China Runs a Trade Deficit?

China reported today that it ran a trade deficit for March, where it imported more than it exported (the last time that this occurred was April 2004). See NYT article here. This is much more complicated that the headline, and does not undermine the piece I wrote previously, Why China Needs the United States. A single month does not change a decade of imbalance, and furthermore, we will see that the underlying causes are not sustainable.

1. Chinese growth has begun to overheat, and appears to be causing Chinese authorities concern. Like numerous countries worldwide, China unleashed large stimulus packages in early 2009 in order to keep their economy growing. Although stimulus packages are often portrayed as "jumpstarting" the economy like a car, "whipping the horse" is probably a more accurate portrayal. When you whip the horse too hard, it can go berserk and run faster than intended. In Beijing, housing prices rose at 8.8% in the month of March and over 60% in the past year! Not only is this fast, it is accelerating.

2. In response to massive demand, residential and commercial construction is occurring at breakneck speeds. In order to achieve this building, China needs to import natural resources, such as oil, iron ore and copper. Record import volumes helped to drive oil up over 5% in March and copper up nearly 9%. Iron ore prices are up some 40% year-to-date.

3. An unwelcome outgrowth of this is large scale speculation. Individuals are purchasing second and third homes in the face of rapidly rising prices (a process that officials are likely to try to discourage). Anecdotal reports suggest that iron ore traders are stockpiling the commodity in anticipation of future demand. As a result, Chinese authorities are trying to limit imports of the raw material.

As we know all too well, rampant asset-driven growth like the housing bubble of 2007 and the crude oil bubble of 2008 is not sustainable. Although China's trade deficit may persist for a few months, it is very unlikely that this will be a long-term shift. Nonetheless, it is coincidentally convenient that this "shift" occurred only weeks before US Treasury Secretary Geithner was originally to decide whether to label China as a "currency manipulator". Sustainable or not, it is all too likely that they will use this data point to defray potential allegations.