Brad Setser

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Big changes, but not much adjustment: China’s March trade data

by Brad Setser
April 10, 2009

The Wall Street Journal puts a more positive gloss on China’s March trade data than I would. To me the overarching story is simple: the data paint a story of deep distress in both the Chinese and global economy.

China’s exports were growing 20% y/y (23% actually) in the third quarter of 2008. They were down nearly 20% (19.7%) in the first quarter of 2009.

Imports though fell by more, in part because of the fall in oil prices. Imports fell close to 30% y/y in the first quarter. That isn’t just a function of falling commodity prices and fewer imported components either; US exports to China — which presumably include a lot of capital goods — are way down y/y.

As a result, China’s trade surplus was larger in the first quarter of 2009 than in the first quarter of 2008 ($62 billion v $41 billion). The global shock has gotten rid of many of the world’s macroeconomic imbalances. American households are saving more and importing less, so the US deficit is down. The oil exporters are no longer running a surplus. Even Japan’s surplus has come down, as demand for Japan’s exports has fallen more rapidly than Japan’s commodity import bill. China’s surplus though has continued to rise.

There is a lot of seasonal noise in the monthly data for China in the first quarter. I looked at a rolling 3m sum of exports and imports to try to smooth the data out. Exports and imports usually fall off their fourth quarter peak in the first quarter. But the fall this year was unusually large.

The nature of the change shows up cleanly in a chart showing the change in the rolling 3m sum of exports and imports. There is a bit of evidence that the pace of decline in imports has slowed. That certainly reflects the stabilization of commodity prices. It also reflects — as the Journal reports — a big increase in Chinese demand for metals like iron ore and copper, as firms — and perhaps the government– stocked up at low prices.

There isn’t though yet evidence of much of a stabilization in the fall in exports. At least not in the backward looking data. If nothing else that suggests that China’s trade surplus may not continue to rise, and could perhaps start to fall later in the year. The impact of the big fall in commodity prices on the data will wear off, and (hopefully) China’s domestic stimulus will kick in.

The absolute magnitude of the change over the last 6 months actually shows up most clearly if China’s exports and imports in the 12ms from April 2008 to March 2009 are compared to China’s exports and imports in the 12ms from April 2007 to March 2008. Exports had been growing steadily at a $200b a year annual pace until the fourth quarter of 2008, when they went into something like free fall.

The pace of decline — in both imports and exports — in this cycle is far, far sharper than the pace of decline in past cycles. In past cycles, a downturn meant no or slow growth in exports, not an absolute fall. That won’t be the case this time around.

The last chart makes explicit something that was implicit in the last chart. The fall in China’s exports was matched by a bigger fall in China’s imports, so China’s external surplus is still growing.

The latest PMI data suggests that China’s economy that the pace of contraction in China’s manufacturing economy has slowed, and perhaps may even be rebounding off a low base. But the trade at least suggests that China isn’t in rude health.

Here is one way of checking: compare the y/y rate of growth in US and Chinese imports. If China was doing better than the US, one would expect its imports to hold up better than US imports, setting aside differences in the composition of the two countries imports.*

Call me crazy, but judging from the trade data alone, I would say China experienced a recession in q4 2008 and q1 2009.

* There are three reasons why Chinese and US exports could be correlated:

— some Chinese imports are an echo of US demand, as China imports components for reexport to the US. This though was more important in 2000 than it is now, as the share of China’s exports going to the US has fallen.
— The US and China both import commodities like oil, and thus both show the effect of changes in the price of oil. This is becoming more important over time, as China’s oil imports are growing.
— The US and Chinese economic cycle is correlated.

It wasn’t an accident for example that Chinese imports grew faster than US imports in 2002 and 2003. China recovered much more strongly from the 2001 downturn than the US. Indeed, China’s policy makers slammed on the brakes in 2004 (leading import growth to slow) because of concerns that the economy was overheating. That was when China first started to show a large trade surplus.


  • Posted by Twofish

    bsetser: Here is one way of checking: compare the y/y rate of growth in US and Chinese imports. If China was doing better than the US, one would expect its imports to hold up better than US imports, setting aside differences in the composition of the two countries imports.


