China Posts Unexpected Trade Deficit: What Does It Mean?

China's unexpected announcement that it had a trade DEFICIT caught the world up short. The reasons are complex and may largely be technical, but the Chinese economy was supposed to be the engine of growth that was going to pull the rest of the world out of its post-financial-crisis malaise. It is not clear that there is a Plan B in Europe or the US, let alone what it might have been. The key questions are why this happened and whether it signals another downturn, the dreaded W-shaped economic recession.

Mish Shedlock, a highly respected financial analyst explains what this may mean for the global economy in coming months:


"Equity futures turned red last night following an unexpected trade deficit in China.

Some reports suggest not reading too much into the deficit because February trade numbers are distorted following the Chinese Lunar New Year holiday. However, even the two-month total is negative, so the holiday excuse is a pretty weak one.

Please consider China Reports Unexpected Trade Deficit as Export Growth Cools

China reported an unexpected $7.3 billion trade deficit, the nation’s biggest in seven years, in February after a Lunar New Year holiday disrupted exports.

Outbound shipments rose an annual 2.4 percent, the slowest pace since November 2009, and imports climbed 19.4 percent, according to a report on the customs bureau website today.

Yuan forwards weakened after the announcement, which may deflect international pressure for China to strengthen its currency to redress global economic imbalances. Commerce Minister Chen Deming said March 7 that it’s “totally unreasonable” to say the yuan is undervalued after U.S. Treasury Secretary Timothy Geithner repeated calls for a faster pace of appreciation.

Economists combine Chinese data for the first two months of the year to eliminate distortions caused by the annual holiday. On that basis, the nation had a deficit of about $890 million, compared with a surplus of about $22 billion a year earlier.

Global Macro Picture Worsens

Two months do not a trend make, but a couple more would do it.

As a side note, people frequently write wondering why China does not buy more commodities with its US dollar reserve. There are a several reasons, one of which should be obvious from the above article.

1.China's manufacturers are already squeezed, unable to pass on rising import costs.
2.Accumulating commodities is pro-cyclical. China is overheating already.
3.Any commodities not bought directly from US suppliers (for example copper from Australia) increases trade distortions elsewhere.
4.Thanks to loose economic policy globally, commodity speculation is running rampant already. No importers want to add fuel to that fire.
China is overheating, and the global macro picture, especially from a Chinese perspective is far worse than that.

The world may not have noticed yet, but Europe is in trouble. The PIIGS are imploding under austerity measures and the most of the rest of Europe except perhaps Germany does not look very good.

Europe is China's largest trading partner.

Factor in the situation in Libya, rising oil prices, an ECB that seems hell-bent on hiking rates (I bet they back off after at most one hike), state budgets under attack in the US (thankfully), and the whole idea that Chinese growth is going to save the world is Fantasyland material.