China’s Trade Deficit: A Good Sign?

China announced its trade data on Wednesday, landing with a surprise trade deficit of USD 880 million in March 2013. This figure has been quite far from the estimated surplus of USD 15.2 billion. It also is miles away from the surplus of USD 15.3 billion in February 2013.

In March 2013, imports in China rose by 14.1% as against the above 15% fall in February 2013. This unexpected rise caused a deficit in the trade balance. A rise in domestic consumption can be linked to the steep growth in imports, thus showing signs of improvement. This has been in line with the government’s policy and will benefit China in the long run.

At the same time, exports in March 2013 rose by 10%. This is weak when compared to an increase of 21.8% in February 2013. The climb in exports was less than estimated for the first time in 4 months. This data has been weak as a result of a decline in exports to Europe and to the US.

A separate data showed that producer prices fell by 1.9% in March 2013, marking the 13^th straight decline. On the other hand, consumer prices rose by 2.1%, which is slower than February’s 3.2% increase - a 10-month high. This represents the taming of inflation in an economy where the government prefers to keep the annual inflation rate below 4%.

China has been impacted to a large extent due to sluggish growth in the US and a recessionary trend in Europe. This had obvious negative implications on the exports of China, which when combined with a slowdown in the domestic economy, called for immediate action from the government towards reviving growth.

Another problem that China had to tackle was the cooling of its property market. Rapidly rising housing prices had authorities pushing for several measures that comprised of stopping loans on the purchase of a third home, allowing single residents to own only one home, enforcing a 20% capital gains tax on income earned in the property market, etc.

Although the data released doesn’t have any direct implications on the property market and that continues to be a problem for the Chinese economy, it shows a revival in domestic demand. At the same time, it shows some easing in inflation, giving more room for relaxing monetary policy to further boost growth. Though the effects of global macroeconomic conditions have been showing up on the performance of China, domestic demand and the potential for growth gives a breather to the economy.