Asian markets mixed as China’s exports slump and inflation looms

Asian markets

Asian stock markets were mixed on Tuesday as investors weighed the impact of China’s slowing exports and rising inflation on the global economic recovery. Wall Street rallied on Monday, but analysts warned that the momentum might not last.

Asian markets

China’s exports fall 14.5% in July

China’s exports suffered their biggest drop in more than three years in July as global demand weakened, adding further pressure on Beijing to find ways to reinvigorate the world’s second largest economy. The value of exports, measured in US dollars, fell 14.5% last month from a year ago, the biggest drop since February 2020 when the initial Covid-19 outbreak battered trade and production, according to Chinese customs statistics released on Tuesday. It also marked the third straight month exports have declined.

The steep drop is a reflection of last July’s high base and lower prices, said analysts from Capital Economics in a research note on Tuesday. After accounting for seasonality and changes in export prices, they estimated export volumes only edged down 0.9% in July from June. However, exports are expected to decline further over the coming months, the analysts said, citing “wider evidence” that global goods demand is falling as pandemic distortions unwind and monetary tightening weighs on consumer spending.

“The near-term outlook for consumer spending in developed economies remains challenging, with many still at risk of recessions later this year, albeit mild ones,” they said.

For the first seven months of the year, China’s exports decreased 5% from a year earlier. In particular, shipments to the United States, China’s single biggest trading partner, dropped 13%.

Exports had been a rare bright spot during the pandemic years, providing much-needed support for China’s economy as it grappled with rigid Covid lockdowns and a slumping housing market. They accounted for 17% of China’s GDP last year. But since last October, those shipments have shrunk as surging inflation and rising interest rates dampen global demand.

Weakening exports deal a fresh blow to the Chinese economy, which lost momentum recently after a strong start to the year. Signs of deflation are becoming more prevalent, sparking concerns that China could enter a prolonged period of stagnation.

China’s imports also disappoint

Tuesday’s data also showed China’s imports fell 12.4% in July from a year earlier, widely missing a forecast 5% drop in a Reuters poll of analysts. It adds to evidence that the country’s domestic demand has softened, with volumes of imports falling to their lowest level since the start of the year.

Analysts are now calling on Beijing to roll out more concrete and forceful plans to prop up the economy, including major measures to boost demand.

“China needs more stimulus,” said Iris Pang, chief economist for Greater China at ING, in a report on Tuesday. “We expect more infrastructure projects to be announced soon.”

Pang also said that China should ease its monetary policy by cutting interest rates or lowering banks’ reserve requirement ratio (RRR), which determines how much money they have to hold back from lending.

China has been reluctant to unleash large-scale stimulus this year, opting instead for targeted measures such as RRR cuts for some banks and local government bond issuance for infrastructure spending. The central bank has also kept its benchmark lending rate unchanged since April 2020.

Inflation worries linger

Meanwhile, investors are also bracing for the latest inflation data from China and the United States this week, which could influence the monetary policy outlooks of both countries.

China will release its consumer price index (CPI) and producer price index (PPI) for July on Wednesday. Analysts expect CPI inflation to ease slightly to 1% year-on-year from 1.1% in June, while PPI inflation to remain elevated at 8.8% year-on-year from 8.9% in June, according to a Bloomberg survey.

High PPI inflation could squeeze corporate profits and weigh on economic growth, while low CPI inflation could signal weak consumer demand and deflationary pressures.

The US will release its CPI data for July on Thursday. Analysts expect CPI inflation to moderate slightly to 5.3% year-on-year from 5.4% in June, which was the highest level since 2008, according to a Reuters survey.

The Federal Reserve has maintained that the current spike in inflation is transitory and largely driven by supply bottlenecks and base effects from the pandemic. However, some Fed officials have expressed concerns that inflation could prove more persistent than expected and warrant an earlier tapering of bond purchases or an increase in interest rates.

Market reaction

Asian stock markets were mixed on Tuesday after Wall Street rallied and Chinese exports fell ahead of a U.S. inflation update that might influence Federal Reserve plans for possible interest rate hikes.

Tokyo and Sydney advanced while Shanghai and Hong Kong declined. Oil prices gained.

Wall Street’s benchmark S&P 500 index gained 0.9% on Monday, recovering one-third of last week’s loss. “U.S. stocks started the week in better form,” said ING analysts in a report. “It is not clear that this is going to last, though.”

The Shanghai Composite Index lost 0.1% to 3,265.02 after the disappointing trade data. The Hang Seng in Hong Kong sank 1.4% to 19,259.88.

The Nikkei 225 in Tokyo rose 0.3% to 32,365.11 after the Japanese government reported labor cash earnings rose 2.3% in June. The Kospi in Seoul lost 0.3% to 2,572.46 and Sydney’s S&P-ASX 200 gained 0.2% to 7,321.90.

India’s Sensex opened up 0.1% at 3,314.02. New Zealand, Bangkok and Jakarta retreated while Singapore rose.

On Wall Street, the S&P 500 rose to 4,518.44 ahead of Thursday’s U.S. inflation update. The Dow Jones Industrial Average rallied 1.2% to 35,473.13. The Nasdaq composite added 85.16, or 0.6%, to 13,994.40.

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