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Monday, March 12, 2012

China Posts Largest Trade Deficit in a Decade

China's trade balance plunged $31.5 billion into the red in February as imports swamped exports to leave the largest deficit in at least a decade and fuel doubts about the extent to which frail foreign demand or seasonal distortion drove the drop.

Import growth of 39.6 percent on the year in February was the strongest in a year, well ahead of the 27 percent expected and more than twice the rate of export growth of 18.4 percent that was barely more than half the pace forecast -- albeit at a six month high.

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Exports in January fell 0.5 percent from a year earlier, the worst showing since November 2009, while imports in January tumbled 15.3 percent, raising concerns that domestic demand may be weaker than previously thought -- even allowing for Lunar New Year factory shutdowns.

China's quarterly economic growth is widely forecast by analysts to slow to just over 8 percent in the first quarter from 8.9 percent in the previous quarter, marking the fifth consecutive quarter of slowdown and likely to put the economy on track for its slowest full year of growth in at least a decade.

Still, that slowdown is on course to be a soft landing, with a clutch of indicators on Friday easing investor fears of a sharp deterioration and revealing ample room for Beijing to loosen policy further to support growth.
Also, check out this article from the Economist on increasing factory wages in China.
China is the world’s largest manufacturing power. Its output of televisions, smartphones, steel pipes and other things you can drop on your foot surpassed America’s in 2010. China now accounts for a fifth of global manufacturing. Its factories have made so much, so cheaply that they have curbed inflation in many of its trading partners. But the era of cheap China may be drawing to a close.

Costs are soaring, starting in the coastal provinces where factories have historically clustered (see map). Increases in land prices, environmental and safety regulations and taxes all play a part. The biggest factor, though, is labour.

On March 5th Standard Chartered, an investment bank, released a survey of over 200 Hong Kong-based manufacturers operating in the Pearl River Delta. It found that wages have already risen by 10% this year. Foxconn, a Taiwanese contract manufacturer that makes Apple’s iPads (and much more besides) in Shenzhen, put up salaries by 16-25% last month.
Although the latter article takes a positive spin on the matter--suggesting that automation and increased efficiency and productivity will compensate for wage increases--China may be on a slippery slope economically. Its economic power has been based on cheap labor and externalizing manufacturing costs (pollution and safety) in the production of low-margin goods. (And currency manipulation, but that is another issue). We should expect that as its labor pool continues to decline, and competition for labor increases, wages will continue to increase, which will erode China's competitive advantage. We should also expect that as the Chinese, overall, experience greater prosperity, they will begin to pursue quality of life issues, including wanting clean water and clean air. As those external costs are internalized, manufacturing costs will continue to rise, further eroding China's competitive advantage.

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