Monday, April 12, 2010

About The Chinese Trade Deficit

China reported its first monthly trade deficit since 2004, coming in at $7.2 billion. This deficit will likely to prove temporary as the numbers aren't seasonally adjusted and as China's exports (and trade surplus)is highest in the second half of the year, when Chinese manufacturers delivers toys and other Christmas-related goods. Even so, the trend is clearly for the Chinese surplus to fall, contrary to the predictions of some so-called trade experts. This will likely ease the attacks on the Chinese currency peg.

I should in this context comment on the fact that some people have argued that this deficit is too convenient to be true and that the Chinese statistical authorities are "cooking the books" on this issue to ease foreign attack on the currency peg.

While it can't be ruled out that Chinese authorities have manipulated the numbers slightly, the larger picture is highly unlikely to be false. Why? Well, because trade numbers are reported by both the export nation and the import nation. If China were to report a $7.2 billion deficit even though in reality they had a surplus, we would see a big discrepancy relative to numbers reported by China's trading partners. For this reason, it is much more difficult to get away with manipulating trade statistics than other statistics.

Knowing this, Chinese statistical authorities will in order to ensure their credibility refrain from any significant manipulation. Meaning that the reported trade numbers are likely to be basically correct, with at most only minor deviations from the real numbers (or at least minor intentional deviations).