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China Update, Emerging Markets, developments, Trump Administration, fx trader, forex -2

On Wednesday China reported its October trade balance. The surplus rose to $49.1 bln from $42 bln in September. However, exports fell for the seventh consecutive month. The 7.3% decline was larger than expected but less than the 10% fall in September. Imports fell 1.4%. This was also more than expected, but a slower pace from September (-1.9%).

The US-China bilateral deficit may become more politicized in the period ahead. Exports to the US fell 5.6% year-over-year in October. This means that the year-to-date US trade deficit with China, by their reckoning is $208 bln compared with $218 bln in the same 2015 period. Note that last week's US trade figures showed the US had a $258 bln deficit with China this year, down from $275 bln in the year ago period.

A sector that has been the sources of much trade friction is steel. China's steel exports for the third month on a year-over-year basis. They were off 15% in October to 7.7 mln tons. Steel exports were off 22% in September and 7.4% in August. However, the surge at the start of the year means that China has still increased its steel exports in the Jan-Oct period for the same year ago period (0.7% to 92.74 mln tons).

Some part of the slowing of steel export growth is the replenishing of domestic inventories. The property boom and infrastructure spending, which has supplanted monetary policy as the key form of stimulus, places a demand on steel as well.  Crude oil imports slipped from September's record. Copper imports fell to their lowest level since February 2015. The drop in copper imports seems to reflect "import substitution" as domestic output is rising with new smelters coming online.

The yuan has fallen 4.4% this year and is now at its lowest level in six years. Given the appreciation of the greenback since Asia closed, it seems reasonable to expect dollar rises further on Wednesday. The currency is likely to be a flashpoint Trump Administration. As a candidate, Trump has claimed China is a currency market manipulator. Many expect him to make this an official assessment early in his term. The Treasury Department, following Congressional legislation, has devised a framework with quantitative measures to better define manipulation. We have shied away from claims of a currency war, but this too can change.

Marc Chandler‚Äč
Global head of currency strategy at BBH
Brown Brothers Harriman

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