3rd LD-Writethru-Economic Watch: Mixed trade data on resilient domestic, tepid external demand

China's export growth in yuan-denominated terms slowed to 1.2 percent year on year in May from 4.1 percent in April, customs data showed Wednesday.

Imports grew 5.1 percent, significantly rebounding from a 5.7-percent decline in April, the first positive reading since late 2014, according to figures from the General Administration of Customs (GAC).

Trade surplus last month was 324.8 billion yuan (about 50 billion U.S. dollars), up from April's 298 billion yuan.

Foreign trade increased 2.8 percent year on year to about 2 trillion yuan in May, while for the first five-months combined it slipped 3.2 percent to nearly 9.2 trillion yuan, recovering from a 4.8-percent decline for the January-April period.

In the five months, exports dropped 1.8 percent year on year and imports went down 5 percent, leading to a trade surplus of 1.4 trillion yuan, said a GAC statement.

Trade with the European Union, China's largest trading partner, climbed 2 percent year on year in the first five months.

Trade with the United States and ASEAN, China's second- and third-largest trading partners, declined 5.2 percent and 1.6 percent.

Trade with Japan, China's fifth largest trading partner, edged down 0.3 percent.

The GAC said imports of iron ore, crude oil and product oil "notably recovered" in the five months -- up 9.1 percent, 16.5 percent and 4.5 percent, respectively.

"We believe this is the result of accelerating infrastructure investment growth, evidenced by a strong construction sector PMI reading in May," said HSBC economist Jing Li in a research note.

"Looking ahead, imports are likely to improve further on the back of planned infrastructure investment for the rest of the year," she said.

Japanese securities brokerage Nomura said China's domestic demand may be more resilient than expected.

Tom Orlik, Bloomberg's chief Asia economist, believes China's import story has been more about prices than volume.

According to him, sharply falling commodity prices pushed headline imports into contraction in 2014 and 2015. In 2016, more resilient prices are supporting a return to growth.

"In volume terms, China's commodity imports have remained on a more or less unbroken upward trend," said Orlik.

Despite improvements on the import side, exports slowed in yuan terms in May and declined 4.1 percent in U.S. dollar terms.

Orlik said China was already the world's top exporter, which means limited room to grow.

China's exporters were also hit by weak global demand, rising domestic wages and a stronger yuan, said Orlik, adding that lackluster external demand was providing little support for growth.

A leading index for export outlook dropped by 0.7 points to 33.1 points in May, signaling growing pressure on export growth in the third quarter of 2016, said the GAC.

Policy makers seemed well aware of these challenges.

Last month, the State Council released a guideline on improving export performance, pledging to provide export firms with more financing support, better export tax refunds and simplified customs procedures.

China's foreign trade dropped 7 percent in 2015, failing to deliver the annual target of "around-6-percent" growth. Exports fell 1.8 percent and imports plummeted 13.2 percent.

If there is no material improvement in external demand, the HSBC research note predicted, China's overall 2016 exports will remain in contraction.

"To this end, more growth supportive policies are still highly warranted," it said. Endi