What’s Behind China’s Trade Surplus?


(Photo Credit: Robert Scoble’s Photostream)
New America Foundation/Economic Growth Program Policy Analyst Samuel Sherraden has written a compelling, concise analysis of the decline in China’s trade surplus during the first quarter of this year.
Sherraden warns that the first quarter numbers should not be misunderstood as evidence of the kind of long-term economic rebalancing necessary to get the global economy on a better course.
From the conclusion of Sherraden’s analysis:

China’s trade balance has declined because China’s stimulus program intensified investment-led growth, increasing demand for commodities and capital goods. Based on our analysis, it is not evident that China has made progress toward rebalancing to a more consumer-oriented economy.
Indeed, there is a danger that if global demand recovers and China continues to neglect the needed structural reforms, China’s trade surplus will again increase. A rise in exports from the recovery of global demand could be combined with the withdrawal of the stimulus program that has driven the increase in imports to push China’s trade surplus back up to worrying levels. Excessive bank lending since the beginning of 2009 incentivized stockpiling of commodities and materials and the development of spare capacity. A tightening cycle could force enterprises in China to reduce imports and rely on existing commodity stockpiles and excess capacity to increase exports, leading to a rise in the trade surplus.
There is a danger, then, that the recent trade figures will temporarily reduce pressure on China to rebalance its economy. Given the likelihood that China’s investment-heavy stimulus will lead to a new surge in China’s net exports, it is even more important that the United States develop a strategy to encourage China to undertake structural reforms to rebalance its economy. Revaluation of the yuan, although no substitute for longer term structural changes, would be a good place to start.

You can read the full “Talking Points” here.
— Ben Katcher


10 comments on “What’s Behind China’s Trade Surplus?

  1. Simon says:

    The growing surplus of an aging nation has forced China to turn to issue large quantities of RMB to quell it from appreciating too rapidly, which, in turn, has prompted inflation, exacerbating an already present issue of disparity of wealth between metropolitan cities and rural areas.


  2. Mr.Murder says:

    China is hoarding raw materials. They’ll gain more market share in down time, not on the sale side of things, on the capacity to produce. This is far greater a threat, they may even flip our commodities trading to levels never thought possible.


  3. erichwwk says:

    Re the Stephen Roach / Paul Krugman controversy on China / U.S. trade balances try:
    “Blaming China will not solve America


  4. Samuel Sherraden says:

    It is uncertain whether global demand will recover. That is why in the paper it says, “if global demand recovers” and we point out the weakness in China’s major export markets in the US, Japan and the EU.
    That said, the US is recovering faster than many anticipated, despite continued weakness in the labor market.


  5. sdemetri says:

    Unemployment will remain high likely to undercounted discouraged
    workers, slack in productivity, books that are cooked in the sense
    that gains from laying off workers, trimming inventories, delaying
    purchases are structural moves that make the bottom line look
    better temporarily. When stimulus spending has played out, things
    will slow again. Just as it did in ’37, though hopefully not so
    I guess it is just too much to think deregulation over the past
    twenty years has had nothing to do with today’s situation for some.
    Predatory markets have had nothing to do with this… of course not.


  6. JohnH says:

    Nadine obviously preferred the regime of Greedy Oligarchs and Plutocrats (GOP), who got us into the mess we’re in today.
    Ah yes, those good old days, when government laws, taxes and regulation did not affect private sector behavior…


  7. nadine says:

    Things aren’t that bright in the US, Wigwag. Unemployment (which is being undercounted by not including discourage workers) will hover around 10% for a long time. Keep your eye on private sector job creation — so far, it isn’t there, and it isn’t likely to be any time soon in the present climate for business that the Obama administration is imposing on the country.
    Obama is governing as if government laws, taxes and regulation do not affect private sector behavior.


  8. WigWag says:

    Would you? Given the talk, overblown or not, about dumping the Euro completely? (Jonst)
    Nope, I wouldn’t; neither will the Chinese.


  9. jonst says:

    Wig wrote: “Does anyone think the Chinese will be diversifying out of the dollar into the Euro any time soon?”
    Would you? Given the talk, overblown or not, about dumping the Euro completely?


  10. WigWag says:

    “Indeed, there is a danger that if global demand recovers and China continues to neglect the needed structural reforms, China’s trade surplus will again increase.” (Samuel Sherraden as quoted by Ben Katcher)
    Is global demand going to recover? Things look bright in the United States where a spate of better than expected earnings reports suggests that the U.S. economy is on the mend. But Europe seems to be collapsing. In just the past two days, Greek government bonds have been downgraded to junk status and ratings have been cut on the government debt of Spain and Portugal. Can Ireland and Italy be far behind?
    All of this suggests that Europe runs the risk of heading back into recession and if it does, it will be impossible for the United States to escape the collateral damage. Mr. Sherradan’s speculation that world-wide aggregate demand is likely to increase in the near term looks iffy at best.
    The one silver lining in all of this is that perhaps it will motivate the Chinese to see that basing their economy almost exclusively on exports is dangerous; it runs the risk of leaving the Chinese economy exposed to the whims of its Western customers; something the Chinese have very little control over. Maybe China will see that a dramatic expansion of domestic demand (which will be facilitated by revaluing the Yuan) is in its own interests as well as the interests of the rest of the world.
    One other good thing about Europe’s financial crisis is that perhaps it will finally silence the dimwits who think the dollar’s days as the world’s reserve currency are over.
    Does anyone think the Chinese will be diversifying out of the dollar into the Euro any time soon?


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