RMB and the Composition of Chinese GDP

Much is being made about China's surprise trade deficit.  It came in at an astonishing -$31.4 billion, the widest since 1989, while analysts expected -$5.4 billion.  Looking a little deeper, exports came in light at +18.4% year over year growth while analysts expected +31.1% growth. Imports, on the the hand handily beat estimates: +39.6% versus +31.8% expected.

Markets are still digesting exactly what to make of this surprise, but it's already prompted several knee jerk reactions:

Slate: "A smaller portion of China’s imports are of goods which will be processed for export, and a higher portion is going straight into domestic consumption."

Given that China's old formula for growth was imports + cheap labor = exports, this is tautologically true, but raw inputs could also point to more investment in China's infrastructure.  And as the data points out, behind the impressive number of imports was a surge in purchases of crude oil and iron ore. Not exactly household staples where GDP per capita is still a fraction of the developed world. 

China's weak exports could simply be a function of weak global demand - too many goods chasing too few currencies.

If that's the case, then there is reason to worry that China is yet again attempting to delay the inevitable rebalancing of its economy. 

China's growth has been fed by investment.  Building things like stadiums, houses, freeways, factories, etc. is what has afforded the country years of high growth.  You would think as the Chinese economy matured and inflationary pressures began, there would be a natural rebalancing. But as is the well-known story by now, China resisted rebalancing by accumulating dollar reserves.  Thus, Chinese wages never went up, exports never waned as Chinese produced goods become more expensive, and finally the Chinese resident never got to consume with little wealth denominated in a weak RMB.

So why would China again spurn fate and hang on to unrealistic hopes for domestic growth through investment? Because that's what the country has always done.

A cursory analysis of China's composition of GDP reveals that investment has actually grown its share of GDP while domestic consumption's share has dwindled.  

Of course, the hare always loses the race just as the rogue trader must eventually realize all his loses. These deferrals can only last for so long.