Let’s start with a serious caveat: the way Chinese New Year wanders around the calendar makes it dangerous to read too much into China’s economic data during the first two to three months of every year. Trade data, retail data, inflation, money - all are affected - and even after decades of trying, I’m still uncertain how to which numbers will be affected, and in what way.
This year, it ought to be relatively simple: Chinese New Year fell on January 31st, whilst in 2013 it fell on February 10th. So generally, we ought to expect January to have had fewer working days this year relative to 2013 and consequently figures for industrial output and exports to be relatively depressed in January before rebounding in February.
But quite possibly it won’t work out like that. The nearest similar timing would be in 2009 (when Chinese New Year fell on Jan 26th, vs Feb 07 in the previous year): in January 2009, China’s exports were down 0.4SDs from trend in January before collapsing 1.9SDs in February. But one can counter that with what happened in 2003 (Feb 1st 2003 vs FEb 12th 2002), when January’s exports were 2.3SDs stronger than expected, before giving back 0.8SDs in February.
So perhaps China’s Ministry of Commerce spokesman was telling nothing but the truth, when he was quoted yesterday as warning the 1Q exports will be 'volatile' and 'we can't rule out the possibility that February’s trade figures will show an abnormal change from last year.' And ‘we should be clear that [January’s] export surge doesn't necessarily indicate favourable times for Chinese exporters’, even if the outlook for the year as a whole is ‘cautiously optimistic’.
And whilst we’re reading the runes, the willingness to let the Rmb depreciate over the last week is also compatible with nervousness about February’s export numbers.
Nevetheless, January’s export data was strong not just for China, but for Japan and Northeast Asia as a whole in a way which defies the popular belief that Asian economies are slowing, and which essentially has not been recognized. In dollar terms, NE Asia’s exports rose 4.7% yoy in January against 2013’s toughest base of comparison (exports jumped 15.5% yoy in Jan 2013).
In momentum terms, January’s movement was 1.6SDs above historic seasonal trends. As the chart below shows, this was merely an acceleration of a trend of rising momentum that had been quietly building throughout 4Q13. In fact, on a 6m basis, the underlying momentum in January reached its highest point for three years. Whilst consensus seems resigned to another year of single-digit export growth from NE Asia in 2014 (following 2.5% in 2013, 3.1% in 2012), even if the unnoticed outperformance of the last six months dies right now, Northeast Asian exports are likely to grow in the high 'teens in 2014. I suspect this is not yet on anyone's radar.
Although China inevitably bulks large over this data, since China accounts for nearly 59% of NE Asia’s exports, it is not the only contributor. In Japan, too (still about 19% of NE Asia exports), January was strong, with exports up 9.5% yoy in yen terms, which beat historic seasonal trends by 0.4SDs. The statistical impact of yen devaluation is beginning to slide out of the data: the yen was down 14.7% yoy against the dollar in Jan vs 19.2% yoy in December. Consequently, the fact that in dollar terms exports fell 6.6% yoy disguised an outperformance vs seasonal trends of 0.6SDs, allowing the 6m momentum trendline to break into substantially positive territory for the first time since May 2012.
The chart below measures 6m changes in export momentum for China, Japan, S Korea and Taiwan, both in local currency terms, and also in volume terms. By January, each economy was showing positive and accelerating momentum, led by China and Japan.
Finally, there is one other piece of surprising news - Japan’s trade numbers may finally be beginning to benefit from the J-curve impact of the depreciation in the yen. The J-curve’s arrival has been delayed so long we’ve stopped expecting it. And on the face of it, the record Y2.79tr trade deficit in January is just another demonstration of its absence. However, there are two reasons to see beyond that. First, January’s trade balance was principally the victim of a 37.7% yoy collapse in ship exports - the classic ‘lumpy item’ distortion.
Second, the fall of Japan’s share of NE Asia’s exports is now finally slowing. As the chart below shows, the peak of Japan losing market share came in August 2013, when over the previous 12 months it had slipped by 3.2pps to 19.5%. By January, that market share loss had slowed to 2.5pp, with a market share of 18.7%. It's not dramatic – indeed, it still hasn't broken the surface. But it is there: the J-curve is in the wings.
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