Curse of the Trade Deficit: China Gets Hit!

A couple of sleepless nights ago, I wrote about how the world’s third largest economy printed a trade deficit for the first time in two years. Well, guess what? China, which is currently holding the number two spot in the global economy, also suffered its first trade deficit in almost a year!

Not even the U.S., which is the current topnotcher in terms of GDP, was spared from a negative trade figures in January. See, even giants are prone to weaknesses!

However, Uncle Sam’s trade deficit wasn’t much of a surprise since their trade balance has been in the red since bell-bottoms were in style! China, on the other hand, has been enjoying a healthy trade surplus for the past eleven months only to see this winning streak come to an end last month.

It turns out that exports slid by an annualized 2.4% in February while imports rose by a staggering 19.4% year-over-year. Since imports outpaced exports by a mile during that period, China’s trade balance revealed a 7.3 billion USD deficit, which is a huge step down from the 6.5 billion USD trade surplus in January.

Let’s take a closer look at the components of the report to find out why China’s trade balance ran all out of love in February.

Higher prices of commodities played a huge role in tipping China’s trade balance to the red, just as it did with Japan’s trade figures. Skyrocketing oil prices, which comprised roughly 10% of China’s imports, was one of the major culprits for the surprise trade deficit.

Still, economic gurus said this is no cause for alarm. Chinese trade activity typically slows down during the first couple of months of the year because of all the Lunar New Year festivities. It’s customary for businessmen to take extended vacations in February, temporarily taking a break from shipping their products abroad in order to pay tribute to the Chinese gods of luck and prosperity.

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Besides, manufacturing firms usually stock up on imported raw materials during the start of the year, gearing up for increased production later on.

While these seasonal factors hint that China’s trade shortfall was probably just a blip, there’s still the possibility that this deficit could widen in the coming months. For one thing, the commodity price rally has yet to run out of steam, which means that higher oil prices could contribute to another surge in imports. Bear in mind that, as I pointed out in my article about Japan‘s trade balance, the turmoil among the oil-producing nations in the Middle East still hasn’t boiled over until now.

On top of that, the effects of the Chinese central bank’s shift to a more prudent monetary policy stance could kick in during the coming months. You see, higher interest rates make it more expensive for firms to borrow money for business investment and expansion. This means that manufacturing industries could feel the pinch and start exporting fewer “Made in China” products around the world.

Sure it all sounds like gloom and doom for the Asian giant, but here’s a theory: What if this was China’s way to keep the U.S. from bullying them into adopting a loose exchange rate policy?

*Gasp*

Although the issue of China’s undervalued yuan has taken the backstage for a while, U.S. lawmakers are still figuring out how to pressure China into giving up its unfair advantage in trade. But now that China announced a weak trade figure and showed that they too are vulnerable to rising inflation, naysayers might be forced to retreat. How can they insist there’s a global trade imbalance when China’s trade balance is in the red, just like everyone else’s?

While I’m inclined to believe that China didn’t print a surprise trade deficit on purpose just to shake off them haters, I have to admit that it’s not such a farfetched idea. Another month of negative Chinese trade figures might just do the trick and bury the issue completely. A trade deficit doesn’t seem like much of a curse now, does it?

I’d love to hear your thoughts on this so feel free to comment below or drop us a line through our Facebook and Twitter accounts!

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