China: A Negative Trade Balance From Covid-19

China in trade deficit

Exports were smaller than imports for China in January and February, which resulted in a trade deficit of $7.1 billion. The last time that China had a trade deficit was in March 2018, at the start of the trade war with the US, when the trade deficit was nearly $5.8 billion.

A lot of imports of medical supplies

Imports fell only 4% year-on-year YTD in February. This is a surprisingly low negative growth figure.

In January and February, China imported an increased value of medical-related supplies; raw materials to produce masks, which falls into the category of textiles and rubber, and latex for hospital beds. Part of this were donations from the rest of the world. Imports from donations increased by more than 4000% YoY YTD, to fight Covid-19.

Exports were bad, as expected

Exports fell 17.2% YoY YTD in February, as expected. Factories were closed for most of January and February due to the Chinese New Year holidays and the coronavirus, and thus we could hardly expect positive growth in exports.

Things should be different in March

Though we do not expect a V-shape rebound in production and exports in March, we believe that China will not receive more donations from the rest of the world. Almost the opposite, we expect China to export some medical supplies to other countries that need help to fight the coronavirus. 

As such, we believe that even though China’s trade could be in negative growth on a yearly basis in March, the trade balance should turn positive.

The negative trade balance is a risk to our GDP growth forecast, again

We have revised our GDP forecasts for China in 1Q20 to 4.4% YoY. Our forecast is now at risk, as we did not expect a trade deficit in the first two months of the first quarter. But we have seen increasingly more fiscal stimulus from the central government, which is also ahead of our expectations. For the time being, we keep our forecasts at 4.4% YoY for 1Q20.

USDCNY to follow the dollar index

We do not think that the People's Bank of China is going to weaken the yuan to boost exports, as what we have seen so far is that the USDCNY has moved in tandem with the dollar index. So the yuan, in fact, has been stronger, from the weakest level this year at 7.03 per dollar on Feb. 24, to 6.93 on  March 6. If the dollar gets stronger, due to the flight to safety from the fear factor of the spreading of Covid-19, then the yuan could weaken to 7.05 by the end of March.