Import growth rose due to a low base effect, and higher-than-expected growth suggested strong domestic demand. China’s import growth in February was 38.1% YoY in USD terms (44.7% YoY in RMB terms), greatly beating market expectation of 20% (23.1%) and higher than the growth of 16.7% (25.2%) in January.

Low base effect was a factor behind higher import growth in February. YoY import growth in February rose thanks to last year’s low base, especially the low base of import prices. Import prices of crude oil and iron ore in February 2016 were at the lows of this commodity cycle.

Trade growth in February was distorted by the Chinese New Year and the leap year factor. The Chinese New Year in 2017 was earlier than that in 2016 and there was one more working day in February 2017 than in February 2016. But as 2016 was a leap year, there was one fewer calendar day in February 2017 than in February 2016. The net effect on trade growth in February was uncertain. Combining the data of January and February can reduce the distortion caused by the Chinese New Year, but cannot avoid the negative impact from the leap year factor.

Cumulative import growth in January~February was strong. Cumulative imports in January~February grew 26.4% YoY, also much faster than the growth in 4Q16 (+2.5%). Higher-than-expected import growth indicates strong growth in domestic demand. We expect the main economic data of January~February (to be released soon) to show accelerated growth compared with December 2016.

Commodity imports were robust, while the MoM growth in import prices slowed. Cumulative imports of coal & lignite, iron ore, crude oil and soybeans in January~February grew 187.7%, 94.6%, 70.1% and 47.2% YoY respectively. Commodity import volumes in February declined MoM due to the impact of the Chinese New Year and the MoM growth in import prices slowed. Coal import prices fell MoM; crude oil and iron ore import prices rose at a slower pace MoM; soybean import prices edged down MoM.

Export growth in February slowed, but the cumulative growth in January~February was still higher than in 4Q16. China’s export growth in February was -1.3% YoY in USD terms (4.2% YoY in RMB terms), weaker than market expectation of 14% (14.6%) and the growth of 7.9% (15.9%) in January. Cumulative export growth in January~February was 4% YoY, still faster than the growth of -5.2% in 4Q16. Considering the negative impact from the leap year factor, the export growth momentum did not deteriorate in January~February.

The growth of China’s exports to the US, the EU and Japan in February was slower than in January. Compared with 4Q16, the growth of exports to the US in January~February was basically flat; the growth of exports to the EU and Japan in January~February picked up slightly; and the growth of exports to Hong Kong, South Korea and Taiwan accelerated significantly.

In contrast to China’s export growth, South Korea’s export growth in February was higher than in January, mainly because its exports benefited from the increase in China’s import demand. China’s imports from South Korea grew at a faster pace in February than in January.

Trade deficit is temporary. China recorded a trade deficit in February, compared to the expected trade surplus of US$27bn. However, February trade deficit/surplus may be distorted by seasonally factors, as the trade surplus often declines in the post-Lunar New Year month. The last time China reported a trade deficit was in February 2014, which was also the month after the Lunar New Year. Looking forward, the trade deficit is unlikely to continue.

External demand is still on the recovery path. The US economy showed a good momentum recently and the market expects the Fed to raise interest rates in March. The Eurozone’s unemployment rate fell to a seven-year low of 9.6% and its manufacturing PMI in February rebounded to 55.4, surpassing the 2014 high. The leading indicator of China’s exports released by Customs rose to 40.2 in February. The continued rebound in the BDI since mid-February also suggested improving commodity demand. Despite uncertainties such as protectionism, we expect global trade to improve in 2017 if the economies of China, the US and the EU all recover and boost emerging market economies. Looking ahead, we expect China’s export growth to rebound moderately; import growth may pull back due to base effect but will likely remain relatively high.