China’s June Trade Surplus Matters to You

Wednesday, July 11, 2007 8:17

It has just been announced that China’s trade surplus hit an all time high at $26.9 billion
USD for June. That is double the amount for June of last year.

China Trade Chart

The only “good” news from a political standpoint is that imports rose by 14.2%, a “sign” that more and more imports are making their way into China from other countries.

Before getting into the real analysis though, there are still a couple things I would like to note:

1) July 1 was the deadline that was the cut off for higher VAT rebates, and as such the volumes being exported were much higher volume wise as people were trying to beat the deadline.

2) These statistics are USD based and as the RMB has moved considerably in the last month, and even more so since last June, nearly 5~6% can be explained by currency adjustments alone.

3) These statistics are not broken down at all at this point, and as such little is known about overall volume increase/ decrease, whether it is Chinese manufacturers or Foreign manufacturers who account for the growth, if the goods are changing from low value goods to high value, etc.

Short term, I would expect to see a blow back in the States and increased pressure on product safety and RMB, which could begin to have a significant impact American business

Medium term, this subject (unless the RMB goes 1 to 1 with the USD) will continue to carry significant ppolitical tone as the U.S. enters the 2008 elections. During this time, I am expecting a slowdown in new entrants to China as well as the restructuring of entities whereby products currently being sold to U.S. will either be sold to other countries or domestically consumed.

Long term it is anyone’s guess. China is taking a real beating in the U.S. press, and most Americans I speak to fail to understand the macro fundamentals that would take place should an all out boycott take place.

for Western businesses in China, it is time to plan ahead, and plan more than ever.

  • If are exporting products from China and were once basing your export costs on 7.61, use 7.5 now rather then 7.5t to see how your margins hold up, then run at 7.2 to see how your margins hold up, and then throw in a 5% reduction in VAT… what do you get?
  • If you are a manufacturing firm looking to enter China, now is the time to sell high value technology (cleantech is HOT right now) into China. You will have the full blessings of both governments (assuming the product is not dual role), and there is currently a critical gap
  • If you are a manufacturer exporting products made in China to U.S. or E.U. markets, I have two words for you. QUALITY CONTROL. The next 18 months will prove that those who are able to sell quality will not be affected by the recent scandals, but those who have failures of any kind or on any scale will experience brand depreciation on a big scale.
  • If you are an investor continue to buy assets, but plan for exiting underneath the most horrendous taxes and regs you can imagine. There are still many many opportunities to make significant returns in China, however the government will continue to introduce ways to punish those who flip or exit in the 1-5 year time frame. Plan ahead
  • If are a consumer in America, get ready to pay more for the goods you love. You have had it good for 10 years, and you will begin seeing price level increases along with every RMB And VAT change. retailer’s have pushed pricing so low, that there is nowhere for anyone in the system to absorb a 5-8% cost increase without it trickling back to the market.
  • If you are an investor in the U.S. stock market.. well, I guess you already have you mark picked out.. .but I would expect to see some stocks fall back as their exposure to China gets highlighted and used as the political lightening rod for the next 18 months.
  • Finally, if you are a fresh mint MBA looking to cut your teeth in China, start planning for tough times. Only come if you are in for the long haul, there are already signs that the pool of fresh minted MBAs with no China based skills or language are too many. If I were you, I would find the next bubble and set up camp… not going to give anything away here, but I hear Costa Rica and Panama are BOOMING.

What possibilities do you see? share your ideas here

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One Response to “China’s June Trade Surplus Matters to You”

  1. China’s trade surplus and why it matters to you » Third Party Logistics News - 3plwire says:

    July 17th, 2007 at 4:22 am

    […] much good stuff to excerpt from this excellent post over at All Roads Lead to China, but I’ll leave you with this excellent advice for Western […]