Chillin' out till it needs to be funded
The large deficit in trade just announced by China on the back of a large 40% jump in imports to $31.5 bln, is not as bad as it seems. The market was expecting a $5 bln deficit and As january and February data are lumped together for most other Indices reported, the seasonally adjusted deicit is almost half the number at $19.3 bln. Also in most analyses the higher caution would already have applied to the fall in imports in January by 15% which was more a cause for worry.
However , the majority wishing for China’s change in direction to a deficit led economy should not rejoice for long from this month’s large deficit as a longer run of deficit and leveling off of exports would finally confirm a growth in domestic consumption over exports market, a key Objective for China’s second phase of growth as also already written into policy. This deficit could well be a one off and in a couple of month’s the entire import reflected in higher exports ( i.e. the deficit could just be a boon for March/April Exports). In fact many point to Beijing having manufactured this month’s deicti too just like March of last year (CNBC) with the State making large one time buys for the Strategic Reserve not just in Crude but also Cotton where it plans to buy 16 mln tonnes according to US Cotton strategists, having already bought 8 mln tonnes from India ( in this Fiscal) (and Cotton prices also easing..bu tthat is another story)
Exports grew at 18% in February. a slow inflation rate earlier at 3.2% makes the case for watching for the use of components in this import surge
as also raw material / commodities incl Oil could be marshalled around with jumping production ( which in the latest data has again fallen ..to..hold your breath..a pitiable 11.9, thrice the rate of the Western Economies at their bullish peaks in 2006/7) that has been crawling just below 50 in the last two months. An exports surge would help China in the next two months. A deficit has been planned for China since 2008/9 as a showstopper China is most worried about but likely to help it jumpstart its economy back both in 2008 and again now, with deficits encouragingly turning on the demand switch , safe at this inflation rate too.
The first reports do not include details of the deficit in terms of goods which contributed to the 40% surge in imports or the trade partners which could be a pointer on how the next few months would look for China.
February finally reported higher 6 mln BPD in Crude imports higher by 18% and strong Copper and Iron imports which could translate into production if not immediatrely then in 2-3 months while warehousing of the metal will happen given China’s obsession with stocking the twin metals for profit. The deficit also helps currency movements that make the wage hikes in china more palatable.
US earlier reported a growing deficit with China at $26 bln., the same apparently not without a jump in imports from the US , similar jumps with increasing surplus from Europe as well, the deficit could thus be explained by other trading partners perhaps Saudi Oil it booked as substitute for Iranian supplies. the US trade thus is likely to stay away from Chinese criticism on currency and trade despite the growing deficit with China.