China: March trade deficit does not change RMB outlook

In March, China's posted the first monthly trade deficit (US$7.2bn) since May 2004. Many people wonder whether it would become a meaningful argument for China to avoid or delay its exchange rate reform. Our answer is no, as this monthly deficit is a symptom of economic overheating and a few other one-off factors and is thus tentative in nature. We expect China's trade balance to return to surplus a few months later, and the outlook for the RMB to resume flexibility should not be affected.

    March exports and imports rose 24.2% (vs consensus of 25%) and 66.4% (vs consensus of 55%), respectively. The main reason for the March trade deficit was the surprisingly strong import growth. We see three one-off factors for the deficit. First, the domestic economy is overheated. Q1 GDP growth will likely reach 12%yoy, translating into exceptionally strong volume growth of energies and raw materials (e.g., alumina 89%, rubber 63%, crude oil 29% and steel 28%). This problem will ease in the second half of the year when GDP growth slows to below 10% as macro policy tightening takes effect. Second, also partly due to China's strong demand for imports, import prices surged. For example, crude oil, iron ore and pulp import prices increased 101%, 21% and 55% yoy respectively. We expect import price inflation to moderate later this year partly due to the base effect and the impact of China's policy tightening. Thirdly, import procurement backed up by the Chinese government also contributed to the abnormal increase in March imports. Against this back drop, we expect import growth to slow to 45%yoy in Q2 and to around 30% in H2 this year.

    On export outlook, we expect further acceleration of export growth to 40% yoy in Q2 (and probably reaching 45% in May) given strong leading indicators from the US and OECD as well as indications from a large number of Chinese export companies. For H2 this year, we expect export growth to moderate to about 30% but (even if import growth remains at 40%) it should still imply an average monthly trade surplus of US$10bn.

    Ranking export growth by product, the strongest performers in March were computer and parts (up 42% yoy), mobile phones and parts (40%), steel (43%), integrated circuits (46%) and electric and power machinery (34%).


Jun Ma (马骏)
Chief Economist, Greater China
Head of China/Hong Kong Macro Strategy
Deutsche Bank Hong Kong