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Sunday, April 10, 2011

Does China's First Quarter Trade Deficit Mean Anything?

http://www.marketwatch.com/story/china-hits-first-quarterly-trade-deficit-since-04-2011-04-10

The short answer here is that it is too soon to tell. You'll notice that it was the first trade deficit since 2004, which was when China's trade surpluses really began to take off, reaching stratospheric levels in 2007 and 2008. China's first quarter trade numbers are always a little weird due to the strong seasonal effects of the Chinese New Year, but most of all the problem is likely tied to the deteriorating terms of trade that China faces due to skyrocketing commodity prices while consumer and industrial demand for Chinese products elsewhere in the world isn't growing that fast.

As to whether even a persistent trade deficit would mean anything for China, that's not clear either. Trade deficits can be problematic for countries with fixed currencies, but we are a long way off from a point of a balance of payments crisis in China. As a matter of fact, we are so far off from that that I feel bad for even including those words in the same sentence.

China's more serious problem has to do with its very sick real estate markets that are flooded with too much liquidity, too much supply, and prices that don't reflect reality.

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