China trade to slow down even more

China's exports growth slowed to a nine-month low of 13.8% y-o-y in November compared to 15.9% y-o-y in October, though better than market (10.9%) and our expectations of 10%. This translated into a 4.8% m-o-m increase (seasonally adjusted), relative to 1% m-o-m in October, by our estimation.

China's imports growth decelerated to 22.1% y-o-y in November from a spike of 28.7% y-o-y in October, but the pace of slowdown was better than market expectations of 18.8%. In seasonally adjusted terms, we estimate import growth rose 2.4% m-o-m in November, notably slower than 8% m-o-m in October. Ordinary trade imports decelerated to a pace of 27% y-o-y in November from 39.8% y-o-y in October, while processing imports picked up to 10.9% y-o-y in November from 8.9%y-o-y in October.

As a result, China's trade surplus narrowed to USD14.5bn in November from USD17bn in October from USD 14.5bn in September. The total trade surplus for the first eleven months this year contracted by 18.2% y-o-y from the same period last year.

Implications:
Both exports and imports are slowing, although the current pace of slowdown is holding up better than expected. That said, this slowdown is likely to intensify in the coming months (we expect a single-digit exports growth rate in 2012), adding further downside risks to growth.

Exports growth has already dropped to its lowest level since November 2009, excluding the months distorted by Chinese New Year. Growth of shipments to the EU, after three straight months of single digit growth, will likely decelerate further alongside the continued deterioration of Europe's growth outlook. Putting aside the weakness of DM, emerging markets are also showing signs of slowdown. The deceleration of China's shipments to the latter is starting to outstrip that of shipments to DM, although the level of exports growth to non-G3 countries remains higher.

Meanwhile, demand at home is also cooling faster than expected. November's softer than expected IP and FAI growth were mainly attributed to weaker domestic demand (weighed down by credit and property tightening measures), consistent with the results of HSBC's November manufacturing PMI (See HSBC China manufacturing PMI (Nov, final)). This means that activity likely has further to slow once the impact of Europe's slowdown fully trickles through.

China's government can and should reflate the economy to support growth and jobs in the coming year. With inflation easing rapidly, Beijing can further ease monetary policy with additional reserve ratio cuts (we expect 150bp reserve ratio cuts in 1H 2012) and a larger new loan quota (we expect RMB8-8.5trn in 2012 vs. this year's RMB7.5trn). Tax cuts and fiscal spending should play a more important role in stabilizing growth. (See China Inside Out: China in 2012: Time to reflate, published 1 Dec).

Regarding China's exchange rate, the renminbi will unlikely see significantly faster appreciation, especially given the continued narrowing of the country's trade surplus (from the peak of nearly 8% of GDP to this year's 2% of GDP). That said, neither does the still sizable trade surplus support a significant depreciation of the renminbi either. Healthy demand for the greenback set against the backdrop of the ongoing EU debt crisis implies that the renminbi exchange rate will likely stay largely stable with rising volatility within its daily exchanging band in the near term.