China’s Recent Trade Deficit: Is What You Yuan What You’re Gonna Get?
China is self-evidently both a minefield and a potential graveyard for would-be global economists, the sort of place where reputations are made and lost in the twinkle of a dragon’s eye, so I think had better tread rather carefully here. However, having duly noted that only fools rush in, here I go…
China ran its first monthly trade deficit in six years in March, a development which encouraged the country’s Commerce Ministry to up the volume a bit on the argument that the need to revalue China’s currency was being greatly exaggerated. The debate surrounding renminbi revaluation has also given us one more reason – beyond the recent accusations of the US SEC – to cast a watchful eye over how things are done at Goldman Sachs: the outrageous suggestion from their Chief Economist Jim O’Neill (in this Financial Times article) that if things carry on as they are, China will soon overtake France as the principal destination for German exports (see in depth analysis below).
The problem is, that with the argument having become so politicised, and with so many different interested parties at work, it is fast becoming hard to see wood from the trees, or even the sandals and tee shirts from the high speed trains.
A One-off Deficit?
Looking through the data, it would appear that while China’s March performance was undoubtedly a one-off, import growth has been outpacing export growth for some months now. And with imports of commodities surging, and with them commodity prices, it was not really that surprising to find that China swung into a trade deficit of $7.24 billion in March, from a surplus of $7.61 billion in February, according to figures issued by China’s Customs agency. Overall imports were up 66% from a year earlier in the moth, with purchases of crude oil and copper at near-record levels in volume terms.
In fact Chinese officials had been signalling for some weeks that March could produce a rather exceptional trade deficit, a development they highlighted to show how China’s strong growth has been boosting its purchases from other countries. But beyond the March reading, China’s trade surpluses have been shrinking as the government stimulus plan, and extensive bank lending, have boosted domestic demand, and indeed the cumulative trade surplus for the first quarter of 2010 fell 77% from a year earlier to hit $14.49 billion.
On the other hand, according to the Chinese customs department, the March deficit mainly comes from trade with Taiwan, Japan and South Korea, while large surpluses continued with the U.S. and the European Union.
Evidently one month’s data is unlikely to convince anybody, and especially when there is so much doubt surrounding the sustainability of China’s domestic consumption growth, so the March data is surely unlikely to silence the deafening roar of international criticism of China’s trade policies, and indeed European voices are now increasingly being added to US ones.
Evidently March’s exports may well have lower than normal as factories took their time reopening after the February Lunar New Year holiday. Exports were up in March, but the rate of increase fell to 24.3% from a year earlier, as compared to the 31.4% annual growth registered in the first two months of the year, although it is hard to tell how much of this weakening was a Lunar New Year effect, and how much the development reflected domestic demand weaknesses among China’s main customers.
Looking at the trade balance chart (above), it is clear there is normally a dip in February/March, and this year we may have simply seen an exaggerated version of what is really an annual phenomenon. Certainly, till we see a bit more data it will be hard to separate a stimulus-based surge from the trend.
China: The New Import Powerhouse?
Separating surge from trend however does seem to have turned into something of a problem for Goldman Sachs Chief Economist Jim O’Neill, since he argued recently (in a widely quoted piece) that:
“As far as China’s involvement with the rest of the world goes, the real story since the worst of the crisis is not China’s recovering exports but China’s strong imports. The forthcoming trade release – interestingly due a few days before the Treasury report – is likely to demonstrate enormous import growth again, absolutely and relative to exports. This is seen not just in Chinese data, but in those from many other important trading nations. Indeed, quite remarkably, Germany’s trade with China is showing such strong growth that by spring next year, on current trends, it might exceed that with France”.
This is quote a claim, and evidently impressed both Tyler Cowan at Marginal Revolution, and the Economist Free Exchange Blog, since they quote precisely this extract in support of their argument that the threat to global economic stability represented by China’s trade surplus is being rather overdone (which may or may not be the case), and they obviously take his China overtaking France claim as good.
As a student of German export performance, I however did not. The most important point to bear in mind is that Germany basically missed out on the first wave of China import growth (with the market being largely dominated by Japan). To give an indication, in 2008 German exports to the Czech Republic and to China were of about the same order of magnitude, a data point which is reasonably suggestive of the extent to which German export growth 2005 – 2008 was dependent on growth in Central and Eastern Europe (both inside and outside the EU). Growth in this market has, of course, now come screeching to a halt, hence the renewed German interest in China, and in general terms, non-European export destinations – which is one reason why, at the end of the day, the sharp drop in the value of the Euro has been as much to Germany’s advantage as it has to that of any other Eurogroup country.
