Today I was on Al-Jazeera, responding to questions about China’s latest announcement that it ran a $7.2 billion trade deficit for the month of March — its first in six years. This is essentially what I had to say:
Today’s news must strike people as surprising, given all they’ve heard about China running chronic trade surpluses. But you need to put it in context. China’s exports every year are highly seasonal — they peak in the fall, when Christmas orders are being shipped, and drop in the spring. So China’s trade surplus usually declines in the spring, and it’s not unprecedented for it to run a one-month deficit even in a year when it ends up running a sizeable trade surplus. The last deficit took place in April 2004, a year in which China went on to rack up a then-record $32 billion surplus.
What tipped this month’s figure from a marginal surplus to a deficit was a surge in imports, up 66% from last year. But it going to be important to drill down and take a closer look at exactly what’s making up those imports. If they are finished consumer goods, then it could be a sign of rising consumption in China and a shift towards more balanced trade. But if they consist mainly of raw materials, as many economists suspect, it could indicate that Chinese manufacturers are gearing up for a surge in exports later this year (a phenomenon compounded by rising commodity prices for inputs like iron ore and crude oil, in part due to rising Chinese
The key question is, is this a trend or a cycle? Is it a trend towards higher domestic consumption and more balanced trade, or part of a production cycle that leads right back to where we started? I’m not convinced yet this is a trend.
There’s a lot of speculation that China may use news of this month’s trade deficit to fend off US pressure to strengthen the RMB, arguing that it is making progress in restructuring its economy and boosting domestic demand. But if this is part of a cycle, as many suspect, and China goes right back to running trade surpluses in a month or so, that argument’s not going to have much staying power. That’s probably why even Chen Deming, China’s Minister of Commerce (who has been very vocal these past few weeks about the damage a stronger RMB could do to exporters) is being careful not to overplay the news, describing the March trade deficit as “a blip on the radar screen” that may soon be reversed.
The key thing to watch, regarding China’s willingness to strengthen the RMB, is the recovery of China’s exports. They’re up just over 20% from last year, but that’s just barely back to the level they were at before the global financial crisis struck. With Chinese exporters already struggling, China’s leaders have been reluctant to hit them with a “double whammy” in the form of a less competitive currency. If exports continue their recovery, though, that will give the Chinese a lot more comfort in moving towards a more flexible exchange rate.