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China Rate Cuts All But Certain

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Collapsing Chinese trade showed that stimulus policies enacted by authorities in China over the past few months have failed to stimulate growth.

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Chinese trade collapsed in July as export and import growth slowed from June showing that the global economy continued to slow. Chinese growth, especially its large export sector, has slowed as Europe dips further into recession as the debt crisis chokes growth on the continent.

Chinese export growth slowed to a mere 1 percent in July after rising 11.9 percent in June. The data missed economist estimates of a 5 percent growth rate, showing that stimulus policies enacted by authorities in China over the past few months have failed to stimulate growth. The slowdown in exports opens the door to further easing policies as well.

Import growth also fell in July, as imports only grew at a 4.7 percent rate from June. The rate of import growth was well below the 6.3 percent rate of growth of imports in June and also missed economist estimates. The continued slowdown in China's economy does not bode well for the U.S., as our two biggest trading partners, China and the eurozone, now are both showing signs of slowing.

The data follows weak industrial production data that was reported Thursday. All of the new data released over the past two days points to a protracted slowdown of China's growth rate and raises fears that GDP growth could slip below 7 percent by the end of 2012.

Should Europe continue to slow, it will weigh on China through China's exports. The eurozone is China's largest trading partner, and so a slowdown can spillover through a drop in trade, as shown in today's data. Also, the global slowdown will surely affect the U.S., as second quarter GDP growth fell below 2 percent and leading economic indicators point to a longer period of slow growth and the increasing likelihood of another U.S. recession.

Rate cuts in China seem all but certain now. The People's Bank of China has cut consumer borrowing and lending rates to try to spur consumption growth, but the slowdown has continued despite these efforts. Analysts now expect further rate cuts and potential cuts of the Reserve Requirement Ratio (RRR) instead of consumer rates. The RRR is the percentage of reserves that banks need to keep at the PBOC. Cutting this rate, which was the choice of rate policy for China in previous rate cycles, would allow banks to have excess reserves which they could hopefully lend out, increasing credit growth and giving the economy a jump start.

Financial markets fell on the data, as the very weak export numbers shocked investors. Global stocks fell from Asia through Europe, as the Japanese Nikkei Index fell nearly 1 percent in Tokyo trading and benchmark European indices followed suit. The EUR/USD dropped as well and broad risk sentiment seemed to fade on the data. U.S. equity futures continue to trade lower in pre-markets, with S&P 500 (SPY) futures falling 6.3 points to 1,394.3.

Editor's Note: This content was originally published on Benzinga.com by Matthew Kanterman.

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