Get used to China's trade deficit

When the balance of trade for February 2011 was published a lot of people were genuinely shocked to see that China had a 7.3$ billion trade deficit, the first since March 2010. When those same people think of China, they think on an enormous factory and lots of container full of goods ready to be transported to the West. While this image is right to some extent, they seem to disregard China's soaring internal demand for non-Chinese goods (mostly luxury items) and the uncomfortable neighbor that rising commodity prices are.

China's main clients are Europe and the USA, and with both of them growing slowly in the first quarter of 2011, exports have obviously slowed down too. China knew this, and expected to offset this slowdown with increasing internal demand. However this internal demand had another idea, it has focused mostly on non-Chinese goods... China is starting to have an incipient middle-upper class, but more importantly it is creating lots of new millionaires every month. And this newly created wealth is mostly being used to buy western goods, specially luxury cars, high-end clothes and fine jewelery. Take as an example BMW and Mercedes, whose sales in China grew 76% last year. This can be the biggest example, but it is only one of many; luxury clothing brands keep opening flagship stores (mainly in Shanghai) to fill the never-ending Chinese appetite for foreign luxury.

How many containers full of light bulbs, ipod accesories or handkerchiefs do you need to compensate for a Chinese entrepreneur buying a fully-equipped BMW 7-series? There you have your trade deficit...

And how does this feel for the still-communist Chinese government? Not good, as they have reportedly banned luxury advertising 'sine die'. They are also well known for not allowing any foreign corporation to enter the Chinese market unless they have a Chinese partner. Although these obstacles are not enough for the Chinese to forget they lust for luxury... 

But the ultimate hit to China's balance of trade have not been goods imports, but rising commodity prices and here there are no adverts to ban or partners to look for. China needs raw materials to produce their goods and oil, lots of oil! to move, and the invoice for those has been growing non-stop and this trend does not seem to be going to stop any time soon. 

credit: TradingEconomics.com

The Chinese economy is not going to stop growing because of this trade imbalance, in fact March numbers show a slight surplus again... But even though China's economic growth is and will be unmatched by any country in the near future, one can not expect their trade balance to be always positive or be frightened about it being negative from time to time. Chinese upper-middle class and high-priced commodities are here to stay.