Sunday, January 10, 2010

China's trade balance points to inflation

The Customs Administration announced record trade flows in and out of China in December. Specifically, exports grew at a 17.7% annual pace, while imports surged 55.9% over the year. This is a remarkable one-month rebound; reported export growth beat consensus expectations by a factor of 3.5 (+ 5% export growth and + 32.5% import growth, according to Bloomberg).

China is experiencing robust domestic demand growth, as illustrated by the surge in imports. Furthermore, there is likely significant price pressure built into this report since the data are measured in nominal $USD. The December trade report suggests that inflation pressures are underway in China's economy; expect a big jump in coming inflation reports.

I wouldn't be surprised if the government allows the yuan to appreciate sooner, rather than later, in light of this report.

Rebecca Wilder

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