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...

Deflating the rare-earth bubble in time

By now everybody, even those without interest in economics at all, will have heard of the commodities rally of the last months. Lack of confidence in the stock markets, in the health of bank's finances, the fear of a worldwide double-dip recession, currency wars, political near-conflicts around the globe... (more on these subjects on future posts) all have contributed to the price rise of most of the physical commodities, specially metals.

Traditionally the classic commodities have been precious metals like gold, silver, platinum and to a lesser extent, palladium. Not only they have an inherent value because of their relative scarcity, but they are also widely used in industry so they serve their wealth reserve purpose very well. Lately we have seen how "purely industrial" metals like copper, aluminum, titanium and molybdenum have joined the classics on this rally with quite interesting growths too. The good part is that all of the commodities named above are obtained from mines spread around the world, which helps to maintain a kind of equilibrium in their valuation. 

Rare-earth elements

This is not the case for rare-earth elements (see Wikipedia), as China is responsible for the 97% of today's rare-earth production. It does not take much to see why this is a problem when these elements are critical in industries like fiber-optics, wind turbines, home electronics (your iphone is included), hybrid cars, magnets in general... even night-vision goggles use them!

Source: wikipedia