Chart of the week: which way next for China’s trade surplus?

Another month, another alarming statistic from China. This month, amid all the other gloom, came the trade surplus.

It jumped from $5.3bn in March to $18.4bn in April. Not the right direction, certainly. But is there cause for alarm? And what is the long term pattern of China’s trade, anyway? Chart of the week takes a look.

China doesn’t want to run a big trade surplus forever, certainly not of the scale that has seen it rack up over $3tn in reserves. China’s stated policy aim is to boost its domestic consumption and move away from the export-led growth of the last few decades. This implies a big increase to imports. So the recent April figure was rightly greeted with a bit of a groan.

But if we look at the long-term trend, the picture is quite different. We have chosen to focus on the trade surplus as a percentage of imports (on a 12 month rolling basis to remove seasonal swings).

The chart below shows two lines, the red line (measured on the left axis) shows the trade surplus. The level in April 2012 is near that of April 2007 – $166bn compared to $207bn. There has been a big increase and drop along the way, but the start and end points – before the crisis to now – are relatively close.

But the blue line shows how the trade surplus has fared as proportion of imports. In other words – what do imports need to do to make up ground? And although the pattern of rise and fall is similar, there is a different story. The import shortfall goes from over 20 per cent in 2007, rises to 30 per cent in 2009, but then falls and keeps trending lower. It ends at less than 10 per cent.

In other words, imports have less catching up to do relative to their size. Imports and exports have both grown so that the relative difference is getting smaller.

This is because the economy as a whole is getting much bigger, quickly. Comparing a monthly trade surplus of $20bn four years ago isn’t the same as a trade surplus of $20bn last month. The absolute sum may be the same, but the impact is smaller.

In fact, as a percentage of GDP, China’s trade surplus has gone from around 7.5 per cent in 2007 to just over 2 per cent in 2011.

This shows there has been something of a structural shift – a move to a more balanced economy. Benoit Anne, head of emerging markets strategy at Société Générale, told beyondbrics: “the excercise [looking at trade surplus as proportion of imports] captures the big picture – the structural shifts in the Chinese economy.”

So does this show the end of China’s trade surplus?

Mark Williams, chief Asia economist at Capital Economics, told beyondbrics that he’s not convinced: “Has China seen the end of its large surpluses? We’re not sold on that idea. China can’t invest forever, and when it sells, the surplus will go back up again.”

Anne said that with the world facing severe financial stress, right now any economic activity in China is welcomed, even if it tips the trade balance back towards a large Chinese trade surplus. “We can worry about the balance later,” he added.

As can be seen on the chart, the last three months on the chart show a small tick back upwards. Perhaps, when it comes to trade, China is chasing its tail.

Related reading:
China trade data add to calls for easing
, FT
China: surplus to requirement
, FT