Investors are skeptical of Chinese economic data. However, news yesterday that Chinese exports fell by a quarter in February shocked investors. Many worry about the implications not just for China, but for world growth.It comes as the IMF is signaling it will likely cut its 3.4% global growth forecast next month. 

There are three separate forces that impacted Chinese trade figures. First are price changes. The dramatic drop in commodity prices, for example, distorts the value of imports (and exports).Chinese producer prices have been falling on a year-over-year basis for nearly four years.Second, there actually is a slowdown in Chinese trade, reflecting softer domestic demand and foreign demand. However, the actual decline in trade was likely distorted by the Lunar New Year celebration. Third, with the threat of additional yuan weakness, there appears to have been a revival of tactics to using trade invoicing to hide capital flows (now outflows). 

Distortions caused by the Lunar New Year are well known. In 2015, the Lunar New Year was in late February and the effect carried into March.That suggests that investors will have a better idea of this year’s distortion with next month’s report.  

Economists typically average January and February data to get a better picture. Doing so this year shows a 17.8% decline in exports and a 16.7% decline in imports.The export order components of official and Caixin PMIs warn of weakness.Global demand is soft.The decline in China’s shipments to Taiwan fell for 13-months through February.Exports to South Korea fell for the 14th month. 

China reported exports to the US, Germany, France, Japan, Canada, ASEAN, and Hong Kong all fell by more than 20% in February.  But combining the January and February performance may offer some clarity.For example, exports to the US fell 23% in February and almost 10% in January.Combined exports to the US fell by around 16.5%.Chinese exports to Japan fell 20% in February and 6% in January, averaging a 13% decline.