China's import drop and Fed's lending warning

Slower imports and tighter lending standards signal ongoing economic challenges for China and the US.

By Ahmed Azzam | @3zzamous | 9 May 2023

  • Asian stocks mixed, Japanese equities up while Hong Kong and Australia slip.

  • China's import drop more than expected, raising concerns about the country's economic recovery.

  • US Federal Reserve warns banks about reduced lending amid slower economic growth.

  • US consumers expect inflation to rise modestly in the near term, but concerns remain about longer-term effects.

What’s happened?

Asian equities were mixed on Monday, with stocks in Japan gaining ground while those in Hong Kong and Australia slipped. Meanwhile, Chinese brokerage firms saw their shares surge amid speculation that the country's financial sector would receive additional policy support. US futures were slightly lower, while European contracts posted gains. In the commodities market, Treasuries and gold rose, and Brent slipped.

The latest economic data out of China showed that the country's export growth slowed in April, while imports plummeted more than expected, raising concerns about the strength of the economic recovery. According to official figures, China's overseas shipments expanded 8.5% from a year earlier to $295 billion, which was faster than consensus expectations. However, the gain was largely due to a comparison with last year's Covid-affected activity levels.

The disappointing news was on the import side, as China's imports dropped by 7.9%, which was weaker than the median projection of a 0.2% decline. The lower-than-expected imports weighed on China's trade surplus, which came in at $90 billion. The data is a further indication that the world's second-largest economy is still grappling with the impact of the pandemic, despite its impressive recovery in the past year.

What to watch?

The US Federal Reserve has issued a warning that banks' concerns over slower economic growth may lead to a reduction in lending, potentially exacerbating an economic downturn. In its latest financial stability report, the Fed highlighted commercial real estate as an area that will receive increased scrutiny from bank examiners. The report comes on the heels of a separate Fed survey that revealed US banks reporting tighter lending standards and weaker loan demand during the first quarter of this year.

Meanwhile, the New York Fed's monthly survey showed that US consumers expect inflation rates to rise more modestly in the near term. Median one-year-ahead inflation expectations for April came in at 4.4%, down 0.3 percentage points from March. However, the three-year and five-year outlooks worsened, indicating that consumers are still concerned about the longer-term effects of inflation.