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China's Newest Surprise. Illusion or Money-Making Trend?

Apr. 12, 2011 8:36 AM ET
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We haven't seen this for seven years: a surprise quarterly trade deficit from China! Is China's massive trade surplus with America and the world at an end? And, will China's $3 trillion stockpile of foreign reserves begin to dwindle?

The short answer is no, not now. But the long term trend is a different story.

China's relentless growth story is driving the world's economy in a very big way. The latest surplus report is just confirmation of a world-changing story.

Frequent readers will remember that China has been trying for years to turn the corner economically. Instead of relying on the world to buy its exports Beijing wants more self-reliance. That means empowering China's own consumers to spend on Chinese products rather than saving their cash.

I know, Chinese consumers may not be wealthy by western standards, but there are hundreds of millions of them. That's why Beijing hopes that the next global financial shock won't depress China's exports as happened last year.

Instead, Chinese consumers will happily take up the slack.

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The brief trade deficit we saw in March of last year wasn't a fluke. It is part of a trend, reinforced by Beijing's five year plan to get Chinese consumers used to spending in a big way.

China's Global Buying Binge

Nobody expects China to end this year with a trade deficit. That's just not going to happen right away.

But China's trade surpluses are showing a trend that few have mentioned in the mainstream media. The following chart shows China's annual trade surpluses in billions of dollars.

China Trade Surplus Trend

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The trade surplus was a record $295 billion in 2008. It dropped to $196 billion in 2009. The figure shrank to $183 billion last year.

That's because China's demand is booming. And for the rest of the world that is mostly good news. Why? Because China's imports rose by a staggering 32.6 percent (year-over-year) in the January-March quarter.

China now surpasses the U.S. as the world's most rapidly growing importer. Averaging the last three months, U.S. imports rose by a monthly $27 billion and China's jumped by $33 billion.

Increasing Chinese demand is also driving up commodity prices. That in turn pushes up the cost of Chinese consumption, amplifying the current trend.

Making Money from China

As the Financial Times points out, oil prices at more than $100 a barrel will benefit Saudi Arabia and the middle-east most of all. A 60 percent jump in iron ore prices will be welcome in Brazil and other mineral exporting countries. But what about the U.S.?

Well, China now runs a net trade deficit with the rest of the world apart from the U.S. But all is not lost. China's imports of aircraft from the U.S. and Europe are on the upswing. So are imports of high tech machinery.

At the low tech end of the spectrum, soybean prices soared by 25 percent last year and Chinese consumption is expected to boom this year.

As Chinese consumers grow richer, consumption of meat, especially pork, is rising dramatically. China's appetite for pork has doubled in two decades. The USDA says the average person in China will consume a record 86 pounds of pork this year, compared with just 43 pounds in 1990.

Fortunately, soybeans and corn are major components of animal feed and the U.S. produced huge amounts of those commodities. Rising prices and rising Chinese demand should continue at a healthy rate, driving up markets for commodities, agricultural machinery and fertilizer for years to come.

Bloomberg reports that “China is building a livestock and meat industry in five years that took the United States 50 years to create. U.S. farm trade with China may double in the next five years.”

But there is a downside for the U.S. if the Chinese radically reduce their savings rate. Chinese capital has been feeding U.S. indebtedness for year. If China swings from saving to spending, the cost of credit to the U.S. could shoot up.

Washington must get its act together. If America can get its fiscal house in order, China's growing consumer story can be a boon to us all.

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