June Exports: Where is the "Expectation Gap"?

What factors contributed to the "unexpected" export performance in June? With the suspension of tariffs between China and the United States since May, the market had anticipated a phased recovery in exports, but the actual performance in June still exceeded market expectations. What factors caused this deviation, and how should we view this half-year "report card"?

From the perspective of different countries, we can observe a clear context:

First, the impact of the tariff suspension in May on China's exports was more "postponed" to the June data. After the joint statement issued by China and the United States on May 12, the SCFI index (which reflects spot freight rates 100%) rose significantly, indicating that the easing of tariffs clearly boosted exporters' orders and expectations. According to the international shipping process for containers, it takes an average of 2-4 weeks from the time exporters book cargo to customs clearance. The statistical standard for China's export goods is based on "actual entry and exit," which means that a considerable portion of the improvement in China's exports to the U.S. driven by the "downgrade" of tariffs falls within the statistical range of June data.

This is particularly evident in the export data to the U.S. in June. In June, China's exports to the U.S. saw a significant narrowing of the year-on-year decline by 18.4 percentage points to -16.1%, which helped China's total exports rebound by 1.3 percentage points year-on-year.

Second, the phased release of U.S. import demand also drove "transshipment" demand from other regions. On one hand, this highlights the role of Hong Kong, China as a "buffer zone," and on the other hand, it reflects a rebound in China's exports to the ASEAN region. In June, these two regions collectively contributed to a 0.8 percentage point year-on-year increase in China's exports.

Third, the resilience of exports to the European Union cannot be ignored. This includes both the depreciation of the renminbi against the euro and the recovery of the European manufacturing sector driven by the European Central Bank's continuous interest rate cuts.

Moreover, the export performance excluding exchange rate factors is even stronger. In June of this year, the central exchange rate of the U.S. dollar against the renminbi appreciated significantly compared to the same period last year, which somewhat "suppressed" the year-on-year export figures in U.S. dollar terms. In contrast, the export performance in renminbi terms was much stronger, with a year-on-year growth of 7.2% in June.

In addition to exports, import performance also exceeded expectations. On one hand, the import base in June last year was relatively low. On the other hand, the continued strong performance of exports also boosted import demand, with significant improvements in imports mainly from ASEAN in June.

Looking ahead, the sustainability of external demand remains an important variable affecting the market. From the changes in asset prices, the improvement in orders and mid-year performance expectations since mid to late June has already driven a round of increases in the A-share export chain The strong performance of the stock market has also influenced the change in risk appetite in the bond market, with long-term interest rates continuously adjusting downwards since the beginning of the month.

So, will the strength of external demand continue?

The core issue here is how much "leeway" there is left in U.S. demand. The United States is the world's largest trading importer, and its import demand plays a key role in China's exports to the U.S., ASEAN, and Latin America.

From the performance of U.S. inventories, the sustainability of "import grabbing" is in doubt. With the release of tariff risks, the previous "import grabbing" behavior in the U.S. has already led to a significant replenishment cycle, which indicates that the strength of the current round of inventory replenishment driven by domestic demand in the U.S. is not that strong. It also means that the previously "overdrawn" demand may lead to a faster decline in subsequent import momentum during the economic downturn. Historically, the U.S. manufacturing PMI new orders minus own inventory can serve as a leading indicator for year-on-year imports (leading the latter by about 6-8 months), and this indicator has shown a continuous downward trend since February of this year.

High-frequency indicators are also reflecting a decline in export momentum to the U.S. On one hand, China's port freight volume has shown a significant decline since early July. On the other hand, China's container freight rates to the U.S. have turned from rising to falling in the past two weeks, with the decline outpacing other routes.

In the short term, the continuation of the tariff suspension window and the "boost" of tariffs on export prices can still support exports. Under the weak performance of PPI, China's export prices have "reversed" and risen (whether in monthly export data or high-frequency Yiwu small commodity export prices). This indirectly reflects that, regarding the issue of "who bears the tariffs," the pressure is not entirely "passed on" to Chinese exporters. Considering the sustainability of external demand, the subsequent downward risk in export "volume" is more concerning than "price."

Article authors: Zhang Yunjie, Tao Chuan, Source: Chuan Yue Global Macro, Original title: "June Exports: Where is the 'Expectation Gap'? (Minsheng Macro Tao Chuan Team)"

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