So the key point to note is that German exports to China started from a comparatively low base, and hence even a sudden sharp surge does not make that much of a dent in the rankings list.
So just what are the facts? Well, according to the most recent release from the German Federal Statistical Office, German exports to China were worth 36.5 billion euros in 2009. Which means that, compared to 2008, exports to China were up around 7%, while total German exports declined 18.4% during the same period. So evidently the importance of German exports to China has been growing, but nothing like as much as O’Neil claims. Really!
Given that German exports to China have been running at something like 40% of exports to France, I thought I would take a look at the actual data. There are two available sources for such information: the German Statistics Office, and the OECD. Here is will use the OECD data. As can be seen in the first chart, there can be no doubt that German exports to China have been growing steadily and impressively over the last 3 years, but it is equally evident that they are still well, well short of those to France, and by no stretch of the imagination could it be thought feasible that China will overtake France as an export destination in the near future.
The second chart puts things in a longer term perspective, and what stands out is the fact that while German exports to China have followed a steady path, while those to France slumped significantly in 2008 as a result of the global economic crisis. So what this means is that exports to France are unusually low (and thus it is impossible to talk of trend), while those to China are unusually (and possibly unsustainably) high, given the impact of the stimulus programme. So to extract his “trend” (which is in no case valid) Goldman Sachs’ Chief Economist seems to be assuming a worst case scenario for France and a best case one for China: hardly a balanced methodology. Or does Jim O’Neil really want to tell us he is discounting the possibility of a sustained recovery in demand in the OECD economies? Even without the benefits of our own “proprietary indicators”, simple testimony of the naked eye should tell us he is wrong here.
Which is a pity, since stripped of its exaggerated claims, his substantive argument may not have been entirely false. Also we should not forget that Germany imports Chinese products (55.4 billion euros worth in 2009, as compared to the 36.5 billion euros worth of exports), and ran a trade deficit of 18.9 billion euros last year (or roughly 50% of the total value of exports) while Germany ran a trade surplus of some 27 billion euros with France.
Whatever You Yuan
In fact the impact of a revaluation in the renminbi may be much more complex than many seem to be assuming, and one good example of the kind of perverse consequences we may see is offered us in a really interesting research note from Alexandre Schwartsman (Bank Santander, Brazil) entitled “What Do You Yuan?”
There is an ongoing debate about how China should handle its currency in face of both political pressures and signs that inflation may be accelerating. Such challenges raise the possibility of the resumption of yuan appreciation trend that prevailed between 2005 and 2008. Of course, we claim no special knowledge on whether or when Chinese authorities will decide on the issue, but in our opinion, eventual decisions on that could have considerable implications for Brazil.
We do not think, however, that the direct effects through the trade channel are the most important part of the story. While it is true that China has become the largest market for Brazilian exports, we rush to note that it still represents only 13% of Brazilian exports (which, in turn, are equivalent to about 12% of Brazilian GDP). Moreover, even its current status as the main customer for Brazilian exports is threatened at the margin by the recovery of exports to the U.S. and Argentina.
Indeed, we believe the main channel of transmission to Brazil is likely to be through commodity prices. We argue, with the help of a small theoretical model, that a stronger yuan should imply higher commodity prices in dollar terms. In fact, it is possible to show that, if dollar commodity prices do not change in response to a stronger yuan, there would be excess demand for commodities, which would eventually drive their dollar prices up.
The economic intuition which lies behind Schwartsman’s argument is really very simple, but the logic is also quite compelling. Basically, it depends on two points:
i) China domestic demand growth is more energy intensive than the OECD average ii) China is large enough to be (to some extent) a price setter, and not simply a price taker.
Put another way, the income elasticity of energy consumption in China is greater than it is in the developed part of the Rest Of the World. This also applies to the energy component of agricultural produce, with important positive consequences for countries like Brazil. That is to say, China consumes energy directly, and indirectly, via the energy input which goes into the food production (fertilizers for soya beans in Brazil, for example) that it outsources. So there is a direct, and an indirect impact.
The net consequence of this, is that the Santander analyst expects the dollar price of commodities like oil to rise sharply on the back of any significant yuan revaluation, making China richer (in relative terms), and logically the developed world poorer. Again, and put in other words, the terms of trade are about to change against Europe, the US and Japan, and possibly bigtime, as the Yuan and other emerging market currencies rise. On the other hand, Brazil and other resource rich emerging economies stand to benefit, equally bigtime, in what will be one of the largest rebalancings of the global economy seen in many a long year. The main losers, it seems to me, will be the long-term structurally unemployed we now have in the developed world, and those living in poor countries with few natural resources.
Where Do We Go From Here?
Where we go from here on the China trade front is now very hard to tell. Evidently, on the one hand, evidence continues to mount that more flexibility in yuan parities in in the pipeline. But will the much sought after revaluation really do all that heavy lifting that is being expected of it? After all, Germany’s currency was effectively revalued upwards on joining the Euro, and the country then spent several years putting downward pressure on cost elements, with the result that the German trade surplus was even larger (as a % of GDP) in 2008 than it was in 1998. And China’s almost unique demographic trajectory also suggests that promoting internal consumption as a growth driver may be up against significant constraints. Life Cycle Theory Nobel Franco Modigliani, in what was his final published paper (2005) – The Chinese Saving Puzzle and the Life-Cycle Hypothesis – drew attention to this oft neglected dimension which evidently forms part of the problem. At the very least, some simple economic theory suggests that all may not be as simple here as it seems at first sight.
On the other hand Chinese officials, far from showing signs of alarm at March’s deficit, generally seem to have welcomed the development. According to Zheng Yuesheng, director of Statistics at China’s customs office, “This kind of deficit is healthy as it happened while both imports and exports experienced rapid growth,” and in any event, as he also points out, China will undoubtedly continue to run (smaller) trade surpluses over the long term. This, at least, has the benefit of being a realistic, and pragmatic assessment of the situation. All we need now is for a bit of this realism and pragmatism to work its way steadily westwards.
Originally published at Global Economy Matters and reproduced here with the author’s permission.
Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any
111 Responses to “China’s Recent Trade Deficit: Is What You Yuan What You’re Gonna Get?”
Thank you for all your valuable efforts on this web page. Kim takes pleasure in engaging in research and it’s really simple to grasp why. Most people learn all regarding the powerful medium you make advantageous items via this website and therefore boost response from some other people on this point and our simple princess is really becoming educated a great deal. Enjoy the remaining portion of the new year. You’re carrying out a first class job.
I simply wanted to send a brief remark to be able to say thanks to you for all the splendid steps you are writing at this website. My considerable internet lookup has finally been rewarded with beneficial points to go over with my family and friends. I would say that we website visitors are truly fortunate to be in a great website with very many wonderful individuals with interesting suggestions. I feel really grateful to have encountered the weblog and look forward to tons of more amazing minutes reading here. Thank you again for everything.
I as well as my friends were found to be checking out the excellent guidelines on your site while at once developed a terrible suspicion I had not thanked the web site owner for them. All the men appeared to be so warmed to learn all of them and have in effect really been enjoying them. We appreciate you turning out to be really thoughtful as well as for selecting these kinds of great areas millions of individuals are really wanting to understand about. My sincere apologies for not expressing appreciation to you earlier.
Man that was very entertaining and at the same time informative.
gigantic daybook you acquire
Sometimes, blogging is a bit tiresome specially if you need to update more topics.~,*;*
Your blog never ceases to amaze me, it is very well written and organized.“.”,
I would really like you to become a guest poster on my blog.~-‘::
Perhaps you should also a put a forum site on your blog to increase reader interaction.;’-;.
I just put the link of your blog on my Facebook Wall. very nice blog indeed..”:::
Judging by the way you write, you seem like a professional writer.””;*-
Very well said, your blog says it all about that particular topic.”,:.;
Well, another blogger already posted a topic like this.~”*”‘
Hey, what kind of anti-spam plugin do you use for your blog.;.—
I love blogging and i can say that you also love blogging.,;~;”
I love reading your blog because it has very interesting topics.~`*`’
Judging by the way you write, you seem like a professional writer.~.’:,
Only a few blogger would discuss this topic the way you do..;~~,
Last month, when i visited your blog i got an error on the mysql server of yours.’.`~’
Your blog has the same post as another author but i like your better.””:*’
Its like you read my mind! You seem to know a lot about this, like you wrote the book in it or something. I think that you could do with a few pics to drive the message home a bit, but other than that, this is wonderful blog. An excellent read. I’ll certainly be back.
Have you already setup a fan page on Facebook ?-.~’,
Hi, do you have a facebook fan page for your blog?.~“;
I see that you are using WordPress on your blog, wordpress is the best.::.~;
Have you tried twitterfeed on your blog, i think it would be cool.`*’:’
Hi, do you have a facebook fan page for your blog?”~-‘;
Your blog never ceases to amaze me, it is very well written and organized..-“,’
I see that you are using WordPress on your blog, wordpress is the best.;~:*.
What would be your next topic next week on your blog..”;:~
I would really love to guest post on your blog.;*,.*
Have you already setup a fan page on Facebook ?;;:;;
I just put the link of your blog on my Facebook Wall. very nice blog indeed.,~’~’
I bookmared your site a couple of days ago coz your blog impresses me.’.-“~
Have you already setup a fan page on Facebook ?.,.*`
I think your blog is getting more and more visitors.”‘.’:
RSS Feeds on your blog sometimes does not work.:,*:~
My friend first found your blog on Google and she referred your blog to me.,”`’,
Hey, what kind of anti-spam plugin do you use for your blog.`;*.,
Wow, you seem to be very knowledgable about this kind of topics.,~”””
Have you tried twitterfeed on your blog, i think it would be cool.`:,”‘
Well, another blogger already posted a topic like this.’;*””
Your blog has the same post as another author but i like your better..;~::
I always visit new blog everyday and i found your blog.*.;”`
You can also put a chatbox on your blog for more interactivity among readers..:”,-
I really love the way you discuss this kind of topic.*”~”‘
Very well said, your blog says it all about that particular topic.:’,-`
You seem to be very professional in the way you write.’`”‘,
A blog like yours should be earning much money from adsense..*~~,
Your blog has the same post as another author but i like your better.;`.”;
Your blog would increase in ranking if you post more often.`;,”,
I just put the link of your blog on my Facebook Wall. very nice blog indeed.”~'”~
I think your blog is getting more and more visitors..;*-.
A blog like yours should be earning much money from adsense.-`-“.
I always visit your blog everyday to read new topics.”,-;”
I’m new to your blog and i really appreciate the nice posts and great layout.*~’~.
I will invite all my friends to your blog, you really got a great blog.:-;’*
I really love the way you discuss this kind of topic.:*~’;
Have you tried twitterfeed on your blog, i think it would be cool.,-“`*
Great blog post and nice discussion among the comments.”-‘*`
Hi, do you have a facebook fan page for your blog?`–`.
I always visit your blog everyday to read new topics.:'”~,
Perhaps you should update the php server on your webhost, WordPress is kinda slow.*`”,,
I love to visit your web-blog, the themes are nice.”:”;~
this is very interesting. thanks to the. we need more sites like this. i commend you within your great subject material and terrific topic solutions.
Have you already setup a fan page on Facebook ?*`’-*
Your blog never ceases to amaze me, it is very well written and organized.’..-*
I will invite all my friends to your blog, you really got a great blog.”,’::
Hello are using WordPress for your blog platform? I’m new to the blog world but I’m trying to get started and create my own. Do you need any coding knowledge to make your own blog? Any help would be greatly appreciated!
I always visit your blog everyday to read new topics..:*'”
Your blog would increase in ranking if you post more often.;”,.”
My friend first found your blog on Google and she referred your blog to me…**~
Ha ha… I was simply online about and required a look at these types of remarks. I can’t believe there’s nevertheless this much interest. Thanks for currently talking about this.
Wow, you seem to be very knowledgable about this kind of topics.,”‘:’
I observe there is certainly plenty of spam on this weblog. Do you want support cleaning them up? I might help amongst courses!
Thanks for the something totally new you have uncovered in your blog post. One thing I want to discuss is that FSBO associations are built after a while. By introducing yourself to the owners the first weekend break their FSBO is announced, prior to the masses get started calling on Thursday, you develop a good interconnection. By sending them instruments, educational elements, free reviews, and forms, you become a great ally. If you take a personal fascination with them as well as their scenario, you create a solid interconnection that, on many occasions, pays off once the owners opt with an adviser they know and also trust – preferably you.
Sources these because one you mentioned the following will be incredibly useful to myself personally! I’ll create a hyperlink to the page upon my personalized blog. I am certain my guests will learn that relatively helpful.
Around 200 years we’ve gone by ‘I regret that I have nevertheless one everyday living to give for my country’ to help ‘up yours’?
Wow, you seem to be very knowledgable about this kind of topics..;,.”
Thanks for taking the time to discuss this, I really feel strongly about it and love learning more on this topic. If attainable, as you achieve experience, would you thoughts updating your blog with extra info? This can be very helpful for me.
