Chinese imports contracted 2.7 percent year-over-year in August, against expectations of a 3.5 percent rise. But analysts are warning that the number may not be as bad as they first seem.
Bank of America's Ting Lu explains that declining commodity prices played a role in the contraction in imports. "Falling import prices of oil and iron ore continued to contribute to the slowing YoY import growth in August. In value terms imports of iron ore fell 20.9 percent on the year, and value of oil imports declined 20.5 percent in August, after rising 1.4 percent the previous month." Moreover, Lu writes that declining commodity prices present the country with an opportunity to accumulate inventories for the future at lower costs.
Societe Generale's Wei Yao notes that the year-over-year expectations were already lofty since they were up 30.4 percent YoY in August 2011.
That being said imports act as a crucial indicator for hard-landing watchers since they have a significant domestic demand component.
"Slowing real domestic demand in China was the key factor, consistent with the soft activity data in the past few weeks," according to Yao.
So what were the worrisome signs? First, on a monthly basis imports contracted 4.6 percent, reflecting a fourth consecutive monthly slowdown. Second, Lu writes that despite decreasing commodity costs, volumes of imports were lower.
Iron ore imports increased just 5.7 percent YoY in August, compared with 6.1 percent in July, and volume of crude oil imports contracted 12.5 percent YoY, after being up 12.4 percent in July.
This chart from Societe Generale shows the trajectory of import and export growth since 2004:
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