China import growth drops to 2.6%

The last time it slipped was during the 2008 global financial crisis and 2012 Chinese New Year holiday.

According to Nomura, Chinese imports were the biggest surprise, with import growth unexpectedly dropping to -2.6% y-o-y from 4.7%. The import contraction was unusual; since 2002, it has only contracted during the global financial crisis in 2008/09 and in January/February because of the Chinese New Year holiday. 

Here's more from Nomura:

China's export growth improved slightly to 2.7% y-o-y in August from 1.0% in July, largely in line with market expectations. After seasonal adjustments, export growth was -3.3% m-o-m from -4.2% in July.

Export growth to developed economies improved in August. Export growth improved to 3.0% y-o-y in August from 0.6% in July for the US and to -12.7% from -16.2% for the EU, but dropped to -6.7% from -1.0% for Japan. On the other hand, export growth to emerging markets continued to slow, to 10.3% from 13.3% for Asean, to -2.6% from 12.4% for South Africa, and to -14.0% from -3.3% for Brazil.

It was partly driven by commodities, as import growth for commodities (iron ore, oil, and unwrought copper) fell sharply to -19.7% y-o-y in August from -4.9%. However, import growth for domestic consumption (excluding commodities) also dropped to -1.2% in August from 7.3% in July, which suggests domestic demand weakened significantly. Import growth for processing trade also fell to -1.5% y-o-y from 0.1%, not a good sign for future Chinese exports.

The decline of commodity imports is driven by both price and volume effects. In volume terms, iron ore import growth was a flat 6% in August from July, while import growth for oil and copper was down to -13% and 5% from 12% and 20%, respectively. In value terms import growth for iron ore, oil and copper was down to -21%, -21%, and -12% in August from -17%, 1%, and 2% in July, respectively.

This weak data is consistent with weak industrial production data and increases the pressure on the government to loosen policy further. President Hu made an unusual speech at APEC on 8 September, acknowledging the downside risks to the economy and emphasizing the importance of promoting infrastructure investment.

The weak August data likely triggered both his speech and the announcement of RMB1trn in projects approved by the government on 5 and 6 of September. We believe government policy will become more proactive and further supportive policies will be rolled out in September such as increasing tax rebates to exporters, cutting the RRR, and approving more infrastructure projects.