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China's Economy Stabilizes Modestly, Stimulus Hope Remains Alive

PART:
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Part 2
China's Economy Stabilizes Modestly, Stimulus Hope Remains Alive PART 2 OF 4

Why Did China’s Exports Shrink in July?

China’s disappointing export data

According to the General Administration of Customs, China’s exports (in US dollar terms) fell 4.4% YoY (year-over-year) in June—lower than the 4.8% YoY decline recorded last month. June was the 21st consecutive month of decline. Exports fell mainly due to weakness in global demand. Also, the United Kingdom’s decision to leave the European Union posed tremendous challenges to China’s export outlook. China’s exports will likely remain subdued in the coming months. From January to July, China’s exports fell 7.4% YoY.

However, exports in yuan terms look more appealing due to the weaker yuan. They have risen 2.9% YoY in July. The yuan has weakened by ~3% against the US dollar year-to-date.

China’s overall trade surplus rose to $52.3 billion in July from $48.1 billion in June.

Why Did China’s Exports Shrink in July?

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Meanwhile, exports to the US, China’s top market, fell 2.0% in July. Shipments to the European Union, its second-biggest market, fell 3.2%.

Imports fell more than expected

Meanwhile, imports fell 12.5% from a year earlier in July—compared to the 8.4% fall in June. It was the 21st straight month of decline. From January to July, imports have fallen 10.5% YoY. Heavy flooding in some parts of China impacted China’s foreign trade in July. Weaker import data indicate that the impact of reforms to stimulate growth in China might be subsiding.

Impact on MFs and ETFs

The slowdown in exports and imports directly impacts the revenues and margins of Chinese ADRs (American depositary receipts) such as China Mobile (CHL), CNOOC Limited (CEO), PetroChina (PTR), and China Petroleum & Chemical Corporation (SNP).

Funds such as the Clough China Fund – Class A (CHNAX), the Guinness Atkinson China and Hong Kong Fund (ICHKX), the iShares China Large-Cap ETF (FXI), and the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) are invested in the previously mentioned Chinese companies. As a result, their performance is also impacted negatively.

In the next part, we’ll look at China’s consumer price index and producer price index for July.

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