Trade deficit?

by Justin

China reported its first trade deficit in six years, meaning that during March they actually spent more money on imports than their cheap labor and goods generate from exports. At first glance this led me to believe that their economic growth could be slowing or transforming somehow. But that doesn’t seem to be the case.

The ever-reliable Chinese news agencies argue that this deficit is natural and no cause for concern as both imports and exports continued their rapid growth trends. Domestic demand for automobiles, an industry in which China recently became the global leader in consumption, grew by more than 50% compared with last year – and hit an all time high in the month of March. The significant indication here is that the Chinese (those that can afford cars, at least) aren’t feeling this little deficit at all. They’re still spending more and more and industries are meeting that demand. So what does it mean?

An article in the Financial Times (among many other sources) that the deficit owes more to imports of crude oil and copper than anything else, which may yield a surplus in the coming months to balance out March’s numbers. Raw supply outpaced demand for a month. Factories also closed for a week in February for the Lunar New Year, creating less supply to meet international demand.

The tricky thing is that China’s Commerce Ministry pounced on this news to say that claims about the undervalued yuan are exaggerated and that other factors in trade balances are being ignored. Although smarter economists, like those interviewed over at the Wall Street Journal, argue that a revaluation is in China’s domestic interests. The theory goes that a Chinese currency no longer pegged to the dollar will become stronger, counteracting rising inflation issues in that swelling economy. But I don’t have any handle on the nature of their domestic inflation.

Bottom line, as near as I can tell, is that this big news story doesn’t mean much. Everything’s still growing, and in this context a deficit isn’t necessarily the stuff of nightmares.