  • Posted by jonathan

    I’m struck by how much imports grew from 2005 and the way they come together with exports right at the edge of the cliff. Some of that import growth must be energy & raw materials, but is much of it components from Korea et al that were then made into finished goods for export?

    I’m asking not only out of curiosity but because if we saw that kind of rise here, we’d say it was likely more consumption by end users. This is more likely consumption by exporters, right? That doesn’t speak well in a lot of ways.

  • Posted by Rajesh

    So how many months of 20% y/y export declines before the Chinese leadership panics?

  • Posted by bill j

    Using the 3 month average does smooth the change, but that’s the problem with it, it misses out the turning points.
    The slow down in trade began in October, but only really shows up in December.
    The pick up in trade began was clearly evident in the March figures yet that does not appear either.

  • Posted by purple

    This looks a lot like the BDI index – which is a good chart to watch as a forecaster of China’s economy (sans domestic stimulus), given its position as workshop of the world.

    BDI is dropping again after an uptick (which forecast the current uptick, aka – ‘glimmer of hope’)

  • Posted by gillies

    below is an extract from a news item about the pentagon ‘war gaming’ international financial moves in the same manner that it war games, say, attacks upon ships in the persian gulf.

    it is relevant to a suggestion that i made in an earlier thread, that holders of dollar reserves – china in particular – are not restricted to the two policies of continued high levels of purchases or catastrophic sell-off.

    there are intermediate policies and or threats –

    ” . . . and second, Bracken says, the event left him questioning one prevailing assumption about economic warfare, that the Chinese would never dump dollars on the global market to attack the US economy because it would harm their own holdings at the same time. Bracken said the Chinese have a middle option between dumping and holding US dollars – they could sell dollars in increments, ratcheting up economic uncertainty in the United States without wiping out their own savings. “There’s a graduated spectrum of options here,” Bracken said . . .”

    once again, you read it first on brad setser.

  • Posted by bsetser

    bill j —

    I looked at the march data separately, and wasn’t convinced it represented a turning point per se. the y/y fall in exports was a bit lower than in feb, but feb was clearly distorted by seasonality. Basically, there always is a bounce in the absolute level of imports and exports in March. You can argue the bounce was a bit bigger than might normally be expected. but so too was the fall in jan/ feb. I don’t see a turning point yet. if the 3m moving y/y fall in exports turns up, i would consider that evidence of a bottom. there is a bit of evidence of the stabilization in the rate of fall in imports, as one would expect given the impact of commodity price falls was a one off.

    jonathan — the rise in imports reflects higher commodity prices and various things linked to strong investment. compared to say the boom in imports in 2000, it is less linked to imported components — as a host of studies found that component production shifted to china, increasing chinese value-add and thus china’s trade surplus (Szed and Cui of the IMF = good example).

    twofish. Imports tend to be very correlated with the growth in domestic demand. Some Chinese imports are correlated with exports (components) but not all. if domestic demand was growing, the y/y swing in China’s imports should be more muted than the y/y fall in their main export markets.

  • Posted by sky

    One should compare y/y quarterly data for Q1-09 due to the Chinese new year holiday of one week.
    Most of the people are on holiday and factory shutdown.
    Last year it was in Feb and this year it was in Jan.

    Comparing the trend using Jan-09,Feb-09 and Mar-09 numbers is not going to give a clear picture for China.

  • Posted by donaldduck

    according to kond-cycle spring is sense of optimism. however, this optimism likely won’t last long as Chinese exports year over year clearly out line the true picture.

    the u.s. is trying to spend it’s way out of troubles. what the u.s. needs to do is devalue the currency by 80% or so, set up manufacturing and start exporting.

    hopefully we’ll do this on our own, if not the laws of economics will eventually put forth dollar devaluation on it’s on.

