After rebounding somewhat in the second quarter of this year, China's external trade faced serious challenges again in recent months amid deterioration in both the overseas and domestic economies.

Domestic demand is not getting any better, judging from the latest official data. Consequently, the persistently unimpressive trade performance has forced authorities to unveil more stimulating measures in an attempt to restore the nation's exports.

Along with the escalation of the European debt crisis and the anaemic recovery of the US economy, China's exports of most traditional products have put in another poor show in recent months.

The country's exports increased by 2.7 percent year-on-year (YoY) in August, up from the 1 percent growth in July, but noticeably lower than the market consensus of above 3 percent, according to the State Administration of Customs (SAC).

The consecutive disappointing performance in exports reflects the sluggish overseas demand amid the escalation of the European debt crisis and slowdown in the US economy. Meanwhile, imports swung to a decline of 2.6 percent after rising 4.7 percent in July and 6.3 percent in June. The sharp imports decline was in line with the uninspiring performance of the domestic economy in recent months.

The ongoing cooling in domestic industrial production activities as well as the sharp decline in most commodity prices had a major negative effect on imports.

As the domestic economy gradually heads south, the volumes of most commodity imports have seen weakness in recent months while the sluggish global economy has also dragged down commodity prices. In first eight months of this year, the import volume of iron ore and crude oil rose 8.7 percent and 7.4 percent, respectively, mitigating the growth of 9.1 percent and 10.2 percent in the first seven months. Despite the rebound in the crude price, the prices of most industrial materials and commodities have remained on a downtrend in recent months.

Going forward, Europe's economy is likely to undergo credit shrinkage and will de-leverage, while the US economy's recovery is likely to slow amid the mounting debt burden and other political and economic uncertainties. The Chinese economy will also remain on a down cycle for at least the rest of the year. Meanwhile, the consecutive rise in labor costs and market-based reforms on the resource pricing system will also negatively impact exporters' earnings from the supply side.

Against the challenging economic environment, China's State Council has unveiled several measures to stimulate exports recently, which include accelerating the administrative process of value-added tax (VAT) rebates for exports; increasing financing support and lowering financing costs for exporters; expanding the benefits of export credit insurance to support trade activities of small and medium enterprises as well as developing and supporting new markets such as Latin America and Africa.

However, this new support package is somewhat below market expectations as there is no new VAT rebate for exports this time. In fact, the tax rebates for exports of most products have been raised to relatively high levels after the previous 4-trillion-yuan stimulus plan back in early 2009. Most products with low tax rebates belong to energy-guzzling and polluting industries, which should be significantly restrained. All in all, the positive policies may provide some support but they can hardly offset the impact of the economic down cycle.

The author is executive director at BOCI Securities. The views expressed here are entirely his own.

(HK Edition 09/26/2012 page2)