China ran a trade deficit in the first quarter, its first quarterly deficit in seven years. One quarter does not a rebalanced economy make, but it does indicate movement in that direction. The question is how solid is that progress.
Reasons to be cautious: The quarterly surplus was tiny. Imports, at $400 billion, barely exceeded exports at $399 billon, and high commodity prices tipped the balance; adjust for the change in the prices of oil and iron ore alone and the deficit would have become a surplus of $18 billion. The quarter also ended with a surge in exports, up 36% in March to $152 billion, not far short of December’s record $154 billion, and moving the monthly trade account into surplus. A tsunami-related decline in imports from Japan would have a effect on the margins, too.
Reason to be a bit cheerful: for two years imports have been growing at a faster rate exports, but not sufficiently so for the full year to turn in a trade deficit this year, we suspect. So currency and trade frictions with the U.S. and Europe will continue in 2011.
The strength of domestic demand, as evidenced by the growth in imports, does suggest, however, that China’s economy is growing robustly enough for the central bank to continue mopping up excess liquidity through raises in interest rates and the capital reserve requirements imposed on banks.