The markets are all a-flutter with news of China’s ‘shock’ trade deficit.
The People’s Republic posted a deficit of $7.3bn in February, its biggest in seven years, according to Reuters. Initial reaction was swift, with Asian stocks tumbling.
But most market commentators seem agreed this was a one-off.
Goldman Sachs analysts Yu Song and Helen Qiao sum up why:
The apparently weak exports and imports data in February was mostly because of the Lunar New Year effects. This data should be viewed in light of the exceedingly strong January trade data which represented frontloading of trade (especially exports) ahead of the New Year (February 3 this year). The combined January-February data still showed robust sequential growth. We expect both exports and imports growth to show meaningful improvements in March as the Lunar New Year effects gradually fade and last year’s base was low (the Lunar New Year was late on February 14 last year and March exports data was more seriously distorted on the downside as a result).
We believe the trade deficit is likely to be a temporary phenomenon distorted by the Lunar New Year. During the several weeks following the Lunar New Year the holiday, distortions affect exports much more than imports because exporters have a much greater tendency to take extended holidays. As a result, there has been a clear tendency for deficit/low net exports to occur at the start of the year and the level of net exports tends to rise within the year. In 2010, the only monthly trade deficit occurred in March 2010 (the level was US$7.4 billion, almost the same as this February) because the Lunar New Year was late but eventually rose to a surplus of US$27 billion in October 2010. There is also a cyclical factor which tends to push up the level of net exports in the coming months: as China continues to tighten, its domestic demand will likely show a further slowdown which tends to lower China’s imports growth as a large share of the latter are for domestic consumption/investment.
The tide of Chinese trade — pulled by lunisolar forces.
If you want a slightly more nuanced view, Capital Economics’ senior economist Mark Williams reckons the deficit reflects both the New Year effect and the impact of higher commodity prices. He’s got some impressive numbers to back it up too:
Looking at the trade breakdown, it is clear that a large part of the relative strength of imports is due to the increase in prices over the last year rather than any pick-up in real demand in China. For example, the dollar value of iron ore imports in the first two months was double that a year ago, but only a fifth higher in volume terms. The value of copper imports was up a quarter in dollar terms, but the import volume was slightly lower. Overall, we estimate that China would have run a surplus of $16bn over the first two months of the year if commodity prices were unchanged from a year ago, rather than the small deficit that was seen.
Blame it on the moon then. Or sky-high commodities prices.
Related links:
QE as ‘shock therapy’ – FT Alphaville
Almost on cue, China posts deficit – Beyond brics
Dick Bove on QE2 as a bank-less “financial war with China” - FT Alphaville