  • Posted by JW

    Yes, we messed up badly. So badly that the only game in town is Fed buys the treasury bonds and other assets committing the “financial incenstry. “. I would challenge anyone to make a distinction between the Federal Reserve and the US Department of Treasury. But, the biggest sinner is NOT US. It is People’s Republic of China. This is where the biggest junk is produced in terms of the physical products and the biggest junk is recycled in terms of financial papers ( i.e. the T-bonds). The Free Trade theory is fundamentally flawed because it omits a very crucial element–BALANCE. The Free Trade out of balance is not sustainable. On top of that you have an extreme top-down pyramid-like wealth distribution in this country of 1.5 billion human beings. How can you support such a monster? I have not mentioned the fact that the biggest fraud is not in the US. It is the banking system of the People’s Republic of China. How much bad loans are hidden in that self-closed system where the communist government controls its balance sheet??? Financial Times shamelessly put out a chart of banks by market cap. , on top of which are several Chinese government banks. MY GOD! Since when we have known how to value these assets? !!! Charlie Munger mentioned the Twine Deficits and the money -creating-out-of-thin-air US Fed. If you put (not add) the China monster from behind the deficits to the forefront, you can see why this man has one of the best minds and is indeed “the better half” of Warren Buffet. My fellow human beings, that is all there is… Game is over.

    China is doubly bad. So, when you have this knowledge, you will see why the world is dangerously impaired. This OTTI is much much bigger than the one facing the banking industry. There is only one solution, it must start from saving job by decisively throwing out the so-called Free Trade theory and installing the Free Trade with balance practice. This stops the job losses to China. Then we need to save money and reduce the debt. We also need to rid of Federal Reserve following the Ron Paul’s lead in this regard. Until we do this, all is a sham. ALL IS A LIE. WE ARE JUST CHEATING OURSELVES. THOSE BETTING ON CHINA WILL BE IN TEARS. A TRUE QUESTION: HOW MANY PEOPLE CAN THE WORLD SUPPORT WITH OUR CURRENT WEALTH DISTRIBUTION AND RESOURCE ALLOCATION SYSTEM ? CAN YOU HANDLE THE TRUTH???

  • Posted by Bhanu

    Need a clarification…

    Softness in Chinese export data in Feb’09 was explained away as the timing of the Chinese new year. I havent heard any comments (in the general media) on if the same effect has be to backed out of March data making it look much worse. Any thoughts…?

  • Posted by bsetser

    sky —

    the y/y change in the 3m moving average (in march) is the same as comparing q1 09 v q1 08.

    agree fully tho that the only way to look at the jan/ feb data is to combine the two months.

  • Posted by bsetser

    The rolling 3m sum measure i used shouldn’t be too influenced by timing of the new year right now, it looks at jan-march of this year v jan-march of last year. the risk is that it may miss changes — i.e. march exports were “only” down 17% or so. Given the m/m volatility, i feel safe saying China’s exports are basically down close to 20% y/y. that may change in q2.

  • Posted by Tamas

    What you reveal here is a standard mistake that people with non-em background tend to make. Emerging markets – almost without an exception – turn out much more dependent on export dynamics than the standard models suggest. It is not only that domestic consumption is dependent on export revenues, but that much of the new investment is usually based on expected future export demand. When this happens, imports of fixed investment product fall faster during contraction than you would expect.

    In this current crisis, the domestic demand of every major emerging market has been overestimated.

  • Posted by sky


    here is another paper on china economic issues

    One of the interesting chart is chart 3 which uses volume instead of price to measure import and export growth, IMO taking out distortion caused by rapid rise and fall of the prices in commodities.

  • Posted by DJC

    US Financial Crisis helps China cement Leadership across Southeast Asia

    April 12 (Bloomberg) — China plans to create a $10 billion investment cooperation fund and offer $15 billion in credit to its Southeast Asian neighbors, extending its influence as the region attempts to weather the global financial crisis.

    The investment fund will promote infrastructure development linking China with the 10 members of the Association of Southeast Asian Nations.

    The measures from the world’s third-largest economy, and one of the few forecast to maintain growth this year, may help speed recovery from the global financial crisis and cement China’s leadership in the region. The nation has already signed currency swap agreements with Indonesia, South Korea, Hong Kong and Malaysia this year to help ease foreign-exchange shortages and aid bilateral trade and investment.

