The earlier part of this week was dominated by talk of monster mergers and news that the radiation leakage from Japan was worse than initially thought. Somehow, in the sea of news stories we've shuffled through this week, the market has almost completely ignored news out of China that it reported its first quarterly trade deficit in more than seven years. How a story like this goes undetected is beyond me because it has every implication to stall this dream-like 10-month-long rally.
With China being the second largest economy behind the U.S., the world looks to the country's economic figures for clues as to whether it can keep up its nearly double-digit GDP growth rate. Given that Chinese exports grew by 26.5% for the year-ago quarter while imports grew at an astounding 32.6%, some investors -- myself included -- are concerned that China's growth may have hit a plateau.
The Chinese government has been encouraging businesses in China to reinvest within China rather than reaping the benefits of exports. While this may at first seem like a head-scratcher, it makes perfect sense. One of the biggest complaints the U.S. has with a country like China is that it artificially keeps its currency low in order to make its exports more attractive to other countries. By reporting a trade deficit, China now has tangible evidence that its low-priced yuan is not disruptive to world trade practices.
More concerning would be what a shrinking degree of exports might say about manufacturing conditions in the United States. China supplies the U.S. with a healthy share of its manufactured goods, so while we are still seeing a growth in exports, that growth rate is slowing, potentially portending to a slowdown in the manufacturing sector in the U.S.
It's my opinion that one factor driving our precipitous melt-up rally has been the strength in the Chinese economy. A certain level of complacency has developed knowing that with China growing at more than 9% we can expect a relatively stable demand for exports from the United States. When news of this trade deficit hit the newswires, all of that complacency disappeared.
Don't get me wrong, China's economy isn't falling off a cliff anytime soon, but suddenly oil-exporting giants CNOOC (NYSE: CEO) and PetroChina (NYSE: PTR) no longer seem like a resounding buy, even with oil prices more than $106 per barrel. Likewise, U.S.-based companies that rely heavily on Chinese imports such as aircraft-maker Boeing (NYSE: BA), conglomerate General Electric (NYSE: GE), and commercial vehicle maker Navistar (NYSE: NAV) now have to be biting their nails wondering if orders will slow.
I may be yelling fire after seeing what amounts to just a flying ember, but I also know that it only takes one ember to start a fire. Our stock market may be in need of a healthy correction, and China's trade deficit could be the ember that ignites that correction.
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could still use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that is free of trade sanctions.
