Unpacking China’s Trade Deficit

So China has a trade deficit…and a big one at that.

The first monthly deficit in 6 years is a gap of US$7.24 billion! Despite hints from Chinese officials, this was much larger than consensus expected (Bloomberg surveys pointed to US$500 million), and we actually expected a small surplus, proving that as usual, Chinese government statements in the press about forthcoming data releases should be taken at face value.  

The news has spurred a lot of talk about how it might affect the ongoing RMB revaluation debate, which the New York Times seems to be suggesting might happen any day now. As Patrick Chovanec points out, the government’s willingness to call this a blip, suggests that they don’t expect an annual trade deficit. Perhaps unsurprisingly, Chinese reserve growth seems to show that capital inflows continued to climb, mostly due to base effects (more on reserves to come later this week).

The jury is still out on whether the import surge (US$119 billion in March) implies a consumption boom. Imports were very strong, both on a y/y and on an adjusted basis. Moreover, it’s striking to me how strong in volume and price terms commodities have become in China’s trade. Five key commodities (oil, oil products, Iron ore, Steel, copper) accounted for about US$25 billion or about 20% of China’s March import tally.  Oil and oil products alone accounted for over US$14 billion. Meanwhile imports of aluminum, coal, and iron ore are on the way up, as volumes of fuel commodities remain near record highs, and metal imports have climbed from their turn of the year lows.

Actually, the close to 20% share commodities make up of total imports has been pretty constant in recent months. Note on the chart: the data on import values released over the weekend was a bit patchy so this goes only through the end of February 2010, when of course total imports were much lower. I’ll try to update the chart when new numbers are released.



Source: Bloomberg

With commodity prices high (WTI oil averaged close to US$85 per barrel in March after it broke out of its range), it remains to be seen if the price of oil will slow consumption as James Hamilton seems to be suggesting it might in the U.S.  Chinese retail fuel prices should be raised if they have not been already.   

My hunch suggests that as in recent months, much of the other imports are still components that could be used in re-export. Li and Fung reports that at least in H2 2009, the processing trade was back in full force. Unfortunately, I haven’t been able to track down the disaggregated import volumes and values for non commodity imports. It does still seem as if China’s consumer goods demands are climbing, perhaps just not as much as some of the most optimistic reads of the data are indicating.

The deficit seems to be the coincidence of two conflicting seasonal trends. Exports tend to weaken slightly in Q1 given the New Year shut down and slower winter and spring demand from the U.S. and EU for China’s goods. With the New Year being a bit later this year, factories seem to have been slow to restart, and there were rumors of staffing shortages. Meanwhile commodity orders tend to be stronger in March/April as infrastructure projects start up and stock piling begins. The sheer increase in crude oil import volumes, which have climbed 39% y/y in Q1 2010, may reflect a) still high refinery runs in China and b) filling of the petroleum reserve. Moreover, with threats of tighter credit policy, there may have been an impetus to continue to build up commodities. On the metals side, the greatest increases were in copper and aluminum scrap whose volumes rose 34% and 100% y/y in Q1.

We will need to wait a few months to see what sort of a trend this really is. Yet, the sheer cost of commodity inflation might actually be one of the strongest reasons for an RMB revaluation. Yuan watchers are set for a busy week. Chinese President Hu is in Washington today as head of one of the 40 delegations to attend President Obama’s nuclear summit, then heads to Brazil for a state visit and BRICs powwow, and then is on to other Latin American stops including Venezuela, perhaps in search of some cheaper version of oil that China seems to be absorbing so rapidly.

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