Shipping containers sit stacked among gantry cranes at the Kwai Tsing Container Terminals in Hong Kong, China. Picture: BLOOMBERG/BRENT LEWIN
Shipping containers sit stacked among gantry cranes at the Kwai Tsing Container Terminals in Hong Kong, China. Picture: BLOOMBERG/BRENT LEWIN

Beijing — China's exports unexpectedly fell the most in two years in December, while imports also contracted, pointing to further weakness in the world's second-largest economy in 2019 and deteriorating global demand.

Adding to policy makers' worries, data on Monday also showed that China posted its biggest trade surplus with the US on record in 2018, which could prompt President Donald Trump to turn up the heat on Beijing in their bitter trade dispute.

Softening demand in China is being felt around the world, with slowing sales of goods from iPhones to vehicles, prompting warnings from the likes of Apple, and Jaguar Land Rover, which last week announced sweeping job cuts.

The dismal December trade readings suggest China's economy may have cooled faster than expected late in 2018, despite a slew of growth-boosting measures in recent months ranging from higher infrastructure spending to tax cuts.

Some analysts had already speculated that Beijing may have to speed up and intensify its policy easing and stimulus measures in 2019 after factory activity shrank in December.

China's December exports unexpectedly fell 4.4% from a year earlier, with demand in most of its major markets weakening. Imports also saw a shock drop, falling 7.6% in their biggest decline since July 2016.

Analysts had expected export growth to slow to 3% with imports up 5%.

"Today's data reflect an end to export front-loading and the start of payback effects, while the global slowdown could also weigh on China's exports," Nomura economists wrote in a note, referring to a surge in shipments to the US over much of 2018 as companies rushed to beat further tariffs.

"The export growth print also suggests that the recent strength of the yuan might be short-lived; Beijing will perhaps be more eager to strike a trade deal with the US; and that policy makers will need to take more aggressive measures to stabilise GDP growth."

Net exports had already been a drag on China's economic growth in the first three quarters of last year, after giving it a boost in 2017.

Asian shares and US stock market futures fell as the surprisingly weak Chinese data added to fears of weaker corporate profits and investment, while the yuan currency gave up some of its early gains.

Higher trade surplus with US

China's politically sensitive surplus with the US widened by 17.2% to $323.32bn in 2018, the highest on record going back to 2006, according to Reuters calculations based on customs data.

China's large trade surplus with the US has long been a sore point with Washington, which has demanded Beijing take steps to sharply reduce it.

Washington imposed import tariffs on hundreds of billions of dollars of Chinese goods in 2018 and has threatened further action if Beijing does not change its practices on issues ranging from industrial subsidies to intellectual property. China has retaliated with tariffs of its own.

However, Beijing's export data had been surprisingly resilient to tariffs for much of 2018, possibly because companies ramped up shipments before broader and stiffer US duties went into effect.

As many market watchers predicted, that boost has faded in the last few months. China exports to the US declined 3.5% in December while its imports from the US were down 35.8% for the month.

China's total global exports rose 9.9% in 2018, its strongest performance in seven years, while imports increased 15.8%.

But December's gloomy data, along with several months of falling factory orders, suggest a further weakening in its exports in the near term.

"A trade recession is likely, in our view," Raymond Yeung, chief economist at ANZ, said in a note, predicting a period of export contraction similar to 2015-2016.

"The global electronics cycle remains the key driver of Chinese exports. A potential downturn in the sector poses the real risk to China's external outlook even if China and the US reach a resolution on their trade dispute."

ING said a fall in electronic shipments could be related to foreign companies avoiding using China-made electronic components, adding that exports and imports of electronic parts and goods will likely shrink in 2019.

Weak imports highlight softening demand

The higher tariffs China levied on US supplies also hit overall import growth. For all of 2018, soybeans, the second largest imports from the US, fell for the first time since 2011.

Even if Washington and Beijing reach a trade deal in their current round of talks, it would be no panacea for China's slowing economy, analysts say.

"The import slowdown is consistent with other signs that growth in China's domestic economy continued to weaken," said Louis Kuijs, head of Asia economics at Oxford Economics.

"Overall economic growth slowed further in the fourth quarter and remains under pressure from weaker exports, slow credit growth and cooling real estate activity."

Chinese policy makers are widely expected to roll out more support measures in coming months if domestic and external conditions continue to deteriorate.

Earlier in January, the Chinese central bank said it would slash banks' reserve requirements — the fifth such cut in a year — as it tries to encourage more lending and reduce the risk of a sharp slowdown.

"If pressure on the economy is still relatively large in the first half, a cut every quarter should be highly likely," said Xu Gao, chief economist at Everbright Securities.

At an annual meeting of top leaders in December, China said it would boost support for the economy in 2019 by cutting taxes and stepping up policy adjustments.

A few analysts believe interest rate cuts are a possibility, but most expect Beijing will refrain from massive stimulus measures like those deployed in the past, due to worries that it could add to a mountain of debt and weaken the yuan.

Sources said last week that Beijing was planning to lower its economic growth target to 6%-6.5% in 2019 after an expected 6.6% in 2018, the slowest pace in 28 years.