China's Trade Deficit: Reason to Worry?

Mark your calendars, pipsters, because you just witnessed a historical event! Early yesterday morning, China posted its first quarterly deficit in seven years! SEVEN YEARS!!!

China recorded a 1.02 billion USD deficit in the first quarter of 2011, which is a far cry from the 13.9 billion USD surplus we saw 12 months ago. Digging into the details of the trade balance report, we'll see that imports, rather than exports, was what bogged down China's trade balance.

The combination of rising commodity prices and domestic appetite for imported goods did quite a number on China's trade balance last quarter. Quarterly imports surged 32.6% year-on-year while exports played catch-up with its own respectable growth of 26.5%.

Should we be worried?

Given the sheer size of its economy, the fact that China posted a trade deficit may be enough to send chills through investors. But if you take a moment to sit on your thinking-chair, don your thinking-glasses, and go through the nitty-gritty details of the report, you'll see there isn't actually much reason for us to be worried.

"What?? China posted a trade deficit and you say we shouldn't worry?? I think Forex Gump has finally lost his marbles!"

No, despite what Pipcrawler would like you to believe, I haven't gone mad! My point is, with imports outpacing exports, it can be argued that China is finally rebalancing itself. This basically means that the economic giant might be in the process of becoming less reliant on exports, and that domestic demand is beginning to pick up steam!

Also, word on the street is that this deficit might actually be the result of the holiday season. Recall that in February, a few Chinese companies suspended factory operations and shipments for at least a week in celebration of the Lunar New Year.

And then, of course, there's the possibility that China is timing the report for this week's G20 and IMF meetings. Unless you've been living in Narnia for the past couple of years, you should know that China is in hot water for not allowing the yuan to appreciate at a pace acceptable to its major trade partners, which effectively makes China's exports cheaper. Now I'm not one to point fingers, but given China's record for posting a couple of red figures right before a big economic meeting, I won't be surprised if they use the trade deficit to argue for a weak yuan!

Whether the trade deficit is part of a grand scheme to weaken the yuan or just a product of seasonality though, I'm sure that over the next couple of weeks, traders will watch China closely for any further signs of weakness. After all, if the world's second-largest economy sneezes, its trade partners (basically the rest of the world) are sure to catch colds!