China’s March trade deficit confirms that its economic recovery is based on domestic demand

Since summer 2009 this blog has been regularly pointing out the factual inaccuracy of those who claimed that China’s economic recovery from the international financial crisis was based on a surge in its exports and/or its trade surplus. China's trade surplus has consistently shrunk throughout that period.

The significance of China now running a $7.2 billion trade deficit in March is evidently not in a single month’s figures, which can be erratic, but in confirming this trend of China's declining trade surplus. This is shown in Figure 1, which charts China's monthly trade balance. Figure 2 shows the monthly balance on the basis of a three month moving average – in order to smooth out short term fluctuations. In either case the sharp downward trend of China's trade surplus is evident.In March 2010 the monthly surplus, on the basis of a three month moving average, was $4.8 billion compared to $20.8 billion for the same period in the previous year.

The basis of the fall in China’s trade deficit is also clear. China's imports have been rising rapidly. China’s pre-crisis exports and imports both peaked in July 2008. While by March 2010 exports were still 18% below the pre-crisis peak China’s imports were 7% above it. Therefore, simply as a matter of fact, China’s rapid economic recovery, with 8.7% GDP growth in 2009, has been based neither on a surge in exports, which have remained depressed below pre-crisis levels, nor on an increase in its trade surplus – which has shrunk dramatically and in the first three months of this year was 77% below its level in the same period a year ago.

It remains to be seen when or whether those who have been arguing China’s economic recovery was based on a rise in exports and/or a surging trade surplus will admit this is not correct. 

Figure 1

 

Figure 2

On a related matter, an equally inaccurate statement regarding China’s trade was made by the British economist and newspaper columnist Will Hutton in that country’s paper The Observer. Will Hutton claimed that China is ‘increasing its reliance on exports.’ Again factually quite false. China’s exports declined to around 25 percent of GDP in 2009 from 35.7 percent in 2006 – as shown in Figure 3.

In reality the increase in China’s domestic demand has led to a sharp decline in the weight of exports in China’s GDP. This confirms that China's economic growth is being driven by its domestic economic expansion. It also remains to be seen whether Will Hutton will correct this inaccurate statement.

Figure 3