Economists divided over surprising export strength

China's January exports stunned the market with a 10.6-percent rise, far exceeding market expectation of less than 2 percent. Reading between the lines, economists at home and abroad were divided over why the figure is so strong and its implications for the economy. The General Administration of Customs said in a Wednesday statement that foreign trade climbed 10.3 percent in January, with exports surging 10.6 percent and imports up 10 percent. OVER-INVOICING CONCERNS Exports at this time last year were significantly inflated due to illicit transactions, so January's exports should have been weaker, according to some forecasters. In the first quarter of 2013, over-invoicing through Hong Kong allowed exports to balloon by more than 20 percent year on year. Figures from the National Bureau of Statistics showed that exports in January 2013 increased 25 percent from a year earlier. Zhang Zhiwei, chief China economist with Japan's Nomura Securities, said in a research note that he was puzzled. "At this stage, we believe capital inflows may have contributed at least partly to January's strong export growth numbers," he said. He surmised that the Lunar New Year had led to strong liquidity demand, yet domestic liquidity has been tight, so there may have been strong capital inflow. Zhang argued that the data on industrial production for January and February will be released on March 13 and should help to confirm the real strength of export growth. Others disagreed. Kevin Lai, with Daiwa Capital Markets, said exports to Hong Kong were still inflated by 16 billion U.S. dollars in December. "At this point, we do not have data to show how much or little was inflated in January," Lai said. Lu Ting, chief China economists with Bank of America Merrill Lynch, also noted that there are no clear signs of hot money inflow. LUNAR NEW YEAR EFFECTS Opinions also collided over what role the timing of Lunar New Year has played. Spring Festival, lunar new year, fell on Jan. 31, the start of a week of holidays for Chinese workers. The holiday started on Feb. 9 last year. The timings of holidays can greatly distort export readings as many manufactures slow or even stop their production a few weeks beforehand. "It seems that the lunar new year effect has had little impact on trade numbers, due, perhaps, to the fact that both January last year and January this year had the same number of working days [22]," Lu said. Wang Tao, chief China economist at UBS, interprets the role of the new year from a different perspective. "The earlier lunar new year in 2014 means that more shipments were could have been front-loaded to January than in 2013, most likely at February's expense," Wang said in a research note. DATA IMPLICATIONS Zhang said it is unclear to what extent the data reflect the true strength of the economy, maintaining his view that GDP growth will slow to 7.5 percent in the first quarter and to 7.1 percent in the second. Other economists are more optimistic. Qu Hongbin, HSBC's chief China economist, said the figures implied stronger than many expected, both externally and at home. Customs data showed trade with the European Union, China's largest trade partner, was up 14.6 percent last month, trade with the United States rose 8.8 percent while that with Japan climbed 7.8 percent. "We remain cautiously optimistic for China's external outlook in 2014," Qu said, citing the improving economic situation in developed economies, including EU and the U.S. Qu expects export growth to accelerate to 10 percent year on year in 2014, up from 7.9 percent in 2013. a Jun, Deutsche Bank's chief economist for Greater China, thinks that underlying export growth may have reached 20 percent in January after adjusting for the data distortion in last January. "We expect the positive trend of export recovery to continue, and export growth should likely rise to 14 percent for the year as a whole," he said. Ma added that the acceleration in export growth will be driven by improving external demand, especially in the U.S. and eurozone, as well as the deceleration of yuan appreciation. As trade surplus remains strong, the yuan will continue modest appreciation this year, said Chang Jian, chief China economist at Barclays. The trade surplus stood at 31.9 billion U.S. dollars last month, up 14 percent from a year ago and 24.2 percent from December, according to new data. Chang said the yuan may appreciate modestly against the U.S. dollar this year to reach 5.95 by the end of the year, which implies an annual gain of 1.75 percent. The central parity rate of the yuan against the U.S. dollar appreciated by 3.09 percent last year, central bank data showed.