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The Latest Trade Figures Out of China Are Gloomy

Port Area Ahead Of Hong Kong's Trade FiguresPort Area Ahead Of Hong Kong's Trade Figures
The figures suggest that Chinese firms are 'over-invoicing' for imports to get round limits on exporting cash.Bloomberg Bloomberg via Getty Images

The latest trade figures out of China depict a dreary start to the year and may only heighten anxieties about a serious economic slowdown in the country.

Exports fell by 11.2% in January from the year before, whereas economists were expecting a modest decline of about 2%, and imports plummeted by almost 20%. Many economists had expected both figures to continue improving at the slow pace they had for most of last year, ever since recovering from a dramatic fall to start 2015. The fact that they did not created fresh doubts about China’s prospects. One of those who expected better figures, Capital Economics’ China economist Julian Evans-Pritchard, wrote that “today’s data suggest that there is a risk we could be wrong or at least that the year has got off to a shakier start than expected.”

The ugly export data also indicated weakness across the world: China’s exports to the U.S. fell by 9.7% year-over-year; those to the European Union by 11.9%; and those to its two largest trading partners in Asia, Japan and South Korea, fell by 5.3% and 15.9%, respectively.

Imports were the more worrisome number for China. In January, imports in U.S. dollar terms fell by 18.8% compared to last year and a 7.6% decline in December. Nomura economists led by Yang Zhao ascribed the much weaker import data to a slumping home economy and government measures to reduce overcapacity in the industrial sector.

It’s also clear that the December decline was probably much worse than the officially-reported 7.6% because it was inflated by companies using overcharged invoices as a disguise for moving money out of the country. As the renminbi was losing value against the U.S. dollar last year, mainland Chinese companies used trading partners in Hong Kong to move more of their capital out of the country and Chinese currency by paying inflated invoices.

So the double-digit January fall in imports was a dreadful figure that surprised everyone. But it may have been nearly as bad in December.

Still, it may be too early to write off China in 2016. Analysts note that early year data is often unreliable because of the shifting date of the Chinese Lunar New Year holiday, when the country’s economy effectively shuts down for a week and the Chinese buy gifts in a Christmas-esque display of consumerism. In fact, the holiday provided an encouraging note as retail sales during the holiday increased by 11.2% from last year, signaling a resilient Chinese consumer.

Also, the crash in imports may be overstated. Imports in major commodities rose by double-digits in volume in January even as the value of those fell because of the drop in commodity prices. Some investors have speculated China is a big winner in the commodities fall—to the tune of $460 billion.

Because of the flaws of January trade data, investors may have to wait till February figures are released to get a better outlook on China.