Two important pieces of economic data came out in China over the past two days.
I’ll deal with the more straightforward story first. On Friday, China’s Consumer Price Index (CPI), a standard measure of inflation, came in at a year-on-year increase of 4.9% for February, the same rate as in January. The number suggests that while inflation isn’t getting dramatically worse, it hasn’t gotten any better either, despite two months of tighter anti-inflationary policies. Even the most optimistic analysts suspect a substantial amount of further tightening will be needed to bring the rate down to the government’s 2011 target of 4%.
Now onto a somewhat more complicated subject. China released its monthly trade figures on Thursday, showing a $7.3 billion trade deficit in February. Since China usually runs trade surpluses – and large ones at that – the news attracted a lot of attention and prompted plenty of speculation about what it all might mean.
A little bit of context here is useful. Last March, China ran its first monthly trade deficit in quite some time. Back then, some analysts suggested that it might reflect a major adjustment in the Chinese economy towards higher imports and more balanced trade. Other observers, including myself, noted that China’s export trade is highly seasonal, and that combined with other factors (including higher prices for imported commodities such as oil), the March deficit might prove ephemeral. Sure enough, China ended the year with a 2010 trade surplus of $183 billion, although that did represent a modest (7%) decline from the previous year — giving ammunition, perhaps, to those who might want to argue either way.
This year’s reprise of China’s “spring deficit” comes at a time when many are talking openly about a slowing Chinese economy, in the face of tightening monetary policy aimed at bringing inflation and asset bubbles under control. It also comes in February, a much trickier month to interpret than March, given the disruption caused by the Chinese New Year holiday. Once again, rising prices of imported oil and other commodities are playing a role. What we do know is that both imports (which rose 19.4% year-on-year in February) and exports (which rose just 2.4%) fell below analysts’ expectations. Could it be that a stronger RMB, which has appreciated 3.9% against the dollar since last June, is finally taking a toll on Chinese exports? Could it be that Chinese import demand is also slowing, as part of a more general slowdown in the Chinese economy?
Arthur Kroeber, of Dragonomics, thinks such conclusions may be premature. We discussed the latest trade figures by email, and he gave me permission to reprint his analysis here:
The only thing that matters is the combined Jan-Feb figure, since the moving lunar new year holiday always makes year on year comparison of single month data problematic.
For the combined Jan-Feb period, exports rose 21% and imports rose 36%, and the deficit was US$900 million. China’s trade is highly seasonal: in the first half of the year and especially in the first quarter, the trade surplus tends to be much smaller and sometimes there is even a deficit. In the second half and particularly in the fourth quarter, the surplus expands (basically has to do with the production cycle of goods made for the Christmas shopping period).
This year’s data are consistent with traditional seasonal patterns and with my expectation that trend growth in exports will slow to around 15%, with imports running a few points higher. 15% growth in exports is slower than in the past decade, but it’s still pretty impressive for what is now the world’s biggest exporter. And it’s still several points higher than export growth for the world as a whole. The Chinese export economy is still in pretty good health.
Whether that’s good news or bad news, of course, depends on how you look at it. It’s certainly good news for Chinese exporters, as well as Chinese officials hoping to continue hitting high GDP growth targets. But it also suggests that — February figures aside — China does not appear to have made much progress shifting from export-driven to domestic consumption-driven growth and (with it) more balanced, sustainable trade. At the very least, it suggests that it’s too early to draw any clear conclusion that China is either slowing or shifting gears.
That, of course, is where the inflation story — and the continued efforts to tighten monetary policy — come into play. How forcefully will China tighten, and how much of an impact will it have on growth? We’ll have to keep watching.
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