Absence of global rebalancing watch – first q4 data point from China edition
I spent last night following the outcome of the US election. It looks like a majority of US electorate tired of Bush Administrations policies (and Rummy) before the rest of the world tired of financing the US.
That is why I am a bit late commenting on China’s October trade data.
Suffice to say a record monthly Chinese trade surplus of nearly $24b ($23.8b) won’t do much to address the concerns of Heath Shuler and Sherrod Brown. If GM and Ford’s survival strategy relies on more imported Chinese auto parts, Ohio’s doubts about trade won’t go away.
The huge October surplus came from two sources. First, Chinese exports continued to grow at a very impressive 30% y/y clip. That is a significantly higher pace of growth than was the case earlier in 2006. Second, import growth slowed to a 15% y/y pace – lower oil prices helped and policy steps to cool investment growth also had an impact. Wang Qing (quoted by Nerys Avery of Bloomberg):
““The big slowdown in import growth is responsible for this huge surplus and it shows the impact of the government’s macro- economic tightening measures, which slowed investment growth,” said Wang Qing, head of Greater China research at Bank of America Corp. in Hong Kong.”
If China’s recent 30% y/y export growth is sustained, China’s 2006 trade surplus will approach $170b – and its 2007 surplus rises to $270b or so — even if China’s y/y import growth rebounds to around 20%. Lots more follows.
Before delving into the data, I want to make two more general points.
First, the surge in China’s trade surplus (and one assumes, its current account surplus) in the second half of 2006 looks a lot like the surge in 2004 both seem to reflect Chinese policy choices.
In both cases, the surge in the surplus came after China’s authorities took policy steps to curb investment growth. In both late 2003 and in early 2006, the authorities started to worry that a surge in bank lending was leading to too much investment. They put on the brakes – and they did so with a set of administrative measures that restrained bank credit growth and made it harder for China’s ambitious local provinces to go forward with all of their grand (investment) plans. Since investment is a component of domestic demand, the result – not surprisingly – was less domestic demand growth and a bigger trade surplus. Put a bit differently, less of China’s (growing) output was devoted to (still growing but not quite as fast) domestic investment and more to exports …
China did not have to rely on administrative curbs on lending and investment to slow its economy; it could have used other tools– notably letting the RMB rise in nominal terms. However, China’s leaders haven’t been willing to allow much RMB appreciation. In 2005, they got lucky. The dollar’s appreciation v the euro helped to reverse some of the RMB’s depreciation from 2002-2004. But in 2006, the RMB has fallen against the euro – a g-3 trade weighted index for China’s nominal exchange rate has hardly moved at all this year despite the RMB’s (small) move against the dollar. Going from 8.07 to 7.87 when Chinese inflation is lower than US inflation and the euro moved by a lot more isn’t a big move.
I think Martin Wolf is right – to keep China from overheating at its current exchange rate, China’s government effectively has to use policy measures to hold investment below China’s savings, notably by forcing the banks not to lend their huge stock of RMB deposits to private sector but rater to lend those deposits – in various ways — to the central bank. Without restraints on bank lending, investment would be higher, domestic demand would be stronger and there would be more inflationary pressures and eventually more pressure for real appreciation.
Second, China’s October trade surplus suggests that the main effect of the fall in oil prices – combined with quite weak Asian real exchange rates — may be to rebalance the world’s current account surplus from the Middle East and Russia toward Asia, not to reduce the deficits of the big deficit countries like the United States.
Asia’s current account balance is currently benefiting from a number of significant tailwinds …
- Lower oil prices and a lower oil import bill.
- Lower oil prices free up funds in the US and Europe to either save more or to consume more. The Chinese data suggest that someone is consuming more Asian goods rather than saving more …
- Rising spending in the oil exporters is generating more demand for Asian goods.
- Rising interest income from rising US and European interest rates. All those reserves earn interest. And the amount of interest is rising fast. Look at Japan’s income balance. The rise in 2005 is just the beginning. Or look at why Japan’s reserves are rising …
- Continued weakness in the Chinese/ Japanese real exchange rate, especially relative to Europe. That encourages the Middle East to buy “Asian” – and Europe to import more Asian goods.
- China’s efforts to curb the pace of investment growth so far have been more successful than its efforts to lower its savings rate.
All this adds up. China’s 2006 current account surplus will certainly top $200b. $250 isn’t out of the question. Current trends imply a 2007 surplus of well over $300b. Well over. Just saying.
In order for lower oil prices to lead to something other than a “rebalancing” of the global surplus toward Asia, lower oil prices need to lead to less savings in Asia – not less investment. And more savings and less consumption in the US, not more Asian imports … Yet that isn’t what we have seen to date.
Let’s look at two charts.
The first shows China’s monthly trade surplus (left axis) and a rolling 12 month sum of China’s trade surplus (right axis). I projected the export and import growth rates of the last three months out (around 30% y/y growth in exports and around 20% y/y growth in imports) through 2007 just to see what would happen. I don’t think this is the most likely outcome – but it is in a sense an approximation of what might happen if nothing changes in China, the US or Europe.
