Zoom in on trade deficit in China

When I saw the news that China had reported a huge trade deficit of $22.98 billion in February, I was almost shocked. This figure give a grim outlook for Chinese economy in 2014, especially in light of the sweeping economic reforms announced at November that would dampen short term economic growth.

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The reform, if carry out with the great determination by the Party, will invariably  slow down domestic investment, because it guarantee to break up state enterprise monopolies and wean them off cheap credit, meanwhile encouraging a more consumption-driven economy. The unemployment rate will looks bad for 2014. My worry is that, if export, the second work horse for Chinese economy, continue to shrink based on February figure, the party might grow more concerned about social instability and postpone the long overdue reform to a longer horizon.

Luckily, some analysts suggested that there are at least two reasons for us to be not so pessimistic.  

First, the dismal figure might be distorted by the timing of the Chinese Lunar New Year holiday , as manufacturers often speed shipments ahead of the long holiday when migrant workers return home and production lines fall silent.

Second, the over-invoicing by exporters last year inflated the base for comparison in February and this will continue for a few more months. Exports surged nearly 22% year on year in February 2013, and the number were widely believed to have been distorted by false invoices from exporters who wanted to bring foreign currency onshore. This is know as the hot money, which aimed at taking advantage of higher interest rates and an appreciating Chinese currency. Due to this false invoicing, the trade result  could continue to be inaccurate for a few more months.

Third, there was strong demand for resources, a major indicator of China’s industrial appetite. Importers continued to build stockpiles and take advantage of low global prices. Crude-oil imports rose 11% from a year earlier, while iron ore imports also were up 22% from February last year. Soybean and copper imports also rose by double-digit margins in the period. Still, volumes in all these major categories fell from January’s record-setting volumes, in part because of the shorter working period due to the Lunar New Year holidays.

Despite these relieving analysis, I still think that economists’ forecast that far-missed the target to be unjustified. When economist made forecast, didn’t they already factor in the impact of Lunar new year? Why they didn’t adjust the data for a inflated basis? Accurate forecast must be based on accurate historical figures that are adjusted for all the observable factors. For now we could only hope that export won’t be this bad for later months.

2 thoughts on “Zoom in on trade deficit in China

  1. meethoon

    I also agree with you that figures would have included the effects from the Chinese Lunar Year. I believe that China is seeing deficits also due to Chinese people are getting more used to with products from luxurious foreign brands. This is not a bad thing because it tell that China is enjoying economic prosperity but longer period of deficit can sure be a problem.

  2. viczhou

    China’s exports in February did trigger concern about growth momentum, but things might not be that bad if we consider a sharp growth of exports in January. Overall, I am still optimistic about the country’s economic expansion because the middle class is growing and the potential of domestic consumption is yet to unleash.

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