Weak Exports Pressure China's Economy

China's exports saw a disappointing drop of 8.3% in July. This was much more than expected, marking the biggest drop in exports in 4 months. Beijing is now under pressure to take action and stimulate the world's 2nd largest economy.

The forecasts predicted only a drop of 1%, following an uptick of 2.8% last month. However, the data that came out on Saturday suggests a decreased demand from Europe, with a drop of 12.3%. The US, China's biggest market, also dropped by 1.3%. The fall in exports to the United States was the first one since March. The Japanese market, another big trading partner for China, also showed a big slag of 13%.

"A recovery in external demand remains far off and economic growth will continue to rely on domestic demand, which implies policies should continue to be relaxed in the second half," wrote Qu Hongbin, a Chinese economist at HSBC.

As for imports, they also fell heavily year-on-year with a drop of 8.1% according to the data from the General Administration of Customs, though this performance did not surprise analysts who have come up with similar predictions. They had expected an 8% drop, following a 6.1% decline in June.

The weak imports can be partially explained by falling commodity prices paid to partners. Australia being one of them, they are one of the largest countries from which China imports, and ships coal and iron. The Chinese industry took advantage of these weaker prices to increase imports of raw materials, which resulted in much higher-than-expected figure of imports of most major commodities. Coal has particularly risen in volume of import in July, with an increase of 28.1%. However, analysts remain negative about the market's future prospects.

"Probably the volumes are okay, but the prices that are being paid are hugely lower. We have got a real concern there for the future levels of the Aussie dollar," Stephen Koukoulas, the managing director of Australian consultancy Markets Economics said.

 He explained that the weaker prices in commodities is a major concern of Australia and New Zealand, as they both are markets that rely heavily of Chinese demand. China's trade surplus recorded was $43.03 billion for the month, when forecasts were higher at $53.25 billion.

These results do not favor positive forecasts about an economic turnaround that China was hoping for. The central bank's report published last Friday warned that China will go through a longer period of economic weakness. They also stressed the importance of implementing new growth strategies by getting away from short-term stimulus tools.

The strong yuan is argued to be the reason why the exports have been so weak. ANZ Research's estimation shows that the nominal effective exchange rate of the yuan has increased by 13.5% since June 2014.

However, some analysts defend the positioning of the yuan as a policy that enables the straightening of the domestic buying power in order for Chinese businesses to borrow and invest abroad, and also as a stimulus for foreign firms and governments to increase their use of the yuan.

Analysts also support the strong currency as it enables the Chinese economy to mean off low-end export manufacturing.

"These factors suggest that China's exports will continue to face strong headwinds," Liu Ligang and Louis Lam said in an ANZ Research note on Saturday.

 They both shared their doubts about China reaching the trade growth target of 6% for 2015.