China is signaling that the March trade figures may show a deficit of as much as US$8bn. If true, that would make it the first monthly trade deficit since 2004.

The good news is that commodity prices have been fairly stable to soft over the last few months so this switch from surplus to deficit shows that China is serious about raising domestic consumption. If this trend continues, China will provide a much needed growth opportunity for the Asian region.

The bad news is that the US Treasury still has to fund record fiscal deficits and will need China as an enthusiastic bidder for some US$2 trillion in paper due to be auctioned in the coming months. With a balanced or slightly negative trade balance, it is unlikely that China will be able to add to its already substantial pile of US debt.

As Senators pile on the pressure to name China as a currency manipulator in April, and the Fed winds down it’s US$1.25bn Quantitative Easing program in March, we could see some serious political sparks flying in the coming few weeks.

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