China's Trade Deficit is a Sign of Things to Come

Agenda-Setting Financial Insight.
March 12 2012 11:13 AM

China's Trade Deficit is a Sign of Things to Come

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An increase in soybean imports has helped translate into a $4.2 billion trade deficit for China. As the country grows wealthier and the cost of labor rises, China will likely see its import trade begin to decouple from its export trade.

Photo by YASUYOSHI CHIBA/AFP/Getty Images

China will have to get used to monthly trade deficits. Special factors contributed to the $4.2 billion negative number for the first two months of 2012, but something fundamental is changing. A smaller portion of China’s imports are of goods which will be processed for export, and a higher portion is going straight into domestic consumption.

A 13 percent volume increase in soybean imports may be partly due to precautionary purchase after drought losses in South America. And the 50 percent year-on-year increase in copper imports is suspicious. Copper can be used a wheeze to circumvent tight monetary policy. Importers get a letter of credit for commodity imports, sell the commodity quickly and keep the credit until maturity.

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But some of the shift is durable. The increased wealth of Chinese households leads to more imports for consumption. Agricultural imports by value quintupled between 2000 and 2010. Automobile imports jumped 33 percent to 184,000 vehicles during the first months of 2012, year on year.

That development makes a big change in the Chinese economic model. Up to now, China’s huge trade machine – about 40 percent of GDP, three times the U.S. or European ratios – has been overwhelmingly dedicated to processing: import something, add a little bit value through cheap labour, export. But as China gets richer, labour gets more expensive and the country becomes more self-sufficient. A higher proportion of trade will come from sectors where China is either especially weak or strong.

There are signs of that transition. Exports of labour-intensive clothing and shoes fell by more than 2 percent, year-on-year. Higher-end exports are faring better, but the 8.8 percent year-on-year growth rate in of electronics and machinery still marks a deceleration from the 11.5 percent growth seen in the last three months of 2011.

It’s fairly easy to keep trade in surplus when almost all exports are basically imports-plus-labour. But as the import economy takes on its own momentum and becomes more separated from the export trade, occasional monthly deficit will be harder to avoid. The trade deficit is sign of things to come. 

Read more at Reuters Breakingviews.

Wei Gu, CFA, is Greater China columnist for Reuters Breakingviews, based in Hong Kong.

Edward Hadas is Economics Editor at Reuters Breakingviews. He joined Breakingviews in both 2004 and 2011, with a year in between at the Financial Times as Assistant Editor of the Lex column.