Opinion: Unexpected Trade Deficit Reveals Strong Rebound in Investment Demand

China unexpectedly ran a trade deficit in February, its first in three years. This was driven mainly by surging imports, both in terms of price and quantity. Strong import statistics confirm the view that government-backed stimuli will continue to support China’s growth in the near term. At the same time, the structure of China’s exports is continuing to improve. A stable yuan, a significant increase in U.S. exports to China, and a narrowing of the U.S.-China trade deficit may already be a positive sign for the Sino-U.S. trade relationship.

February’s Trade Deficit

China’s exports in U.S. dollar terms decreased in February, down 1.3% year-on-year; however, China’s imports jumped for the second month in a row, up 38.1% year-on-year. While last year’s low base may have played a role, the robust import growth shows that domestic demand in China is rather strong. On the other hand, as exports are usually suspended temporarily during the Chinese New Year (in early February this year), export figures can be distorted significantly.

Stronger-than-expected domestic demand and Chinese New Year distortion led to a $9.2 billion trade deficit in February. This was China’s first trade deficit since February 2014.

Recovering Global Demand

By country, exports to developed economies in February declined; for example, exports to the U.S. decreased by 4.2% year-on-year, to the EU by 5.8%, and to Japan by 7.8%.

However, considering January and February data together (as a way to deal with the Chinese New Year effect), exports to the U.S. still recorded positive year-on-year growth, and exports to Japan and the EU showed improvement compared with December. A similar situation can be seen with some emerging economies, like Brazil and Russia.

Apart from that, exports to the Association of Southeast Asian Nations (ASEAN), China’s third-largest trading partner, improved in February. China’s year-on-year export growth to ASEAN in February increased from minus-0.8% in January to 1.9%. Considering January and February export data together shows the trend of global demand continuing to recover remains valid.

Improving Export Structure

China’s mechanical and electronic products still experienced higher-than-average export growth in January and February. Their share of total exports reached 58.4%. At the opposite end, export growth for seven labor-intensive products stayed in negative territory, with their combined share falling to 20% in the first two months of this year.

Although export growth for toys and plastic products remains encouraging, traditional labor-intensive products such as clothes and textiles recorded year-on-year declines. While this suggests that China is losing its comparative advantage in labor-intensive products, it represents an improved export structure as well.

Rising Commodity Imports

The highlight of February’s trade statistics was the robust demand for raw materials. Imports of coal, iron ore, and crude oil in value terms rose 145.1%, 107.9%, and 69.4% year-on-year respectively in February. Surging import prices also contributed; for example, coal prices doubled from February 2016, and iron ore prices increased by nearly 80%.

Of course, the quantity of imports grew steadily as well. Imported quantities of coal and iron ore increased by 30.6% and 13.4% year-on-year. Government fiscal stimuli is the key reason why demand for commodities is so strong.

In addition to commodities, automobile imports increased by 59.6% year-on-year. That might suggest that domestic consumption demand is strong as well. In fact, China’s imports from the U.S., Japan, and the EU also improved significantly in February, suggesting that import growth in China is not driven by commodities alone.

Yuan Stability

As the prices of major imported goods have risen significantly while the prices of China’s exported goods remain largely stable, the terms of trade in China may continue to deteriorate. If the People’s Bank of China can keep the yuan exchange rate relatively stable, it would help prevent import prices from rising further in yuan terms and help stabilize export prices.

In addition, a stable yuan may reduce the possibility of a trade war between China and the U.S. In fact, the significant increase in U.S. exports to China and the narrowing of the U.S.-China trade deficit in February may already be sending a positive signal for the Sino-U.S. trade relationship.

Shen Jianguang is managing director and chief economist at Mizuho Securities Asia Ltd.