More evidence Chinese economy is weakening

Imports fell 6.8% in June compared to a year ago. Economists anticipated a smaller drop of 4.1%. Exports also fell by 12.8%, more than the 10% expected. To find a bigger drop, we have to go back to February 2020, when China exports came virtually to a halt. Chinese factory activity has been shrinking in recent months and policymakers are now reckoning with the prospect of prolonged slower growth in the world's second-largest economy, around just 3% annually, according to economists' forecasts. That is less than half the typical rates throughout recent decades and creates the feel of an economy in recession.

(Video Transcript)

Chinese trade surplus

Now, even though the Chinese trade surplus widened in the month of June, this shouldn't hide the fact that it's another sign that the world's second-largest economy is beginning to fade. China trade is missing forecasts of both imports and exports. And in fact, it was a big move lower and a big surprise for the markets as well. Imports fell 6.8% in June compared to this time last year.

Economists anticipated a small drop of 4.1%, with exports also falling by a margin of 12.8%, also more than the 10% expected. Despite the high drop, we have to go back to February 2020, when China's exports came to a virtual halt. China's export slump comes as sluggish overseas economies struggle with inflation and rising interest rates and import a few goods from Chinese factories.

If we look at what's been happening to the Chinese yuan, We've seen the dollar fall recently against a whole basket of currencies, and that's exactly what's happened.

The US dollar

But look at what's going on today, the USD is up, one of the few moves up for the dollar in today's trade against that weaker CNH. Now, Chinese factory activity has been shrinking in recent months and policymakers are now reckoning with the prospect of prolonged, slower growth in the world's second-largest economy, just around 3% annually, way below the 5% that had been anticipated.

The Chinese Yuan

Now, with this rise that we've seen we've got to go back to the bottom of this chart here where in January we hit a low for the dollar against the Chinese yuan on expectations that things would begin to pick up as China came out of the COVID-19 lockdowns. But since then, it's really been the dollar against that weaker CNH.

Chinese economy overview

Now, Chinese factory activity has been shrinking in recent months and policymakers are now reckoning with the prospect of prolonged, slower growth in the world's second-largest economy, just around 3% annually, way below the 5% that had been anticipated Chinese yuan.

Now, with, this rise that we've seen we've got to go back to the bottom of this chart here where in January we hit a low for USD/CNH on expectations that things would begin to pick up as China came out of the COVID-19 lockdowns. But since then, it's really been a dollar story.

Only recently has the USD pulled back, and now 3% is less than half the rates typical throughout the recent decades for Chinese growth and creates the feel of an economy in recession. It's not in recession, but nonetheless, it feels like that compared to recent activity.