The second graph compares Chinese exports with US exports – with recent y/y export growth rates forecast out through 2007. There is a lot of seasonality in China’s trade, but – barring major changes – China will be exporting way more than the US by the second half of 2007.
Again, this is a linear extrapolation of recent trends — not a forecast. I tend to think both US and Chinese export growth will slow a bit in 2007. It is meant to illustrate what happens if nothing changes.
It also shows that the dollar depreciation had an impact on both US and Chinese exports. Both the dollar and the RMB started to fall v. the euro in early 2002 – and fell a lot in 2003. And, with a bit of a lag the pace of both US and Chinese goods export growth accelerated. China just accelerated more
- US monthly goods exports are on track to rise from around $60b a month in 2000-01 (admittedly, a soft patch in the global economy) to around $100b.
- Chinese goods exports are on track to rise from around $20b a month in 2000-01 to something like $110b a month (on average) in 2007.
That is phenomenal.
This surge in Chinese exports does — I believe — represent a radical acceleration in the pace of globalization/ global integration relative to even the 1990s. Here is one way of framing the resulting (political) challenge: the American electorate isn’t as comfortable with global imbalances — at least the consequences of those imbalances that impact their daily lives — as the world’s financial markets.
As my former boss Dr. Summers observed last week in the Financial Times, the insecurities that have come with intensified globalization is something that is increasingly shaping the politics of the US, Europe and many middle income countries that compete with China. Economic insecurity wasn’t the main focus of the US mid-term elections — but it was a part of it.
A lot of the dislocations associated with globalization would still be around in the RMB had appreciated rather than depreciated in real terms over the past few years. But I do think the strains would be significantly lower if we had a different kind of globalization, one where a bit less capital flowed uphill.
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Attached in the Reuters article on the Chinese government purchase of 150 Airbus A320 and 20 Airbus A350 aircraft when Prime Minister Wen Jiabao visited Airbus headquarters. The article further discusses the quid pro quo deal for Airbus to build its first overseas aircraft assembly plant in Tianjin China. There is no single airline in China capable of making a single jumbo 170 aircraft purchase. The Chinese Ministry of Civil Aviation makes the single 170 aircraft purchase and allocates the aircraft to various airlines like China Southern and Air China.
Any predictions for Germany’s goods export performance? Are the US and China set to overtake it? After all, it tops the export league tables.
The French International Relations Institute has predicted that by then, Greater China (China, Hong Kong, Macao and Taiwan) would be the leading economic power, accounting for 24 per cent of the world economy. North America (the US, Canada and Mexico) would be next with 23 per cent of world GDP. Goldman Sachs has also projected that by 2050, China will have the largest economy in the world, followed by the US and India.
China is set to overtake germany, i just don’t know when. I have tended to look at the eurozone data rather than the national data, but i’ll try to add germany into the data I track when I update the eurozone data for September. Germany’s exports have grown at an impressive clip, but nothing like China’s.
“If GM and Ford’s survival strategy relies on more imported Chinese auto parts, Ohio’s doubts about trade won’t go away. ”
Well said, Brad. The implication is that economic decision making in Beijing has to consider reactions in Ohio and the economic decision making in Washington has to consider the reactions in Fujian. This is perhaps the true manifest of globalization’s impact. However, current political climate in both countries tend to view this relationship in very simplistic terms. Both sides tend to demonize the other and be suspicious of each other’s motives. Unless we move beyond this simplistic political dialogue, the global imbalance will continue.
Politicians must focus on middle America http://www.ft.com/cms/s/0fae4916-6ae1-11db-83d9-0000779e2340.html – “Between 2000 and 2005 output per hour worked in the business sector increased by 17 per cent, while the median hourly wage rose by only 3 per cent. The total real income of the median household is lower than in 2000, when President George W. Bush was first elected.
“The forces behind this development include technology, the rise of winners-take-all markets, globalisation and also, perhaps, immigration. Together, these pressures have exacerbated inequality by increasing the rewards of skilled labour and, at the very top, of the most successful business-people, sports stars and entertainers. At the same time, they have undermined the position of lower-skilled workers.
“Trade benefits the economy as a whole, but not everybody. If the openness on which the entire world economy depends is to be sustained politically, winners must be willing to share more of the gains with losers.”
It’s _Still_ the Economy, Stupid http://bigpicture.typepad.com/comments/2006/11/its_still_the_e.html “its in the great middle where we see all sorts of angst coming… And, if we are to believe what members of this group are actually saying to pollsters, its that same middle that is likely to impact the mid-term elections…”
Economic Inequality in the United States http://www.frbsf.org/news/speeches/2006/1106.html – “Beyond education and training, the United States has long deployed an array of policy tools to combat inequality and diminish economic insecurity. One example is the earned income tax credit…” http://www.rgemonitor.com/blog/economonitor/156593
Instead of always debating China, how about a honest discussion about the capital misallocation impact from Greenspan’s credit bubble policies on the US Economy. While there is legitimate demand for housing, very little is affordable housing. Builders across the nation have built McMansions and ultra-luxury condos for speculators from coast to coast. The massively overbuilt Miami and Las Vegas regions continue construction of luxury condominium towers with starting prices in the upper 6 figures. How many retiring yuppie baby boomers are that wealthy to afford million dollar condos in Florida, Phoenix, or Las Vegas? Unless we can house 10 mexican immigrant families in these million dollar McMansions in Phoenix, who can afford the property taxes and maintenance expenses on these grotesque and obscene McMansion homes.
