China's July Exports Surge; Trump's Tariff Agenda Clouds Outlook; Hang Seng Index Climbs

Key Points:

• China's exports surged 7.2% in July, but PMI data signals a worrying contraction in manufacturing demand.
• Imports rose 4.1% year-on-year, reflecting a possible rebound in domestic consumption and supply chain demand.
• Trade optimism lifted Mainland China and Hong Kong stocks, with the Hang Seng Index climbing 0.59% intraday.

China Exports Surge… Imports Signal Lift in Demand

China's economy continued to face scrutiny as US President Trump proposed fresh tariffs targeting non-compliant trade partners. Chinese trade data signaled a surge in demand, temporarily easing concerns about China's economic outlook.

Exports soared 7.2% year-on-year in July, up from June's 5.8% increase. Meanwhile, imports jumped 4.1%, following June's 1.1% rise, indicating stronger domestic demand.

CN Wire remarked on July's trade data, stating:

"This export resilience persists despite high U.S. tariffs, indicating strong global demand continues to support China's economy. […]. However, whether this momentum will last remains uncertain, as front-loading effects may fade. Recent data show trade activity slowing, with Chinese ports handling fewer containers in the week through August 3, marking the second consecutive weekly decline."

While customs data point to resilience, forward-looking indicators suggest a softening global demand trend.

July's trade terms contrasted with trends from the Manufacturing PMI data that pointed to a further weakening in external demand for Chinese goods. The S&P Global China General Manufacturing PMI and NBS Manufacturing PMI were below the crucial neutral 50 level in July, signaling a sector-wide contraction.

Notably, the S&P Global China General Manufacturing PMI survey revealed that new export orders contracted for the fourth consecutive month, with orders falling at a sharper pace than in June. The NBS Manufacturing PMI new export order index fell 1.2 percentage points to 47.1.

While July's trade data impressed, the Manufacturing PMIs raised red flags, given that Trump's tariffs targeting transshipments had yet to take effect.

China's Trade Routes Threatened as US Targets Transshipments

In July, two key trading partners reached trade deals with the US, potentially affecting China's attempts to bypass US tariffs. The US imposed a 20% tariff on Vietnam and, more significantly, a 40% levy on transshipments. Additionally, Indonesia faces a 19% tariff on shipments to the US.

Meanwhile, the US administration is reportedly planning to impose rules of origin for indirect shipments.

The new tariffs and the potential for sweeping levies on transshipments may adversely impact demand for Chinese goods and the broader economy.

While July's trade data signaled a pickup in economic momentum, fears of a shift in trade terms are likely to linger as tariffs take effect.

Commenting on China's trade outlook for the second half of the year, Garcia Herrero stated:

"Rerouting will be much harder in the second half. So that's going to hit Chinese exports indirectly. So, that's why the second half is tougher and the government has been preparing."

Considering the challenges in the second half of the year, she expected export growth to slump to 2-3% year-on-year in the third quarter and potentially 1% in Q4.

The US administration's plans to target transshipments may support Garcia Herrero's projections.

CN Wire also remarked on China's increasing reliance on third countries, stating:

"China has increasingly relied on third countries--such as Vietnam and Mexico--for manufacturing final products or components, a trend that accelerated after the first U.S.-China trade war and escalating restrictions. China's share of value-added manufacturing for U.S.-bound goods via these countries rose to 22% in 2023 from 14% in 2017."

Could China Be Next on Trump's Tariff Agenda?

July's trade data may draw the attention of US President Trump and his administration. The latest data suggest that their efforts to dampen demand for Chinese goods are failing. The US could impose heavy tariffs as part of its rules of origin policy and may target China with more punitive levies.

On August 6, President Trump doubled tariffs on India to 50% in response to the continued import of Russian oil. China imports oil from Russia and Iran, raising the threat of retaliation.

Market Reaction: Mainland China Equity Markets Recover from Early Dip

July's trade data raised demand for Mainland China-listed stocks. The CSI 300 and Shanghai Composite Index were up 0.05% and 0.12%, respectively, following the release of the trade data, recovering from earlier losses. Meanwhile, the Hang Seng Index climbed from 24,908 to a session high of 25,060 in response to the data. At the time of writing, the Hang Seng Index was up 0.59% at 25,058.

Hang Seng Index – 5 Minute Chart – 070825