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China’s Foreign Trade Is Slowing Down

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Exports and imports

China’s exports (in US dollar terms) fell 6.9% year-over-year (or YoY) to $192.4 billion in October compared to a decline of 3.7% in September. Imports fell by 18.8% YoY to $130.8 billion compared to a 20.4% fall in September. This figure indicates that China’s foreign trade is shrinking. As a result, China’s trade balance grew to $61.6 billion in October.

Exports are down due to weak global demand. A decline in industrial production and a rise in labor costs are making China less competitive in the global market. China is a major importer of crude oil, copper, and iron ore. The prices of these commodities have fallen sharply. But imports are still falling mainly due to low domestic demand on account of a slowing economy.

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Currency devaluation and rate cut

The People’s Bank of China (or PBoC) devalued the yuan to prop up exports in August. Also, on October 23, 2015, the PBoC cut its benchmark lending and deposit rate by 25 basis points to 4.4% and 1.5%, respectively. It also cut the reserve-requirement ratio for banks by 50 basis points to 17.5%. However, the October export data didn’t show significant improvement in growth.

Need for further stimulus

China’s central bank may need to resort to further monetary stimulus in the form of more rate cuts to support the slowing economy as well as to lessen the capital outflow from the country.

Impact on mutual funds

Tencent Holdings (TCEHY) is included in the top ten holdings of four mutual funds: the Clough China Class A Fund (CHNAX), the Guinness Atkinson China & Hong Kong Fund (ICHKX), the Eaton Vance Greater China Growth Class A Fund (EVCGX), and the John Hancock Greater China Opportunities Class A Fund (JCOAX). TCEHY has a large export exposure. A slowdown in exports directly impacts its revenues and margins.

Similarly, Chinese American Depositary Receipts (or ADRs) such as CNOOC (CEO) and PetroChina (PTR) would be directly impacted by the slowdown.

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