What’s The Deal With China’s Trade Deficit?

On Wednesday, China’s General Administration of Customs reported that the nation ran a trade deficit of $880 million in March, the first in over a year. Officials reported that exports grew 10 percent year over year, instead of the 11.6 percent anticipated by economists. More important, officials reported that imports grew 14.1 percent, which compares to expectations for an increase of just 6 percent.

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For some context, China reported a trade surplus of $15.25 billion in February and $29.15 billion in January. All three trade reports released this year have surprised economists in one way or another, and the results for March have revitalized concerns about the trustworthiness of data out of China.

There are any number of theories about why the official figures rarely match up to expectations. Chief among them is a form of gamesmanship that involves exporters issuing fake invoices to people who want to transfer currency into the country. This creates false export data and allows companies to dodge around China’s tight currency controls. Evidence of this rests in a 93 percent increase in exports to Hong Kong in March — more than twice the amount of exports to the United States…

Chinese exporters also have an incentive to game the system and generate false import/export data because of value-added tax rebates. Last year, Chinese police busted a fake-invoice ring that had claimed tax rebates worth as much as 10.6 billion yuan ($1.71 billion).

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While there’s little doubt that fraudulent behavior is affecting the numbers to some degree, general economic conditions could also have a hand in creating the discrepancy. There’s little doubt that major trade partners such as the United States and Europe are facing tremendous economic headwinds that have put brakes on demand. Exports to the U.S. fell 6.5 percent from the year-ago period, while exports to the EU fell 14.0 percent.

On the other side of the coin, a strong domestic economy could account for the unexpected increase in imports. Earlier reports on China’s manufacturing industry suggested that such a thing could happen, and March’s report shows that commodity imports such as copper and oil led the surge. Imports from the U.S. climbed 30 percent from the year-ago period.

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