analysts also found it hard to explain China's record purchase of raw materials in January as underlying demand has not shown any convincing signs of a pick-up.

Indeed, the level of China's iron ore stockpiles is at its highest in nearly 1-1/2 years, lending weight to arguments that the jump in imports was down to China stockpiling before the Lunar New Year holiday.

China's biggest annual holiday, the Lunar New Year usually dampens economic activity as factories and offices close shop for long periods before and after the festivities.

Although China's economic data is in theory adjusted for seasonal factors to smoothen out fluctuations due to events such as holidays, most experts do not agree on the best method for seasonal adjustments and do their calculations differently.

"Every time we think we understand what the Chinese New Year effect is, we will hear later that there has been some adjustments," said Louis Kujis, an economist at RBS.

"It's fair to say that this should not make people more nervous about global demand and China's economy, but I also think we have to keep on scrutinizing the data and wondering how much this really means."

(Reporting by Shao Xiaoyi and Koh Gui Qing; Editing by Kim Coghill)

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