October’s trade surplus came out and the number is both good news and bad news.The bad news is that at $27.1 billion, this is the highest monthly trade surplus on record, surpassing slightly the previous record, last June’s $26.9 billion.The good news is that it is not as bad as the $30 billion surplus many expected (indeed the South China Morning Post called the number “surprisingly small”).
Exports grew by 22.3% year on year, to $107.7 billion, which was in line with forecasts, but imports surprised on the strong side, growing by 25.5% year on year to $80.7 billion.Although part of the higher import bill was because of higher oil and commodity prices, and another part was probably caused by increased commodity imports to fuel the expansion in industrial production, at least some were crediting import growth with government programs to boost consumption – according to the Financial Times, Li Yushi, vice-director of a Ministry of Commerce think-tank in Beijing said “The strong growth in imports should be attributed to China’s encouraging policies and the strong domestic economy.”I am not sure how we would disentangle the impact on consumption of government programs from the wealth effect caused by the bull stock and real estate markets, but there you have it.
China imported this year about 13-14 million tons of crude oil a month.A quick Google search tells me that there are 7.2 barrels in a ton, so China imports about 100 million barrels a month.Working backwards, if we assume that the 100% of the difference between actual and expected import levels was caused by higher oil prices, China’s oil bill would have had to have increased by $30 per barrel – not very likely.I don’t know how China imports oil, how much is purchased spot and how much forward, and what the timing of the forwards are, but very roughly I would guess that rising oil prices account for about one-third of the import increase, unless China does all of its buying in the spot market (which I doubt), in which case the recent accelerating oil price increases would have doubled this share.
The surplus in the first ten months of this year was US$212.4 billion, up 59 per cent from US$133.6 billion in the same period last year. The surplus for all of last year was US$177.47 billion.On a straight line projection, it suggests that this year’s trade surplus will exceed last year’s by over $100 billion.Among the comments in the various press reports I have read I see that some analysts believe that the lower-than-expected number takes pressure off China in its discussions with Europe and the US, but I am not sure I agree.It is hard to dismiss a record trade surplus by saying it could have been even higher.At any rate year-to-date Chinese exports to Europe and the US grew by 30.7% and 15.5% respectively.The China-US trade surplus in October was $15.4 billion for the US versus $13.9 billion with Europe. This will make the European discussions later this month a little testy.
As regular readers know, I believe that the level of industrial production is the key indicator of future trade performance, and since that number has been high and rising, I expect more record or near-record trade surpluses over the next few months.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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January, 2008
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