China's composite PMI output index in August 2024 was 50.1%, down 0.1 percentage points from the previous month. Among the sub-items of manufacturing PMI, only the inventory of finished goods and new export orders rose, while the purchasing price of raw materials and the ex-factory price index fell the most, and the production and business activity expectation and purchase volume index also declined significantly. This means that the current industrial sector is still facing a lack of demand, passive replenishment of the situation, and business expectations have signs of weakening.

Exports are better than expected or seasonal, first is the base period effect; Second, the uncertainty of tariff increases brought about by the US election has led enterprises to grab exports; Third, due to the impact of extreme weather such as typhoon and rainstorm, the typhoon weather in the southeast coastal areas in July affected the export rhythm, and some product exports may be delayed to August.

The decline in import growth reflects that domestic demand is still weak, which is also consistent with recent high-frequency data signals such as PMI and prices.

Fed cuts interest rates

In the early morning of September 19, Beijing time, the Federal Reserve announced a rate cut of 50 basis points, reducing the target range of the federal funds rate from 5.25-5.5% to 4.75-5.0%. This is the first interest rate cut by the Federal Reserve since March 2020, which also marks that monetary policy is shifting from a tightening cycle to an easing cycle, and the RMB exchange rate against the US dollar is expected to be accompanied by the Federal Reserve's interest rate cut.

On the positive side, the interest rate cut is conducive to reducing the financing cost of enterprises and promoting the investment and development of enterprises. At the same time, the depreciation of the US dollar reduces the cost of imported goods denominated in foreign currencies, which helps to reduce production costs and improve profitability for foreign trade enterprises that need to import a large number of raw materials and equipment.

But the Fed's rate cuts also carry potential risks. Interest rate cuts by the Federal Reserve usually lead to the depreciation of the dollar, which increases the foreign exchange risk faced by foreign trade enterprises at the time of settlement. If foreign trade enterprises are denominated in US dollars, the depreciation of the US dollar will directly reduce their income in local currency. For foreign trade enterprises that hold a large number of US dollar assets or liabilities, the depreciation of the US dollar may lead to a decrease in the value of assets or an increase in the cost of liabilities.

China is differentiated from major export markets

Affected by changes in the global trade environment, regional political tensions and economic restructuring, China's yarn and fabric exports to many major markets in the world have declined, but exports to ASEAN, the largest market, still maintained double-digit growth.

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