The Chinese establishment is not shy to show us that after a long period of hoarding cash in the negative yielding "safe haven" of US Treasury bills, they are prepared to initiate the world`s biggest corporate shopping spree. Data released by the Chinese Customs Office present the biggest monthly trade deficit since 1989 as the industrial mammoth is seeking to employ its cash reserves by purchasing industrial commodities like copper and oil. Whereas the deficit may well be seasonal due to the timing of the Lunar New Year, the figure does show the spending appetite of China.
Perspective on the Yuan
According to the Customs Office, the increase of exports in February of 18.4% failed to compensate for the surge of 39.6% in imports, as compared to February 2011. This lead to a record trade deficit of $31.5 billion. The data are skewed due to their seasonality as the Lunar New Year fell in February in 2011 and in January this year. Even so, including seasonal adjustments, exports in February rose by 4% while imports expanded by 9.4%.
The trade deficit along with yesterday weak economic data on industrial output and retail sales will increase the chances of further monetary easing from the Peoples Bank of China. This could entail further reserve rate reductions (which would increase the available liquidity of banks) and less flexibility in allowing the Yuan to appreciate against other currencies. But there is little that the PBOC can do about the other reason of its less-than-expected exports figure: the economic recovery in the United States is still to be proven and the Eurozone debt crisis is definitely not over yet. From Bloomberg:
For those short term traders that issue buy and sell orders based on the expectations of further quantitative easing, this is a positive signal towards a looser Chinese monetary policy. Now that Fed chairman Bernanke has failed to mention further QE in his latest speech, prompting the market to partly discount such a scenario, risk assets need as much QE crack as they can get. Don`t rule out a Monday rally in these asset classes.