China Posts Largest-Ever Annual Trade Surplus with US: What's it Mean?

China posted a $275.8 billion trade surplus with the US in 2017, even though its overall surplus shrank. What's next?

A global recovery led by the U.S. provided a shot in the arm for Chinese exporters last year, boosting China’s economy. Rising American demand, in particular, pushed up Chinese shipments, expanding China’s trade surplus in goods with the U.S. by 10% to $275.8 billion in 2017, according to Chinese customs data released Friday.

That figure, a record for the nearly five decades for which such data exist, marks the U.S.’s largest trade deficit with any trading partner. By comparison, China’s overall foreign trade surplus contracted 17% as higher prices of oil, iron ore and other commodities raised the value of inbound shipments from countries like Russia, Australia and Saudi Arabia.

Mr. Trump savaged China as a predatory trader during his campaign for the presidency, though he has toned down his rhetoric since. In an interview with The Wall Street Journal on Thursday, before the latest trade figures were published, Mr. Trump suggested he would have resorted to stricter measures to correct the trade imbalance with China if it weren’t for Beijing’s help in pressuring North Korea over its nuclear weapons development.

“We’ve been much tougher on China, but not nearly as tough as I would be, but they are helping us a lot with North Korea,” Mr. Trump said.

In closed-door meetings with American officials and business executives, Chinese officials have threatened tit-for-tat for any U.S. penalties and urged American companies with large operations in China to warn Washington against taking such actions. “We have contingency plans in place,” a Chinese official involved in policy-making said, without giving details.

One likely target is imports of U.S. soybeans. China’s hefty demand for soybeans, used to feed hogs in large-scale farms, has benefited U.S. farmers and companies including Cargill Inc. and Archer Daniels Midland Co. , and executives with American soybean exporters have said they’ve been warned that shipments could suffer in a trade spat with the U.S.

What's Does it Mean?

  1. Trump will howl. Whether he starts a global trade war over this is another matter. NAFTA negotiations were a disaster, but Trump still has done nothing yet.
  2. The US has a huge buyer for US Treasuries.

I had a laugh last week regarding reports that China may slow or halt its purchases of US treasuries. China will do no such thing. To be more specific, I see a buyer of approximately $275.8 billion in US treasuries.

For the most part, those who think China will cut back its net purchases simply do not understand trade math.

There may be some small differences between the trade deficit and Chinese purchases of treasuries, the most likely possibility is if China needs to prop up the Renminbi to halt capital flight.

China may also try to buy US companies instead. But I suspect Congress would kill most of those proposals.

Mike "Mish" Shedlock

we buy cheap goods they get dollars that can't be spent and sit in treasuries. sounds like we have the better deal

SweetKenny, The US will not be the only caged animal. The big battle royale will playout between the EU, Japan, and the US. The US gets a bye in the first round, as the more indebted EU and Japan battle it out in the first cage match. Since the EU banks and pensions are hopeless, my money says we will face Japan in the finals. The US will destroy Japan in the first minute, but suffer a fatal blow when it stumbles out of a bar while bar hopping in celebration and walks right in front of a bus filled with dollars. Remember, it will be a rising dollar that brings down the house of debt cards.

the u.s. brings in high skilled workers or so it tries under the h1b visa program that trump doesn't like

With very few options but treasuries, itnis true that China cannot stop buying. However, as they transition from an export economy to a consumer-based one, they will stop accumulating dollars and begin investing into their domestic economy.

China's new 10-year plan made it clear they no longer benefit from increases in its foreign-currency holdings, and they will allow their currency to float more, expanding the trading band. The yuan will appreciate against the dollar, as dollar purchases decline, which is better for their domestic economy. They cannot keep the yuan down any longer.

The G5 have been sellers to prop up their own currencies, with a few like Germany and Switzerland being buyers to hedge against the euro. The rest of the world has banned together to keep the dollar from rising, which is another reason the Fed waited so long to raise rates. It is a rising dollar that pops the govt debt bubble. Even the BIS has warned about the mountain of dollar-based loans outside the US -

Trade deficits are a joke, like CPI and unemployment, since they only look at capital flows and not merchadise. China could buy gold in the US and sell it in London and tell Trump see, we are working to help you with the trade deficit. Better yet, since interest payments are included in the Current Account, the deficit will be aided by increasing rates, as interest payments to China will increase. Besides, merchandise trade is only 1% of global investment, which is the real driver of markets, not stock buybacks, QE, or any other excuse given by those that think govt's can manipulate the trend.

You also have pensions reducing their purchases of long-term treasuries in favor of high-grade corporates, which don't default. As confidence in govt's decline, the trend from public to private will increase. If you think stocks are rising because of buybacks, just wait until the govt bond bubble pops.

great points, the current situation of an export driven economy that values capital spending over consumer spending is hurting the chinese. they need to rebalance, not for the united states but for themselves. china is exporting its way to poverty

@Blacklisted wrote:

[...China could buy gold in the US and sell it in London and tell Trump see, we are working to help you with the trade deficit....]

China could buy gold and just keep it (which they are already doing), though I'm not sure if there is enough free gold in the US pm market to make purchases from there large enough to move the trade deficit needle.

In fact, I wonder if the near decade-long build up of gold reserves by China (and Russia) is in part, driven by a desire to diversify away from US Treasuries.

In 2010 China held $1.15T in treasuries, in 2017 they held $1.05T. The cumulative surplus trade with US was $1.5T in that period. Mish, your "math" is way off.

Trump needs to wear a made in China hat that says "Make China Great" LOL. He's a paper tiger

you can buy the Make America Great Again hat from Trump for $25, or $8.99 on Amazon, Made in China

More of America's wealth is flowing into China that these numbers indicate because a backdoor is also adding to it. Follow the money and the United States huge trade deficit with Mexico becomes even more disturbing as you begin to understand where the money eventually ends up. When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash.

A bit of research quickly confirms that the many billions of dollars Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. More on the problem with this in the article below.