    “China is going to take the opportunity of this crisis to further establish itself in Asia,” said Huang Jing, a visiting professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy. “All this will have a huge political and diplomatic impact in the region, in addition to the economic impact.”

    Other planned measures include 270 million yuan ($39.5 million) in aid to Cambodia, Laos and Myanmar, and donation of 300,000 tons of rice to an emergency East Asia rice reserve to boost food security, the statement said.

    China’s proposals give Asean countries “another option” besides going to the International Monetary Fund or the Asian Development Bank for funding, Huang said. That may aid China’s standing with Asean, where memories are still fresh of the painful conditions imposed by the IMF in exchange for rescue packages during the 1997-98 Asian financial crisis, according to Huang.

    “Southeast Asian countries will welcome the proposal,” he said.

  • Posted by DJC

    China Slows Purchases of U.S. and Other Bonds

    HONG KONG — Reversing its role as the world’s fastest-growing buyer of United States Treasuries and other foreign bonds, the Chinese government actually sold bonds heavily in January and February before resuming purchases in March, according to data released during the weekend by China’s central bank.

    China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

    China has lent vast sums to the United States — roughly two-thirds of the central bank’s $1.95 trillion in foreign reserves are believed to be in American securities. But the Chinese government now finances a dwindling percentage of new American mortgages and government borrowing.

    In the last two months, Premier Wen Jiabao and other Chinese officials have expressed growing nervousness about their country’s huge exposure to America’s financial well-being.

    Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend.

  • Posted by Rien Huizer


    The HKMA staffers provide evidence for the fact that China has become a demand-constrained economy with apparently very high secondary effects of export (not net exports) fluctuations. A bit like Japan: sentiment (business investors and consumers) seems to be quite dependent on exports (probably perceptions of expected exports. In Japan that results in a strong JPY causing widespread gloom (and real gloom as well with all those retail investors being caught once every so often with their FX losses on instruments bought to escape the yieldless domestic financial markets). Perhaps the Chinese gvt should use its considerable propaganda capacity to change this psychological feature of modern China? With so much further scope for increasing world market share (at least five years of abundant labor and rapid increases in technical efficiency, plus a lot of “sunk” foreign capital that will not want to expand anywhere else) this is one economy where sentiment should be upbeat, except among the small group of businesses that are obsolete (and happen to be in the country’s foremost development zone).

    If China is unable to tackle this motivational problem, it will mean that it may continue to outcompete other countries, but for a pie that shrinks faster than when China’s domestic demand were less sensitive to this “gloom” thing, which may be appropriate in Japan and the West but is nonsensical in China. A government concerned with stability should make its citizens a little more panic resistant.

  • Posted by sun bin

    i am just wondering, if one could estimate the “trade – export industry related” figure. e.g. the value-added of china’s export is say 30% of its export value (say 60% of imported parts + commodities, and 10% local parts+commodities + 30%labor/profit/rent/others). then roughly 70% of its export value (70%x 260bn) is the imports. then we find the actually chinese “consumed” is the difference of this number and its total import.

    if one assumes the ‘consumed import value’ largely unchanged (or grows with a rate similar to GDP growth — in reality probably faster than GDP growth) and do a regression of the historical trade data, one can estimate the slope as the percentage value imported (ie the ‘say 70%’ number)……this sounds like an interesting exercise to do?

  • Posted by nick r

    How accurate are China’s economic data?

    I don’t know what to make of this report:

  • Posted by euro

    Is China sending some of it’s reserves into Europe?

    Think we will see a strengthening of the Euro as we move into summer.

    Also why no trade relationships established between Brazil and China? Wouldn’t this be practical and make sense? Oil for Good?

  • Posted by euro

    Sorry “Oil for Goods”, not oil for good:)

  • Posted by DOR

    Tamas: One mistake non-China EM people tend to make is to assume China follows the same pattern as other EMs. In China, investment is heavily weighted toward domestic demand in this decade.

    nick r: China’s data suck (including some trade data), but that’s all we’ve got. I regularly throw a 20% margin of error at whatever comes out of the NSB.