China's monthly surplus was over $10 billion in August, and "only" $7.5 billion or so in September. The pace of export growth dipped a bit in September (v. August), while import growth stayed at its August levels.

I think there is both less and more to this data point than meets the eye.

Less for two reasons:

First, the fall in the year over year export growth in September part reflects the fact that Chinese exports were quite strong last September.   Base effects matter.   Exports from China last August were $51.5 billion, and exports last September were $56 billion.  Exports dipped back down to $52.5 billion in October, so if monthly exports stay in the $70 billion range, the y/y rate of export growth will tick up back above 30% again next month.   We should not put too much emphasis on monthly growth rates.   For the full year, China's rate of export growth continues to be above 30%.

The real challenge comes in November and December – since last November and December Chinese exports surged and topped $60 billion.  My forecast – a significant slowdown in year over year export growth rates for those months. 

Second, higher oil prices alone should generate higher imports.   September 2005 oil prices were over 40% above September 2004 oil prices.   I want a bit more data on oil import volumes – and import volumes generally – before assigning enormous significance a second month of comparatively strong import data.  China's oil import growth (measured in volume terms) has lagged China's growth; there may be a bit of "catch up" going on now. 

More for two reasons as well: 

First, I do think China's export growth is likely to slow, even if i don't think that slowdown really shows up in the September data.  Sustaining 30% growth off China's now large export base will be hard.  Monthly exports next September would need to close to $91 billion.   Plus, China's exchange rate has appreciated significantly this year.  Not against the dollar.  But against the Euro.  For the past few years, China's exports to Europe have been growing faster than China's exports to the US.  That should change in 2005.  So if China's year over year export growth rate slows in November and December, as I suspect, that may signal a broader slowdown. 

But remember, export growth is now around 30% — even if it slows to say 20%, export growth will still be quite strong.  Exports will be growing faster than the rest of the economy.

Second, there is more and more evidence suggesting that the central bank is starting to take its foot off the brakes, and, partially as a result, that the domestic side of China's economy is resuming some of the vigor it saw in 2003 and in early 2004.   Specifically, after clamping down on construction lending last year, the central bank seems (the data is incomplete) to have concluded that it is safe to allow some expansion again.   And by failing to pick up the pace of its sterilization enough to offset the surge in China's reserves, it also seems to have allowed a bit more rapid growth in China's money supply. 

Any increases in domestic demand are welcome, though it might be nice if someone somewhere in the world was not relying on housing to support domestic demand.   But China still needs to do far more to really lay the basis for consumption-led growth.  I agree with the Financial Times oped page: 

Nor can [Japan's] economic revival – welcome as it is – substitute for Chinese action on imbalances. Japan's surplus is high, but slowly declining. China's surplus is exploding upwards, from $17bn in 2001 to $69bn last year and an estimated $116bn this.

Moreover, Japan, an ageing, rich country, should be running a surplus, while China, a relatively young, poor country, should be running a deficit, at least equal to its annual inflow of foreign direct investment, $61bn last year. China could sensibly allow its current account surplus to decline by $177bn: far more than Japan could.