China will have to get used to monthly trade deficits. Special factors contributed to the $4.2 billion negative number for the first two months of 2012, but something fundamental is changing. A smaller portion of China’s imports are of goods which will be processed for export, and a higher portion is going straight into domestic consumption.
A 13 per cent volume increase in soybean imports may be partly due to precautionary purchase after drought losses in South America. And the 50 per cent year-on-year increase in copper imports is suspicious. Copper can be used a wheeze to circumvent tight monetary policy. Importers get a letter of credit for commodity imports, sell the commodity quickly and keep the credit until maturity.
But some of the shift is durable. The increased wealth of Chinese households leads to more imports for consumption. Agricultural imports by value quintupled between 2000 and 2010. Automobile imports jumped 33 per cent to 184,000 vehicles during the first months of 2012, year on year.
That development makes a big change in the Chinese economic model. Up to now, China’s huge trade machine – about 40 per cent of GDP, three times the US or European ratios – has been overwhelmingly dedicated to processing: import something, add a little bit value through cheap labour, export. But as China gets richer, labour gets more expensive and the country becomes more self-sufficient. A higher proportion of trade will come from sectors where China is either especially weak or strong.
There are signs of that transition. Exports of labour-intensive clothing and shoes fell by more than two per cent, year-on-year. Higher-end exports are faring better, but the 8.8 per cent year-on-year growth rate in of electronics and machinery still marks a deceleration from the 11.5 per cent growth seen in the last three months of 2011.
It’s fairly easy to keep trade in surplus when almost all exports are basically imports-plus-labour. But as the import economy takes on its own momentum and becomes more separated from the export trade, occasional monthly deficit will be harder to avoid. The trade deficit is sign of things to come.
