Chinese March Trade Deficit Highlights Increase in Domestic Consumption

Recent reports are speculating that China may log its first monthly trade deficit in six years when the official trade numbers for March are released on April 10th. Top officials have said recently that trade numbers may indeed show that China imported more than it exported this month. This would be the first monthly deficit since April 2004.

China’s economic growth last year “was achieved mainly by relying on domestic demand,” Pre- mier Wen Jiabao said recently. He continued on to say that in the first week and a half of March, China had a trade deficit of about $8 billion, showing that China’s trade surplus has been narrowing as of late. His remarks came after comments from Chen Deming, China’s Minister of Commerce, said that he expected to report a trade deficit for March 2010. At a conference last week, Chen said that “in the first two months of 2010, imports from the U.S. were up 37%, from Europe up 35% and from Japan up 48%. China’s trade surplus for January and February already was down 50% from a year earlier.”

In a speech last week, the Chinese Minister for Industry and Information Technology Li Yizhong highlighted the importance of domestic consumption in moving China away from its export-dominated market orientation. This follows similar speeches given by President Hu Jintao, Premier Wen Jiabao, and Vice Premier Li Keqiang in early February regarding the need for a transformation of China’s economy.

Previous measures put into place to increase China’s domestic consumption include halving the purchase tax on all cars under 1.6 liters to 5% and continuing the policy in 2010 with the purchase tax raised to 7.5%, a February 2009 initiative that provided expansion of the subsidy program for rural purchase of home appliances throughout the country after the program was launched in three provinces in 2007, a subsidy started in March 2009 that was given to rural residents equivalent to 10% of the purchase price of a new minivan or light truck and extended
for another year in 2010, a 13% rebate plan for farmers who purchase motorcycles a effective through January 2013, a home appliance replacement plan which allocated RMB 2 billion to encourage home appliance upgrades in nine pilot cities which began in June 2009, and subsidies being offered to farmers to increase output of grain, potato, highland barley and peanut, as well as to purchase agricultural machinery and construction materials beginning in January 2010. Officials expect to release more measures throughout 2010.

Certainly the announcement of a trade deficit in China for the month of March would provide tangible evidence of success in China’s efforts to decrease the country’s dependency on exports in generating economic growth. This is consistent with the goals of government officials throughout China and provides another data point behind the investment thesis driving ARC China’s overarching strategy.

Adam Roseman

Founder & CEO ARC China

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