Morning Market Update July 10: China Fraud Crackdown Reveals Bad Export Numbers

July 10th, 2013 by

Precious metals saw slight gains overnight on short-covering and bargain hunting, except palladium which rose sharply on a surge in U.S. auto sales. Oil futures remain high after hitting another 14-month high overnight, while the dollar is weaker on profit-taking after hitting a three-year high yesterday.

While the big news today was expected to be the release of the June FOMC minutes and the speech afterward by Fed Chairman Ben Bernanke to calm the usual over-reaction of the markets, developments in China have stolen the early spotlight.

In the face of obviously “cooked” import and export numbers compared to trading partners, the Chinese government began a crackdown on fraudulent billing by exporters in May. Today, the true numbers came out, and it wasn’t pretty.

June exports dropped by 3.1% against expectations of a rise of 4%, and imports fell 0.7% versus expectations of an 8% gain. This news sent the Nikkei down in Japan, though Chinese and Hong Kong stocks were up 2% and 1% respectively. A Chinese government spokesman described the outlook for the third quarter as “grim.”

Chinese businesses are estimated to have file over $75 billion in fake invoices in order to bring speculative foreign money into the country and sending it back out in avoidance of capital control laws. The Chinese government has restricted foreign speculative cash inflows in an effort to combat inflation.

The more believable Chinese import and export numbers suppressed the European stock market, already feeling the pain of Standard & Poors’ downgrading of Italy’s sovereign debt to BBB.

by David Peterson