Youre so cool! I dont think Ive read anything like this before. So good to find somebody with some original thoughts on this subject. Thanks for starting this up. This blog is something that is needed on the web, someone with a little originality. Good job for bringing something new to the internet!
Actually like your web sites particulars! Undoubtedly a beautiful supply of data that is extremely helpful. Keep it up to carry publishing and that i’m gonna proceed reading by way of! Cheers.
Perhaps you should also a put a forum site on your blog to increase reader interaction.;-`.;
Good post and right to the point. I don’t know if this is truly the best place to ask but do you folks have any ideea where to get some professional writers? Thanks in advance 🙂
The thing i like about your blog is that you always post direct to the point info.”~–`
I’ve learned new things from a blog post. Yet another thing to I have discovered is that generally, FSBO sellers are going to reject a person. Remember, they can prefer to not use your providers. But if you actually maintain a gradual, professional connection, offering aid and remaining in contact for about four to five weeks, you will usually have the ability to win a meeting. From there, a listing follows. Cheers
Thanks for taking the time to debate this, I feel strongly about it and love studying extra on this topic. If possible, as you acquire experience, would you thoughts updating your blog with additional data? This can be very helpful for me.
Perhaps you should also a put a forum site on your blog to increase reader interaction.”;,**
You can increase your blog visitors by having a fan page on facebook..*”,-
Have you already setup a fan page on Facebook ?*:,:*
RSS Feeds on your blog sometimes does not work..`*,*
Dude, please tell me that youre heading to write more. I notice you havent written an additional weblog for a while (Im just catching up myself). Your weblog is just also important to be missed. Youve acquired so substantially to say, this kind of knowledge about this topic it would be a shame to see this blog disappear. The internet needs you, man!
Have you tried twitterfeed on your blog, i think it would be cool.”~’~
The nice thing about these blogging and site-building engines along with CMS websites is the deficiency of limitations and ease of manipulation that allows builders to carry out rich written content and ‘skin’ the site in such a way that with very small energy one would certainly not notice how it is making the internet site tick all without restraining content along with effectiveness.
I must say, as substantially as I enjoyed reading what you had to say, I couldnt help but lose interest after a while. Its as if you had a excellent grasp on the subject matter, but you forgot to include your readers. Perhaps you should think about this from extra than one angle. Or maybe you shouldnt generalise so much. Its better if you think about what others may have to say instead of just going for a gut reaction to the subject. Think about adjusting your own thought process and giving others who may read this the benefit of the doubt.
good suggestion and well worth viewing.
I would really love to guest post on your blog.’.,,’
How do u occupy an idiot? Press down – Press up…Press Down…!
Hello, i think that i saw you visited my website so i came to “return the favor”.I am attempting to find things to improve my website!I suppose its ok to use a few of your ideas!!
How is it that just anyone can create a blog and get as popular as this? Its not like youve said something extremely impressive –more like youve painted a quite picture through an issue that you know nothing about! I dont want to sound mean, right here. But do you actually think that you can get away with adding some quite pictures and not definitely say something?
I just put the link of your blog on my Facebook Wall. very nice blog indeed.,*-:~
Great ¡V I should definitely pronounce, impressed with your web site. I had no trouble navigating through all tabs and related information ended up being truly easy to do to access. I recently found what I hoped for before you know it at all. Quite unusual. Is likely to appreciate it for those who add forums or something, website theme . a tones way for your client to communicate. Excellent task..
Hi, do you have a facebook fan page for your blog?-`:’:
I always visit your blog everyday to read new topics..”*`~
Your blog would increase in ranking if you post more often.-~’*:
Your blog is one of a kind, i love the way you organize the topics.;’;,:
Only wanna comment that you have a very decent site, I like the style it really stands out.
Hello excellent website! Does running a blog such as this require a large amount of work? I’ve virtually no knowledge of computer programming but I had been hoping to start my own blog in the near future. Anyhow, if you have any recommendations or techniques for new blog owners please share. I know this is off topic however I just wanted to ask. Many thanks!
I discovered this website by doing a key phrase look for my area of interest. I’m so glad I stumbled on your web site. You might have your self a loyal reader now. My Blog: http://www.youtube.com/watch?v=rjYsZs-YsFs
You may have simply just been diagnosed with prostate melanoma and don’t know how to proceed; the first thing to undertake is don’t panic.
Your blog never ceases to amaze me, it is very well written and organized.*-*:-
I’m new to your blog and i really appreciate the nice posts and great layout.~`’-`