July trade figures are an indication that growth momentum is returning in China

China's economy has got off to a good start in the second half of the year, with the July trade figures providing early indications of improvement.

With global demand improving slowly but firmly and the full effect of the recent pro-growth measures enacted by the Chinese government coming into play, it seems reasonable to say that the world's second-largest economy has bottomed out from its deepest slowdown in recent years.

In what perhaps was the most upbeat signal, imports notched up an impressive growth of 10.9 percent in July, thereby reversing the declines of the previous two months.

The robust growth in imports also bodes well for the exports sector. China is a manufacturing powerhouse, with processing trade - in which companies import raw materials and semi-finished products, manufacture and assemble them, and then sell the final products to overseas clients - accounting for a third of its total foreign trade. Therefore, imports are an important indicator for future trend of exports. Since imports witnessed remarkable growth in July, it is reasonable to expect exports to grow accordingly in two to three months.

July is traditionally the month when Chinese manufacturers increase raw material stocks, which will then be processed in the next three months to meet the Christmas orders.

Last month, China's iron ore imports rose 26.4 percent, compared with the 6.8 percent growth in the previous month. Imports of crude oil grew 19.6 percent, much higher than June's 2.1 percent.

The raw material import spree is an indication of the renewed business confidence on export prospects, as it is obvious that production is being ramped up to cater to rising demand.

Recovering global demand was in fact the most significant economic indicator in July. Exports to the United States rose 5.2 percent, reversing the decline of 5.4 percent in June. The European Union bought 2.8 percent more Chinese goods in July, the first rise this year if January and February figures are analyzed together to avoid the statistical distortion created by the Spring Festival seasonal factor. Given that there were no obvious one-off factors to boost growth, it makes sense to conclude that the demand of China's two largest export markets is improving remarkably.

According to Shanghai-based Universal Consultancy, manufacturers, especially the large ones and those enjoying a competitive edge in branding, technology and marketing networks, are employing more short-term workers and also sourcing raw materials.

The consultancy firm conducted a survey of 300 manufacturers and exporters in Jiangsu, Anhui and Zhejiang provinces, and Shanghai, collectively viewed as the major export centers of China, in July. More than 43 percent of them said they had received more orders on a yearly and monthly basis. This is a remarkable improvement over the 12 percent figure recorded for May. In addition, 62 percent of the polled companies said more US and European orders were placed last month, compared with 15 percent in May. Therefore, it is not surprising to see 51 percent of the surveyed business owners expressing cautious optimism that the worst might be over.

The improvement in foreign demand is also in line with the performance reported at the Canton Fair, a major barometer of China's exports, in May.

The fair attracted 202,766 overseas merchants, up 7 percent from the autumn session six months previously, and transactions reached $35.54 billion, up 8.8 percent from the last session.

Recovery was not just witnessed in the export market. Trade figures in July also showed an improvement in domestic demand.

China's imports under the general trade item, a category that measures mainly finished products, grew 14.8 percent last month, a remarkable improvement over June's 3.7 percent.

As these imports will ultimately be sold to end consumers in coming months, domestic demand is certain to bounce back.

Clearly, on both international and domestic fronts, the July trade figures offer more reasons to be optimistic.

However, skepticism over the authenticity of China's trade figures has not totally vanished, with some analysts believing that speculative money flows under the disguise of trade spruce up the trade data.

That accusation made sense in March and April, when the fast appreciation of the yuan led to large amounts of foreign money flowing into the country.

But that seems to have stopped after authorities cracked down on fake trade, and international capital started flowing out of China as the yuan slowly strengthened.

In July, the mainland's trade with Hong Kong, a major destination for international money flows, grew only 2.8 percent. It was 66 percent in January-April period. Clearly, hot money flows have slowed. In that sense, even if distortion exists, the July trade figures can be considered largely trustworthy.

Other economic indicators in July also give positive signs.

Industrial output rose by 9.7 percent year-on-year in July, up 0.8 percentage points from June. July growth was close to this year's monthly record of 9.9 percent in January and February.

This means that industries have bounced back from a low and are keen to produce more with a growing confidence in future market demand.

The producer price index, a major gauge of factory-gate prices, declined 2.3 percent in July. Though it continued to drop, the margin of decline has narrowed from June's 2.7 percent and May's 2.9 percent. This shows that wholesale prices are improving slightly and factories have gained some advantage in negotiating prices. The bargaining chip of factories, which represent the supply side, will increase only after the demand for their goods and services increase. In that sense, slower PPI decline means overall demand is steadily going up.

In addition, the pair of purchasing managers' indexes, a gauge of manufacturing activity, shows the manufacturing sector is improving.

The official PMI rose 50.3 in July, from 50.1 the previous month. The PMI compiled by HSBC grew to 49.7 in July from 48.7. (A reading above 50 suggests business grows, while a reading below 50 means a contraction in business.)

Although the two indexes disagreed over whether the sector was growing, their contradictory findings actually showed that a partial recovery in the manufacturing sector is happening, although a cross-sector rebound has yet to come.

The official PMI measures mostly state-owned big producers, while the HSBC index focuses more on small and medium-sized manufacturers.

As big manufacturers enjoy more competitiveness, it is common to see them rebound more quickly from a slowdown or a recession. This is exactly what is happening in China's manufacturing sector: Large companies are leading a recovery in the industry, to be followed by small ones if demand continues to improve.

But not all economic indicators are doing well.

Retail sales of consumer goods in July rose by 13.2 percent, compared with 13.3 percent in June. This seemed to suggest that the domestic demand was not improving.

However, considering the July growth was the second-best so far this year, and only marginally worse than the best, the performance can by no means be called sluggish.

All these economic figures appear to suggest a recovery is taking place in the production process with initial signs of improvements in external and domestic demand. A full-scale recovery is expected to cover both manufacturing and consumption after domestic demand, as reflected by retail sales, becomes solid.

From a policy perspective, we have more reasons to be optimistic about the rest of the year.

After months of struggles to define the bottom line of the economic slowdown, top policymakers agreed last month that 7.5 percent was the minimum growth rate the country should achieve.

A slew of measured pro-growth policies were rolled out late last month. They included facilitation of customs clearance, cancellation of some customs fees and suspension of business and value-added taxes on micro businesses. More importantly, rail construction is expected to gather speed after Premier Li Keqiang vowed to ensure funding for projects, especially in western and central parts of the country.

The credit situation has also been improving in July, meaning real-economy businesses now have better chances of getting cheaper loans. The credit crunch that swept through the interbank market in June basically came to an end in July, with interbank rate ebbing to 3.5 percent from June's average of 6.6 percent. Loans to companies were restored last month after banks managed to fix the holes in their books.

Although no massive stimulus has been rolled out, it is fair to say the worst slowdown in the Chinese economy since 2008 may well be over.

The author is a financial analyst in Shanghai. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/16/2013 page11)