Understanding China’s rare trade deficit, revisited

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Courtesy of gordontlong.com.

On March 10, China’s General Administration of Customs reported that its February monthly trade deficit had reached $31.5 billion, its weakest performance in more than two decades. Chinese imports surged by a faster-than-expected rate of 39.6 percent compared to February last year, while exports climbed at a slower-than-expected rate of 18.4 percent. Perhaps counter-intuitively, the red figure is not a solid sign of slowing Chinese growth or a restructuring of China’s export-led development model towards one that is domestic consumption-driven. Chinese trade is highly seasonal in nature and has potential to be substantially boosted by governmental stimulative measures — China’s February trade deficit may turn out to be ephemeral.

The red figure has triggered many guesses about the status quo and future trend of the Chinese economy. Some journalists interpret the figure as the latest indication of China’s slowing economic growth, lending evidence from China’s 2012 GDP growth rate target of 7.5 percent — a seven-year low when growth was cresting closer to 9 or 10 percent in the last few years. Other journalists interpret the figure as an indication of a restructuring of the Chinese economy that taps into the purchasing power of China’s expanding middle class. With China’s economic growth moderating and Europe failing to recover from the 2007-2009 global financial crisis, there are concerns that the global economy will slow as well.

China’s monthly trade deficit can be partially attributed to weaker demands from Europe and North America. With the eurozone teetering on the brink of a recession, China’s exports to the region slumped by $9 billion, or one third, compared to January. In the meantime, a slow U.S. recovery resulted in Chinese exports to the U.S. dropping $7.3 billion last month.

However, less than enough attention has been paid to the fact that Chinese trade is highly seasonal by nature. The Chinese New Year holiday, which is in late January or February based on the lunar calendar, could distort the figure due to the shutting down of the exporting manufacturers to celebrate this national holiday. In the first half of the year — especially the first quarter, the trade surplus tends to be much smaller and sometimes goes negative. In the second half — particularly in the fourth quarter, the surplus expands due to the production cycle of goods made for the Christmas shopping period in North America and Europe. In March 2010, for example, China ran its first monthly trade deficit in recent memory. Back then, some analysts rushed to conclude that it might indicate a major adjustment in the Chinese economy towards enhanced purchasing and more balanced trade. However, China ended 2010 with a trade surplus of $183 billion.

In addition, the Chinese New Year factor can be tricky, since the difference in timing of the Chinese New Year holiday from year to year provides some complexity in comparing figures between two consecutive years. The 15-day holiday may start some time between late January and late February. Some economists thus suggest that the January and February trade figures should be averaged. In January, China recorded a trade surplus of about $27.3 billion. For the two months combined, exports rose by about 7 percent and imports rose by about 7.7 percent, paling in comparison with what they were in 2011.

Besides the distortion effect of the Chinese New Year holiday and weak demand markets in Europe and North America, falling property prices may have initiated a chain reaction that has had a negative effect on investment and development. Already, there is a slowdown in steel and iron ore imports, which may reflect a reduction in domestic investment. The pace of iron ore imports slowed to 5.7 percent in January-February, compared to a 7.9 percent contraction in the fourth quarter.

As China weathered the darkest moment of the global financial crisis thanks to a generous government stimulus package, it is plausible that the Chinese government will do something similar should the trade figures in the upcoming months fail to go up. Last year, the government expended much effort in curbing rapidly rising consumer prices. Now that the inflation has slowed, the Chinese government is able to focus on the pace and quality of the country’s economic growth.

All things considered, there is unlikely to be a hard landing in China this year, given the seasonality of China’s trade and the possibility of the implementation of a government-sponsored stimulus package. At the very least, China’s February trade deficit is suggesting that it is still too early to draw any precise conclusion whether China is slowing or shifting gears. Trade deficit is not inherently bad for China at all. To the contrary, as China begins its transformation towards a more domestic consumption-led economy, trade deficit will increase and the country will have a more robust economy in the face of slow recovery in the rest of the world.

Shiran is a senior. You can reach her at sshen1@swarthmore.edu.

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