Export powerhouse China has posted a rare trade deficit for March, fueled by a surprise 2.7% year-on-year decline in exports. Within the total, the bilateral trade surplus with the US rose by 18% y/y in March to USD 15.4bn.
With the world’s top two economies threatening each other with billions of dollars in import tariffs, a widening surplus with the US, combined with falling overall Chinese exports, may appear a toxic combination. But we see reasons to remain optimistic on the global trade outlook:
- This latest China data reflects export front-loading ahead of a late lunar New Year holiday. Notably, the March export decline follows a 44.1% surge in February. First-quarter data suggests a more robust performance, with China’s overall exports and those to the US rising 17.7% and nearly 15% y/y respectively.
- Currency effects have also played a role in boosting China's trade surplus in USD terms, with the yuan appreciating 4% year-to-date (and more than 6% in 2017). This should begin to fade, with the yuan likely to trade near current levels through 2018, in our view.
- President Donald Trump’s call to re-examine the abandoned Trans-Pacific Partnership (TPP) pact suggests a softening of his unilateralist approach to trade. Significant carve-outs to first-round aluminum and steel tariffs also suggest headline threats should be taken as a bargaining position rather than a final stance.
Trade war rhetoric is likely to go on causing market volatility in the near term. We continue to monitor the potential for escalation, but our base case remains that trade frictions will not disrupt global trade flows much. We remain overweight on global equities.
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