When Chinese officials reported late Friday that the country’s exports had fallen 18.1% in February, the news came on top of another event that was perhaps even more nerve-rattling. The country had experienced its first onshore bond default when a solar energy company failed to make its full interest payment.
China’s trade deficit in February totaled $23 billion, compared with a surplus of $14.9 billion in February 2013, and a consensus estimate for a surplus of $14.5 billion.
Other signs are also cautionary: Inflation posted a 13-month low in February, and producer prices fell for the 24th consecutive month according to a Bloomberg News report. Last week, the country set its 2014 GDP growth target at 7.5%, but the weak export showing has put China behind the pace it needs to maintain in order to meet that growth target.
An even bigger question is how strong is demand for Chinese products? Will domestic demand make up for weakness in foreign demand?
Part of the reason for the February decline is timing. This year, the Lunar New Year holiday had a clear negative impact on manufacturing and exports compared with 2013, when the holiday came 10 days later and boosted the February numbers. Lower demand from the United States, where unusually cold weather tamped down consumer spending, likely contributed to the drop in exports as well.
For the first two months of the year, China’s, exports have declined 1.6% compared with the first two months of 2013. That’s the worst showing in five years, and compares poorly with a 23.6% gain in 2013 compared with 2012.
What could be happening is that China is focusing more on domestic demand. Wages have been climbing which should boost domestic spending and increase imports. That, in turn, could be pushing the trade balance into deficit. Unfortunately, domestic demand would have to grow at a much faster rate to make up for the drop in exports, and that’s what has people worried.