[20081113]China Economy - "Exports Slowed; Trade Surplus Hit Another Re

Pls see attached the full PDF research report, below is a highlight:
China’s October exports decelerated as expected, but the size of the slowdown exceeded market expectations. The trade surplus hit another record high.
China’s export growth decelerated from 21.5% in September to 19.2% in October (Chart 1), consistent with our forecast (19.0%) and slightly above market consensus (18.1%). This is in line with our projection that exports will slow significantly as new orders shrink and orders in hand are delivered. Growth rates declined mainly for exports of machinery/electrical products (Chart 2) and exports to the EU, South Korea and India (Chart 8).
Import growth slowed sharply from 21.3% YoY in September to 15.6% YoY in October, lower than our forecast (19.0%) and market consensus. Reasons include: 1) An acceleration in the decline in domestic demand, while the (possibly) negative growth of October power generation indicates sluggish industrial production, reducing demand for raw material imports; 2) Falling import prices due to the bursting of international commodity price bubbles (Chart 3); and 3) A decline in import demand for the processing trade (40% of China’s total imports) due to the export slowdown.
As imports decelerated more than exports, this pushed up the trade surplus by 30.3% YoY to US$35.24bn, another record high (Chart 4). This is largely consistent with our forecast (US$32.0bn, vs. market consensus at US$30.0bn), reinforcing our view that the trade surplus may continue to expand during the economic downturn (Chart 5).
China’s exports face significant downside risk going forward: 1) New export orders are shrinking rapidly. The new export order index in October PMI deteriorated to 41.7%, an all-time low (Chart 6). 2) The global financial crisis is undermining exports due to its impacts on the real economy and credit: a) The economic slowdown of China’s major western trading partners has eroded their demand for Chinese exports (Chart 7), while plunging commodity prices also reduce import demand in resource-exporting countries, as is well illustrated by the recent slowdown in exports of machinery and electrical products. b) The credit crunch is impeding access to financing for importers in these countries, further constraining China’s exports. Exporters have recently recorded an increase in overseas importer defaults, and a few foreign ship importers recently abandoned orders, despite having already made down-payments. Our empirical study also shows that the international credit crunch is eroding exports (see our Macroeconomy Weekly dated October 20).
Accordingly, we think China’s export growth faces major downside risk over the next few quarters. The appreciation of the trade-weighted nominal RMB exchange rate is expected to slow to 2~3%, and the RMB/USD rate depends on the strength of the dollar. A 2% RMB deprecation against the dollar is possible in 2009.