February's trade surplus was smaller than expected. No big deal. January's was larger than expected. The combined surplus was around $12 billion. That's down a bit from q4, but it should be down from q4. There is a lot of seasonality in the Chinese data, and q1 is traditionally weak quarter.
What confuses me then? The fact that the narrowing of the trade surplus seems to be coming entirely from an acceleration of import growth, rather than any real fall off in export growth. Export growth in January and February was 25.5% -- far stronger than I expected a few months ago. The trade surplus did not increase because import growth was 27.4%.
Some of that is a base effect - q1 2005 was a very weak quarter for imports. Particularly oil imports. Some is a price effect. China imports oil too. But some of it may reflect an acceleration in construction - something that could have been spurred by the acceleration in money growth and general loosening of administrative controls that the PBoC put in place after the July revaluation. They were apparently worried the revaluation would really derail the economy.
"Much stronger construction growth fueling higher imports" is the story that Jonathan Anderson of UBS has been pushing in his client notes - and it certainly fits the January-February data far better than the "export growth slowdown" story that Andy Xie of Morgan Stanley has been pushing.
So doesn't that solve the mystery? We are witnessing a replay of 2003. Strong money growth, strong lending growth, surging construction all lead to surging imports - keeping the China's trade surplus from growing even as its exports explode.
Alas, Anderson changed his tune a bit today. His construction index isn't as strong as it was in the third quarter of 2005. however, he argues other indicators don't suggest a sharp fall-off in construction spending, only an end to the acceleration of last fall.
And a blow-out in spending is a bit at odds with still very subdued inflation number.
So I am confused.