Why You Shouldn't Believe In The Declining Chinese Trade Surplus

The General Administration of Customs of China just announced that the trade surplus for January was US$6.46 bn, declining for 3 straight months since October last year.  Both Exports and Imports grew, but imports have been growing at a fast pace for the past couple of months.


Source: General Administration of Customs

Though as far as rebalancing the global economy, it is still far from clear that China is indeed now relying less on exports.  The chart below shows the trade deficits of US with China.


Source: St. Louis Fed, US Department of Commerce: Bureau of Economic Analysis, Census Bureau

It is true that US exports to China has been growing rather quickly of late, but looking at the trade balance figure, the hopes that China is shifting its economy from export driven to domestically driven and that the US will run a smaller deficit with China are still pretty much a wishful thinking.

Data from the US suggest a strong seasonality of US trade with China.  I found that trade deficit of US with China tends to be narrowed towards the end of a year and continues to drop in the first two or three months every year before rebounding.  Data from China also shows some out-of-trend numbers in the first quarter of every year, likely due to the Chinese New Year.  On the chart above, I plotted the non-seasonally adjusted trade deficit with China in blue, and the 12-month moving average in red.

Despite a narrowing of trade deficit with China, it is still far from clear (at least to me) that there is a genuine turning point, or the recent narrowing of trade deficit with China is merely a manifestation of seasonality.  Not to mention that the overall trade deficit was still increasing.

For now, of course some people can be cheerful that China has smaller trade surplus, so international pressure on Chinese Yuan Appreciation would be smaller.  After looking at the chart above, of course, you should now realise that that is a bit of a wishful thinking.

Also sprach Analyst – Investment Analyses, World Economy & Finance

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