China's trade surplus is likely to disappear sooner than later

Comments on news from BusinessSpectator “China swings to shock trade deficit”, 10/03/2011, http://www.businessspectator.com.au/bs.nsf/Article/WRAPUP-2-China-trade-swings-to-largest-deficit-in--ET7DR?OpenDocument&src=hp6


I am not as optimistic on China's trade surplus as some of those people mentioned in the piece.

I would see that it will be a trend for China's trade surplus to decrease and to turn to deficit possibly as early as next year.

China's costs of production are rising and rising fast. Wages are rising and will rise more to address the issue of inequality and will also be a result of diminishing rural labour surplus.

Commodity prices are rising too.

Energy prices will do the same and perhaps rise more than commodity prices due to reduction in emissions intensity.

To ease social problems, the real costs of land may also rise, because government has to pay more compensation to using rural land.

On top of those, the Chinese currency is appreciating.

Other countries especially the US will also do more to increase their exports and reduce their trade deficits.

In short, it will be inevitable that China will see its trade surplus reduced and turned into trade deficit. Only then it will stop its currency appreciation and possibly to depreciate its currency for a short while to facilitate its further economic and structural transformation.

The recent uprising and unrest in the Arab world will accelerate China's government's push to increase the wages/income of Chinese workers and speed up the rise of China's costs of exports relative to its imports.

Yes, its productivity will undoubtedly also rise, but that is likely to be more than offset by the rise in costs for some time to come.

Any claim of China's trade surplus will continue is likely to be a simple extrapolation of the past without taking into account of the changed circumstances both inside and outside China that will feed into the Chinese economy and its economic costs.