Editor's Note: Jimmy Zhu is the chief strategist at Fullerton Markets. The article reflects the author’s opinion, and not necessarily the views of CGTN.

Weaker global demand – as reflected in the most recent Chinese trade data – along with a potential further escalation in US-China trade tensions will weigh on the outlook for Chinese exports from now on.

With the yuan remaining soft amid accelerating inflation, the People’s Bank of China’s room for further monetary easing is currently seen as limited. Policymakers are expected to accelerate fiscal stimulus and infrastructure investment to counter increasing external uncertainties. 

China’s trade data for August show exports to its major trading partners broadly slowing down. Furthermore, Trump’s latest proposed additional tariffs on Chinese products would mean levies on all imports from China to the US. Meanwhile, CPI and PPI figures released Monday show producer prices further easing for a second month in August, suggesting softer domestic industrial demand. 

Exports to US and likely Fed hikes to squeeze PBOC's room to maneuver

China’s exports to the US in August grew 13.2 percent on a year-on-year basis, representing growth of more than 10 percent for a fourth consecutive month and the fastest pace since February this year. While some front-loading activities to avoid possible higher tariffs cannot be ruled out, two sets of economic data in the US last week point to growth momentum in the world’s largest economy remains robust:

1)  ISM manufacturing PMI surged to 61.3 last month, peaking above 61.0 for the first time since 2004. Together with the data on Chinese exports to the US, the PMI figure shows the trend of robust industrial demand in the US has yet to reverse, despite the escalating trade tensions between the two largest economies.

2)  US employment statistics for August released last Friday were impressive. Nonfarm payrolls added 201,000 workers, above earlier expectations. The growth of average hourly earnings rose 2.9 percent year-on-year, at the fastest pace since the global financial crisis a decade ago.

Stable US economic activity has strengthened the outlook on a more hawkish Fed, and the dollar index climbed 0.24 percent last week, marking the first weekly gain in four. The futures’ market is now priced with a 66.9 percent rate hike possibility in December, versus 62.2 percent at the beginning of last week.

The PBOC tweaked its FX policy twice last month when onshore yuan trading neared 6.9 to the dollar, including imposing reserve requirements on some trading of FX forward contracts and resuming the countercyclical factor in yuan fixing.

Such moves reveal that any disorderly depreciation in the yuan exchange rate is not favored by policymakers. Hence large-scale monetary easing could be off the table for now, while US monetary policy is tightening.

This has been reflected in the China rates and bonds market. The spread between China/US two-year government bonds yield has widened to 50 basis points (bps) from 19 bps two weeks ago. Meanwhile, the China overnight repo rate jumped more than 100 bps in the past month after the PBOC paused injecting cash into open market operations for the 14th day. 

Import data painful for US exporters as China looks elsewhere

Data show trade tensions between the two largest economies are forcing Chinese importers to shift away from purchasing US products. Import growth in dollar terms gained only 2.7 percent on a year-on-year basis, which was the slowest pace in seven months. Some companies from other countries may have benefited from the tariffs as Chinese importers looked for substitutes.

China proposed a 25 percent tariff on US liquefied natural gas (LNG) imports last month as part of its retaliation measures. Imports from Russia rose 69.1 percent over this period, while purchases from Canada surged 70.8 percent after a rise of 70.1 percent in July.

Both Russia and Canada are the top energy producers in the world, so the threat of a tariff on LNG imports from the US may have encouraged some Chinese buyers to shift their strategies, hurting those US stocks in energy sectors. The S&P 500 Energy Index has dropped nearly five percent since the beginning of August, contrasting to the wider S&P 500 which has gone up two percent.

China also saw its imports from Brazil increase last month, after placing tariffs on US soybean imports in July. Chinese imports from South America’s largest economy rose 28.2 percent last month, up from 18.1 percent in July and far above the average 8.4 percent seen in the past five years.