Globally Imbalanced

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Did you say trade deficit???

That’s right. China actually posted a trade deficit this March, the first monthly deficit since April 2004. They reported a deficit of $7.24bn for March, down from a surplus of $7.61bn in February. Alert the media! Does this mean I have to change the name of my blog and that issues surrounding global imbalances have been resolved ?

As always, there’s the good news and the bad news. Let’s start with the bad news. China still has a massive trade surplus with the US. The main deficit in this month’s numbers came from China’s trade with Taiwan, South Korea, and Japan. The issue of structural imbalances allowing Chinese exporters to subsidize US consumption has not been remotely addressed by these figures. Of course, we’re already hearing from our friends at the China Ministry of Commerce, who are exclaiming that:

“The continued improvement in our country’s balance of trade has created the conditions for the renminbi’s exchange rate to remain basically stable,” spokesman Yao Jian said in a statement, using the currency’s official name. He said the fact that China ran a deficit in March, without any move in its currency, shows that “the deciding factor for the balance of trade is not the exchange rate, but market supply and demand, and other factors.”

This number is additionally biased as many Chinese exporters were closed for the Lunar New Year holiday. The export lobby is naturally going to jump all over this number, but I’m hoping the economists and government officials in charge are still properly monitoring the longer-term trend.

Now for the good news. It should be noted that the deficit was not due to declining exports, but rather a 66% surge in imports. Exports were still up 23.4%, down from 31.4% growth in January and February. The most important thing to realize about this jump in imports is that:

Import prices rose 17 percent in March from a year earlier as raw-material costs climbed, Huang Guohua, a customs bureau official, said at a briefing in Beijing before the data were released. Net imports of crude oil were the second-highest on record, the bureau said.

Remember this moment…import prices are rising in China. An artificially weak Yuan is great for exporters but the tradeoff is that domestic consumption is hurt with a higher price for imports. Even more important to keep in mind is commodity imports. China’s demand for commodities will continue to grow, and most commodities are priced in USD. Keeping the CNY weak against the USD means that while China’s own businesses import oil and metals to function, it will get more and more expensive for them. This is one of the more pressing examples of the internal political divide that exists between the exporters who want to maintain this unsustainable currency arrangement, and the rest of the country that for the longer-term would benefit from a stronger CNY.

Unless China thinks we’re heading back to $30 oil, or that their appetite for commodities will decrease over time, this month’s trade deficit should not be taken as a sign that all is well with the Yuan. In fact, it’s a reminder of the unsustainable situation that their own development requires they address. It’s just another piece of the overall puzzle indicating that measured action to strengthen the Yuan should be taken in the coming months.

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Filed under: Chinese Politics, Trade Numbers

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About Me

Former emerging markets currency trader in NYC for seven years, turned MBA student at INSEAD living in Singapore.