China Trade Surplus Soars but Domestic Demand at Risk

Chinese trade surplus soared to a new record in August, further bolstering confidence in the yuan which is already trading near a six-month high against the US dollar.

However, the fact that the surplus is aided by slowing imports rather than rising exports points to downside risks to domestic demand, analysts said.

The trade surplus increased to $49.83bn in August, a new record, from $47.3bn in July, beating market forecasts.

It was mainly driven by falling imports, dropping 2.4% to $158.6bn after falling 1.5% in the previous month.

Export growth slowed to 9.4% year-on-year to $208.5bn, when compared to the July growth of 14.5%.

The yuan traded down on Monday despite higher than expected trade surplus as the details of the data underpins experts' view that the world's second largest economy has to address weaker prospects for domestic demand.

The USD/CNY rose to 6.1452 from Friday's close of 6.1405, further distancing the from the six-month low of 6.1346, touched on 4 September.

Data on 1 September showed that Chinese official manufacturing PMI slipped to 51.1 for August from 51.7, while analysts had been expecting 51.2. The manufacturing PMI estimated by HSBC too has fallen in August, to 50.3 from 51.7.

Domestic demand in China looked more subdued, said Hongbin Qu, HSBC's China economist. "We think the economy still faces considerable downside risks to growth in the second half of the year, which warrant further policy easing to ensure a steady growth recovery."

China's CPI inflation data for August is due on 11 September. The market consensus is for a slower year-on-year inflation of 2.2% from 2.3% in July. The PPI data scheduled for the same time may show the index falling 1.2%, steeper than the July drop of 0.9%.

On 13 September, data may show Chinese industrial production growth slowed to 8.8% in August from 9.0% in July, on a year-on-year basis.