China’s Trade Deficit: What’s All the Fuss About?

For a country that boasts of double-digit GDP growth and a strong export industry, a $7.24 billion trade deficit would certainly raise some eyebrows. This sharp dive from a $7.61 billion SURPLUS in February was spurred by a 66% rise in China’s imports. Much of it can be attributed to the rise in commodity prices and the pickup in domestic demand.

Aside from that, China also saw a huge decline in exports to its Asian neighbors, namely Taiwan, Japan, and South Korea. Still, the Asian giant was able to chalk up trade surpluses with its trade partners in the West, such as the US and the UK. It looks like made-in-China products will continue to dominate the international arena!

Some economists say that Chinese officials could use last month’s deficit as another reason to keep their fixed exchange rate policy. Being an economy that heavily relies on exports, having a stronger Yuan could further hit China’s plateauing export industry, possibly putting a huge dent on their GDP.

China can also argue that the deficit, which was brought about by a huge leap in imports, is a sign that the country is in the process of rebalancing its trade. You see, rising imports could be an indication of an improving domestic consumption. This could mean that China is starting to move from an export-oriented economy to a more balanced one.

A month’s worth of data, however, is not enough to say whether China is indeed rebalancing its economy and starting to spend more. A rise in imports, especially if most of them are finished goods, could reflect a surge in domestic demand. But if the bulk of imports are simply raw materials, then China could just be stockpiling for its exports later this year.

For now, the deficit experienced in March could simply remain an anomaly. After all, one bad reading doesn’t mean a trend, right?

PoD Chart

The next couple of weeks should be interesting and I may have to cut back on tinkering with my new iPad to focus on some meetings between Chinese and American leaders. Later this month, Chinese President Hu Jintao will be meeting up with US counterpart Barack Obama. As I’ve said in a recent post, the US Treasury has coincidentally postponed their currency report, probably to ease tensions between the two nations.

I’m actually really interested to see whether Mr. Hu is going to spin this recent trade deficit and explicitly use it as grounds to prevent the Yuan from appreciating. If he does, it might just irritate the US lawmakers once again which could lead to an implosion of trade relations between the US and China.

Of course, nobody really wants this, not even the US. Why? Well, why would the US want to miss out from this sudden splurge of spending by China? Even if most of the March imports came from neighboring Asian nations, chances are the US does not want lose out on its share of cake.