3 reasons behind Chinese export growth's sharp decline to 1%

Will it recover in Q3?

According to UBS Investment Research, May export growth dropped significantly and such weakness is expected to delay the overall recovery until Q3 2013.

UBS also noted that while base effect and the tighter scrutiny on export documentation are mainly to blame for the decline in export growth in May, weaker global demand and the strong RMB have also likely contributed. 

"Largely as a result of the weaker export growth, we have revised down China’s GDP growth forecast for 2013 from 7.7% to 7.5%. We now expect that a more obvious q/q rebound to occur only in Q3 2013, and have therefore revised down our Q2 and Q3 2013 growth forecast both from 7.8%y/y to 7.6% y/y," says UBS.

Here's more:

China export growth slowed sharply from 14.7%y/y in April to 1%y/y in May in USD terms, much weaker than expected (BBG 7.4%, UBSe 6%). Imports surprisingly declined by 0.3%y/y in May, also weaker than expected.

The weakness in export growth can be attributed to three factors:

1) Base effect: both export and import growth were strong in May 2012 and the high base contributed to the weak y/y reading this year.

2) Tighter scrutiny on trade invoicing and trade-related FX flows has resulted in the deflation of reported export growth. This adjustment may have alone led to a 7-8 percentage points drop in the headline export growth rate in May.

3) Export demand weakened as global economic activities softened in recent months and the RMB appreciation persisted. Both the US and the EU have seen weaker activities recently, which have contributed to the slowdown in some emerging market economies. Chinese exports are also facing the headwind of a 7% real appreciation in the past 12 months.