My Blog

February 15, 2008

According to today’s Bloomberg, “China's trade surplus jumped more than economists estimated in January, a sign that the world's fourth-biggest economy may keep powering global growth as a recession looms in the U.S.”  Data released by the Chinese authorities yesterday showed a trade surplus of $19.5 billion for January.  This is below December’s $22.7 billion (which tends to be swelled by Christmas shipments), but it is 23% higher than last January’s $15.9 billion.  More importantly it was also higher than the consensus estimates, of just under $17 billion.  Exports rose by a very high 26.7%, to $109.7 billion for January, while imports increased by 27.6%.

Although the number surprised substantially on the upside (yet again), a number of analysts tried to downplay or explain away the higher-than-expected surplus, and to predict (yet again) that things will improve.  “Such strong export growth is unlikely to be sustained. I think it’s abnormal,” said Li Yushi, vice-director of a think-tank under the Ministry of Commerce, according to an article in today’s South China Morning Post. “Many exporters are in difficulties due to rising costs and the yuan’s appreciation, and export momentum will ease in coming months.”  Analysts focused on the seemingly strong growth in imports and noted that part of the increase in exports might have been an anticipation of the early Spring Festival, which this year came eleven days earlier than last.  The need to get work done before the holidays kicked in left exporters rushing to fill orders in January that might normally have been filled in February.

While this may be true of exporters anticipating the holidays, it should also be true of importers, and the net figure still should not have been so high.  Anyway since the date of the Spring Festival was widely known by economists I don’t see why its impact should have been unexpected.  What is more, this trade surplus, high as it is, still understates the strength of Chinese exports and overstates the rise of imports.  According to Mark Williams, of Capital Economics, “the value of imports was also inflated by the high cost of oil imports last month. We estimate that this alone accounts for 12 percentage points of the growth in imports. If oil prices had remained flat, January’s surplus would have been in the region of $28bn rather than $19.5bn, not far off an all-time high in the oil price-adjusted data.”

When the trade surplus numbers started coming down at the end of last year, I wrote in my blog (January 11, “December's trade surplus declines to $22.7 billion”) not to take the decline too seriously. 

Many analysts are suggesting that we may have seen a cresting of export growth and perhaps even the trade surplus.  I am skeptical.  I think recent export-related cooling measures, plus the surge in oil prices, may have brought the trade surplus down temporarily, but the figures are still very high and money growth is still excessive.  Once the initial cooling measures on exports wear off (not to mention when the anti-inflationary cooling measures on consumption kick in) we will get back to the old dynamics of an expanding money supply leading to expanding industrial production leading to expanding exports. 

My reasoning was that as long as there was excess money creation it would feed into rising industrial production via rising investments, and as long as industrial production climbs faster than consumption, China’s trade surplus must stay high or rise.  I think it is going to be very hard to see a real decline in the trade surplus until we see either a sharp rise in forced domestic investment (rising inventory levels) caused by a significant falling off of foreign demand, or until the currency regime is fixed, either by a lot more appreciation or by a lot more inflation.  China’s trade surplus is part of the monetary trap in which it finds itself caught.

Talking about trade, the US also reported trade figures yesterday.  The US trade deficit shrank in 2007, for the first time in five years, by 6.2%.  This was partly explained by a reduction in the growth rate of imports (5%) and partly because of a sharp rise in exports (12%).  The lower-than-expected trade gap may cause the fourth-quarter GDP growth numbers to be revised upwards.  It also underscores how risky the current strategy may be of significantly relaxing the fight against inflation and overheating because of concerns about a collapse in US demand.

So far, just as I and all the other monetary alarmists have been predicting, there hasn’t been much moderation in China’s growth numbers.  In spite of the recognition in October of how flawed Chinese economic policy-making had been over the past several years in its failure to take into account out-of-control monetary policies, it seems that we have gone right back to the old days.

Comments (1) for "China’s trade surplus was hi...

While the high oil price makes up a large part of increased imports, the higher production costs (oil, labor, materials, appreciation) should have bigger impact on export. You can argue that the export would have been much lower if all the above factors were eliminated. I wonder what policy implication it means. By fatbrick - 2/15/2008 4:32 AM