China's $7.3bn trade deficit for February has more than simply a monthly significance. The crucial fact is that it is part of a sustained decline of China's trade surplus - the details of which are outlined below.
This trend is not only objectively important for the world economy but also refutes analyses that China is pursuing a ‘mercantilist' course aimed to secure a large trade surplus. The latest figures should therefore be examined against longer term trends.
As a considerable international debate has taken place on the direction of China's trade surplus, this trend clearly confirms the analyses of those, such as this blog, which have pointed to China's declining surplus, with its economic expansion being driven by strong expansion of domestic demand.
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China's declining trade surplus
Evidently no great significance should be attached to a single month's figure for a country's trade balance – particularly when it coincides with the largest public holiday of the year, as with China's Lunar New Year (Spring) festival. China ran a trade deficit in February but it will run an overall surplus this year. What is significant is the declining trend of this surplus.
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The simplest adjustment that can be made to see the trend, and to avoid the distortions of a single month's data, one which most analysts have carried out, is to combine the January and February 2011 figures. The reason for this adjustment is that China's Lunar New Year Festival falls some years in February and some in January, so simply an annual month by month comparison results in a seasonal statistical distortion. China ran a $6.4bn surplus in January 2011, and taken with February's result, the combined figure for the two months is a deficit of $0.9bn. As China's trade surplus is usually higher in the second half of the year than the first, this should not be taken to suggest China will run an overall deficit in 2011.
What was significant, however, was the clearly and sharply declining figure for China's combined trade balance in January and February this year compared to previous ones.