By: Dr. Mike Campbell
The world’s second largest economy has published its first quarterly trade deficit in seven years. Figures for Q1 2011 show that the trade deficit stood at $1.02 billion, according to the Chinese General Administration of Customs.
Demand in Europe and the USA, critical Chinese export markets, continues to be sluggish as the regions slowly emerge from the financial crisis. China is hoping to stimulate domestic demand and be less reliant on its exports, but it is also having to take steps to rein-in inflation and prevent a property bubble from bursting.
The consequences of the recent Japanese natural disaster are also likely to have an impact on China since Japan is China’s largest importing partner. It remains difficult to determine the knock-on effect of the Japanese earthquake in her trading partner’s economies and the picture will only emerge after the full extent of catastrophe on Japan’s own economy becomes clearer.
A Look at China's Recent Past
China was quick to emerge from the global recession and has produced spectacular growth in comparison with the world’s other leading economies. The rise of China as a major economic power has been export-led. It remains to be seen whether the Q1 figures will be just a blip, or if there has been a more fundamental readjustment of her trading balance over the shorter term.
China remains under criticism for keeping its currency artificially low. Whilst some movement has been seen over the past twelve months, the appreciation of some 4% against the US Dollar needs to be put in context. The Dollar is coming off historic lows against the Yen and has depreciated by 7.8% against the Euro since this time last year. If the effects of the sovereign debt crisis in Europe are taken into account, it becomes clear that the Yuan is being manipulated.