China’s Trade Deficit: Reason to Worry?

Mark your calendars, pipsters, because you just witnessed a historical event! Early yesterday morning, China posted its first quarterly deficit in seven years! SEVEN YEARS!!!

China recorded a 1.02 billion USD deficit in the first quarter of 2011, which is a far cry from the 13.9 billion USD surplus we saw 12 months ago. Digging into the details of the trade balance report, we’ll see that imports, rather than exports, was what bogged down China’s trade balance.

The combination of rising commodity prices and domestic appetite for imported goods did quite a number on China’s trade balance last quarter. Quarterly imports surged 32.6% year-on-year while exports played catch-up with its own respectable growth of 26.5%.

Should we be worried?

Given the sheer size of its economy, the fact that China posted a trade deficit may be enough to send chills through investors. But if you take a moment to sit on your thinking-chair, don your thinking-glasses, and go through the nitty-gritty details of the report, you’ll see there isn’t actually much reason for us to be worried.

“What?? China posted a trade deficit and you say we shouldn’t worry?? I think Forex Gump has finally lost his marbles!”

No, despite what Pipcrawler would like you to believe, I haven’t gone mad! My point is, with imports outpacing exports, it can be argued that China is finally rebalancing itself. This basically means that the economic giant might be in the process of becoming less reliant on exports, and that domestic demand is beginning to pick up steam!

Interest rate cut

Also, word on the street is that this deficit might actually be the result of the holiday season. Recall that in February, a few Chinese companies suspended factory operations and shipments for at least a week in celebration of the Lunar New Year.

And then, of course, there’s the possibility that China is timing the report for this week’s G20 and IMF meetings. Unless you’ve been living in Narnia for the past couple of years, you should know that China is in hot water for not allowing the yuan to appreciate at a pace acceptable to its major trade partners, which effectively makes China’s exports cheaper. Now I’m not one to point fingers, but given China’s record for posting a couple of red figures right before a big economic meeting, I won’t be surprised if they use the trade deficit to argue for a weak yuan!

Whether the trade deficit is part of a grand scheme to weaken the yuan or just a product of seasonality though, I’m sure that over the next couple of weeks, traders will watch China closely for any further signs of weakness. After all, if the world’s second-largest economy sneezes, its trade partners (basically the rest of the world) are sure to catch colds!

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  • Ames Tiedeman

    The United States of America has not had a trade surplus since 1975. We have not had a trade surplus with Japan since April, 1976. Every year since 1983 we have been in deficit with Europe. The last time America had a trade surplus with both Russia and China was a very brief period during the Cold War. We have been running ever increasing trade deficits with South Korea since 1998. Our 1993 trade surplus with Mexico is now a 100 billion a year trade deficit. In the 1970’s, 80’s, and much of the 1990’s our trade deficit was never more than one half of 1% of GDP. We now find ourselves with a trade deficit of between 5% and 7% of GDP depending on how you count. From 2002 to 2007 the trade deficit exploded. The only reason unemployment stayed well under 6% is because of the credit bubble. 63% of all jobs created from 2000 to 2006 were housing or credit bubble related. We did not feel the destructive affects of the trade deficit because of this credit bubble. I have concluded from work I have been doing that America will never get unemployment even under 7% with a trade deficit of over 3% of GDP, without a major credit bubble. The U.S. Economy has actually stopped functioning like a real economy. We literally need a credit bubble to function. America must move from the ideology of free trade to the economic policy of balanced trade. Until this structural shift takes place you can bank on the American economy being the laughing stock of the world economy.

    Ames F. Tiedeman
    Dripping Springs, Texas

  • Ames Tiedeman

    Ames Tiedeman asks U.S. Government to re-think all Trade AgreementsU.S. Economy will never work again until the merchandise trade deficit is cut to well under 1% of, 12/07/2011 – The De-Evolution Of America: Lower taxes? Higher taxes? Does anyone actually think being plus or minus 5% on taxes will make a lick of difference for the U.S. economy at this stage in the game? The economy will never again work the way we all want it to work with the current account deficit at 6 or 7 percent of GDP. You cannot get unemployment even under 6% without a credit bubble, with a current account deficit as large as ours. We have not had a trade surplus since 1974. We have been in decline for 40 years and this decline has only accelerated in recent years. We closed 55,000 plants in the United States since 1980. Your politicians won’t tell you this because some of them fed you the false promise of free trade. Others don’t want to admit NAFTA has been a complete failure for America. Great for Mexico as that giant “sucking sound” Ross Perot predicted has materialized. Clinton and Gore promised the American people ever bigger trade surpluses with Mexico and ten’s of thousands of new high paying jobs. Just pass NAFTA they exclaimed! Quite laughable, really. We have gone from a trade surplus of a few billion a year to a trade deficit nearing 100 billion per annum with Mexico. Our trade situation with China, South Korea, Japan, and Germany is equally depressing. We are responsible for employing their people as our people suffer. They will not pay our bills so why are we employing them via our consumption? This must all end. America has done a terrific job of creating a low employment and low wage society, for millions. Quite sad indeed. No civilization has succeeded by consuming more than it produces. We must massively restructure. Until America decides to produce what it consumes you can forget about any long term economic recovery. The financial games all failed. The credit bubble is gone and now the U.S. economy is exposed as the biggest joke of all time. Credit bubbles have a way of masking the real issues. How do we fix the American economy? Start by making every American who has received a Nobel Prize in economics return the award. Why? because they were either 100% wrong or their work proved to be of no benefit to the American economy. Next, leave the WTO, end NAFTA, and go about setting up country-by-country trade deals that are realistic based on where America stands today. It is not 1955 anymore. The world has either matched us or surpassed us in industry after industry. We have literally become an emerging economy is some industries as we have faltered so badly. We must, for major industries such as steel and automobiles, move to a must-be-made-in-America policy. No longer allow imports of products in specific industries. They must all be made in America. We must employ our people. We can no longer employ the world via our consumption as so many Americans remain unemployed. We must use our 50 state union to our advantage. We must promote massive trade between the states. We must socialize CAPITALISM to avoid becoming a socialist state! We must reinvigorate the American people. We must manufacture. I am calling on the American Government to do a complete re-think of this myth called FREE TRADE. It has destroyed much of the middle class and has put all Americans on the road to a much lower standard of living.

  • easybook

    I’ll visit my astrologist first then go to Narnia.

  • easybook

    I’ll visit my astrologist first then go to Narnia.