After China was expected to post a $4.9 billion February trade surplus, the centrally planned economy demonstrated just how easy it is to shut all CNY "undervaluation" critics up, by posting a miraculous $7.3 billion trade DEFICIT in February, which just happened to be the largest in 7 years, following January's surging surplus. The result was due to a general contraction in both exports and imports during the month, but obviously a much larger drop in the former - Exports growth decelerated to 2.4% Y/Y in February (consensus forecast: 27.1% yoy) , down from 37.7% yoy in January. The implied month-on-month; seasonally-adjusted; annualized (s.a. ann.) growth rate was 40.7%, down from the 74.0% growth recorded in January. At the same time imports growth softened to 19.4% yoy in February (consensus forecast: 32.6% yoy) , down from 51.0% yoy in January. On a M/M seasonally adjusted annual basis, imports growth was 58.3% in February, down from 101.8% in January. And as the chart below shows, while February is traditionally the weakest export month for China, this level of surprise can only be attributed to political determination to once again shut up CNY critics, as the case that the renminbi is undervalued goes out of the window should this level of deficits persist. As for the party line, where something is always blamed for everything, this time it was the Lunar New Year's fault.
The apparently weak exports and imports data in February was mostly because of the Lunar New Year effects. This data should be viewed in light of the exceedingly strong January trade data which represented frontloading of trade (especially exports) ahead of the New Year February 3 this year). The combined January-February data still showed robust sequential growth. We expect both exports and imports growth to show meaningful improvements in March as the Lunar New Year effects gradually fade and last year’s base was low (the Lunar New Year was late on February 14 last year and March exports data was more seriously distorted on the downside as a result).
We believe the trade deficit is likely to be a temporary phenomenon distorted by the Lunar New Year. During the several weeks following the Lunar New Year the holiday, distortions affect exports much more than imports because exporters have a much greater tendency to take extended holidays. As a result, there has been a clear tendency for deficit/low net exports to occur at the start of the year and the level of net exports tends to rise within the year. In 2010, the only monthly trade deficit occurred in March 2010 (the level was US$7.4 billion, almost the same as this February) because the Lunar New Year was late but eventually rose to a surplus of US$27 billion in October 2010. There is also a cyclical factor which tends to push up the level of net exports in the coming months: as China continues to tighten, its domestic demand will likely show a further slowdown which tends to lower China’s imports growth as a large share of the latter are for domestic consumption/investment.
A far more credible explanation is that of Bank of America which blames the plunge on surging oil:
Bank of America-Merrill Lynch estimates that each $1 increase in oil prices per barrel may cut China’s annual trade surplus by $1.9 billion. Oil climbed today in New York as violence in Libya renewed concern that supplies are under threat.
Yet the ultimate purpose of this doctored data is of course political.
“I think this is probably the end of the currency wars,” Tim Condon, Singapore-based head of Asia research with ING Groep NV, told Bloomberg Television. He said the deficit was “a move everyone wants to see” and addressed key concerns of the Group of 20 nations relating to economic imbalances.
Brazil Finance Minister Guido Mantega popularized the term “currency war” last year to describe nations securing export advantages by suppressing the values of their currencies.
And some charts showing the collapse in the world's marginal growth driver.
Total China monthly trade:
Total trade by key country - note the rather distinct plunge in February exports to the US and UK.
China-US trade balance:
And China-Rest of the World: