China Economics:October Trade Data Remained Soft;Capital Outflows Stabilised

Exports growth picked up less than market expectations, whileimports growth edged up on the back of still strong domesticdemand. October FX reserves data suggest that underlyingcapital outflows have likely stabilized amid capital controls.

    Declines in exports and imports growth narrowed in October, but slightlyweaker than market expectations. Exports growth picked up to -7.3% YoY inOctober (vs. -10.0% YoY in September, consensus and MSe: -6.0% YoY) due to alow base, while seasonally adjusted sequential growth softened, dragged byweaker capital goods exports. Imports growth edged up to -1.4% YoY in October(vs. -1.9% YoY in September, consensus and MSe: -1.0% YoY), defying a high base,likely reflecting still resilient domestic demand growth. As a result, the tradesurplus rebounded by US$7.1bn to US$49.1bn in October (vs. US$42.0bn inSeptember).

    Increased capital outflows in 3Q16, but October outflows may have stabilized:The preliminary 3Q16 balance of payments published by SAFE slipped to -US$136bn (vs. -US$35bn in 2Q16) due to increased capital outflows. October FXreserves dropped by US$46bn (vs. -US$19bn in September), largely driven bynegative valuation effect. Excluding the effect, the decline in FX reservesnarrowed to -US$9bn in October (vs. -US$26bn in September). This suggests thatthe underlying pace of capital outflows has likely remained largely the same asin September amid capital control measures.

    Outlook: In our view, China's exports could hold up in coming few months, as ourglobal economics team's leading trade indicator (MSGTLI) has improved.

    Meanwhile, we expect imports growth to remain largely stable on the back ofstill strong cyclical strength in 4Q16. We expect China's declining investmentreturn and the divergent policy stance in China and the US will keep capitaloutflow pressures alive, and the PBOC will allow a gradual pace of depreciationin CNY against the USD, with ongoing interventions to avoid large volatility.

    Regulators are likely to tighten capital restrictions further if capital outflowpressures intensify.