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...

Germany's biggest enemy: a strong euro.

Neither the (now certified) fall of Portugal nor increased debt pressures on other european peripheric countries have been enough to tumble down the never-ending rise of the euro exchange rate against other significant currencies. This should be very worrying for the heart and engine of the eurozone, Germany. I am sure Germany is already worried about that, what I mean is they should be worried enough to do something about it. 

A net exporter like Germany should not allow its currency to be its Achilles heel. Ok, the currency is not really German, but they are its founding fathers and the main reason why it exists... With this in mind, it becomes very difficult to understand why they allow 'their idea' to make their international trades more expensive and complicated. In the actual economic situation, competitiveness and efficiency are key to keep selling and Germany can lose their edge because of this. It is survival of the fittest.
The competitiveness indicators based on consumer prices published by the ECB show this trend clearly, see charts below (where 100% equals the index value in 1999 ) with an obviously sharp decline coincidental with the rise of the euro.

Harmonised competitiveness indicator for Germany. Credit: Deutsche Bundesbank

A strong euro is obviously good for debt issuing, for general borrowing and for imports but it can really hurt the muscle of Europe. Maybe you could think of it as eating everyday at McDonalds (no bashing here, just an example): it is cheap, it is easy and convenient as you can find one almost everywhere and it gets you through the day. But in the long-term fats are bad for your figure and, more importantly, bad for your most important muscle, the heart. The European Central Bank (ECB) is damaging the heart of Europe.

The tsunami reach on the global economy

On previous posts we have done a brief analysis on the devastating effects of the earthquake-tsunami combo on the Japanese economy. To have a more general and complete view of the events, one has to look at the other side of the story too, the collateral effects the damage suffered by Japan will have on the global economy. Over the last days we have heard words of relief from Japan's government and from analysts saying that the bite on Japanese GDP will not be as big as thought on first instance. But, no matter how fast the world's third biggest economy can recover from the disaster, the weight of said economy makes it impossible to dismiss the effects it  will have in the coming months (and is having as of now) on the march of the global economy.

Countries affected

The first wave to affect the global economy was a logic fund repatriation, specially from Japanese banks and insurance companies in need of liquidity to begin with reconstruction tasks at home. This initial repatriation made the yen go higher instead of immediately falling as expected, but this is not something to fear specially for the rest of the world. What some people are fearing is that Japanese mutual funds, hedge funds and instruments alike began to massively withdraw their positions over the rest of the world to take their money back home. If this movement is done gradually no significant damage would be done, Japanese money would simply be substituted by somebody else's money. But if this repatriation was to be done massively it would pose an important threat, specially for emerging markets. Emerging markets usually rely on bigger economies' capital to fund their growth, to the point where a runaway of Japanese money could partly derail short-term growth expectations for some emerging markets. I am not talking China, Russia or Brazil here which are exposed but big enough to not notice a heavy change. I am talking about smaller markets like South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Thailand, South Africa or Chile.