Getting Inside the Chinese Trade Numbers

Includes: CYB, FXI
by: Emerging Money

by Tim Seymour

The March import/export numbers came in from Beijing over the weekend and the headlines probably made Tim Geithner and the administration smile.

Despite a small trade surplus in March, the first quarter over all came in showing a mild deficit — the first in seven years. This means that China is now importing a bit more than it exports, which means the country’s once-massive trade policy is finally normalizing.

The question is whether this is good or bad for emerging markets investors.

On the one hand, we have seen this because China has started letting the yuan appreciate. This is automatically a positive for the yuan funds like CYB.

And if the trade deficit is a result of stronger real consumer import demand — means they are consuming more and the domestic economy is really actually transforming — combined with solid western export demand, then you have the right mix in the stew.

This scenario would be most bullish for consumer names like CHIQ and arguably neutral for the large-cap industrial names that FXI is loaded with.

And if you believe the trade deficit was only the result of the inflationary impact of higher commodity prices — which China needs to import — then it is bad news for emerging markets.

Either way, a Chinese official said the deficit is going to be temporary but acknowledged that the 2011 surplus would be smaller than 2010. This is good if you believe in balance.