DC: The Chinese economy simply does not work the way that you think it does. There is no such thing as the Ministry of Civil Aviation.
State-owned airlines pool their purchasing power through the China Aviation Supplies Import and Export Group which buys planes from Boeing and resells it to the state-owned airlines, and the whole system is designed to resemble US corporations.
Can you pull numbers that indicate that capital is misallocated? Despite the bubble in the housing market, what Greenspan did was a lot more sensible than “crash and burn economics.” The trouble with deflating a bubble is that things can go too far in the other direction, and Greenspan belongs to the school of economics that argues that the Great Depression was not an inevitable results of the 1920′s, but rather misguided policies of the early 1930′s that made things much more painful than necessary.
My own feeling is that “pain is good” theories of economics are very dangerous, because there isn’t the ability to consider the possibility that the theory is wrong. You do something. People scream and things fall apart. If you believe that “pain is good” you do even more of it. People scream and things fall apart even more. The danger is that you don’t stop and reconsider that your theory might be wrong until you’ve destroyed an entire economy. witness China-1965, Russia-1990, Cambodia-1977 or any number of countries under IMF stabilization programs.
I’d be interested in knowing why you think the monetarist analysis of the Great Depression is wrong, and if you will reconsider if another five years pass any nothing seriously bad happens to the US economy. Suppose the housing bubble deflates with a soft landing. At that point it looks like Greenspan is a hero.
In Austin, the real estate market was tough for a few years after , but all of the buildings are getting filled up and there is new construction which is getting filled.
JW said ”
My own feeling is that “pain is good” theories of economics are very dangerous, because there isn’t the ability to consider the possibility that the theory is wrong. You do something. People scream and things fall apart. If you believe that “pain is good” you do even more of it. People scream and things fall apart even more”
My own feeling is that “pain is a fact of life” – in economics, and simply is a part of the human condition. The more vigorous the attempts to counter naturally-occuring entropy that is inherent in cyclical vicissitudes, the more likely they will produce greater distortions to price signals thus subverting very essence of capitalism as allocator of resources. Governments are unnatural. Policy unnatural. All has consequences. Yet we understand many of these consequences better than we ever have before, whether through Keynsian or Monetarist lenses. Certainly not enough perhaps to let the all-knowing CP, Politburo (or Walmart for that matter) allocate resources, but enough for a guy like Issing, or Volcker (probably even Joe Wang) with a most capable staff, to make a good educated guess in wagering that aggregate speculative activity in Real Estate, and assess whether their prices relative to income are unsustainable and should not be encouraged to further excess by low interest rates or highly-levered mortgage products. The same goes for stocks. Even more so when every single asset class on the face of the planet from Orchard Land, Commercial Real estate, Antiques, sports memorabilia, rare Kimonos or Samurai swords, precious metals, 2nd hand life policies, credit spreads, and so on is raging and vaulting upwards.
Sensible and empathetic policymakers, proto-central bankers and economists have understood for more than a century and a half that to restrict credit uncessasarily is to potentially restrict output and thus impoverish the working man, robbing them (and society) of output and wealth and all that it might bring. Yet these same people have understood that to facilitate the distribution of credit in quantities too large, and on terms too easy, ignites the animal-like speculative spirits, causing all manner folly, of over-investment and consequential misallocation of ostensibly scarce resources, that, despite mans best efforts to the contrary, typically ends in classical fashion of overinvestment, oversupply, and price destruction. None of this is new.
What is new is the de facto attempt to outlaw and banish downward adjustments in economic activity or prices or both. And with each attempt – whether by monetary policy, tax cuts, reserve requirement relaxation, financial innovation – creates distortions, and the same-again stealthily in friendly countries (think ZIRP & 6% GDP fiscal gaps in Japan) where freely flowing capital can continue distort and inflate across borders. And all this is pre-galloping inflation. The moral hazard now builds. Balanced policy has negative consequences. Too much is at stake for prices to fall, or demand to drop. Pressure rises to goose it all costs. The smartest guys in the room figure it out first. They lever up – buy assets – buy everything – LBOs MBOs leveraged real estate, sell debt to the saps to you and me – and to our pension funds. Then, the game becomes obvious. People take out home equity loans and consume, lever as much as they can when they see others doing it. Where does it stop? Congress holds hearings, pressuring the Central Bank keeps money loose. It is a negative feedback loop run amok, and the outcome is deterministic.
Yes it’s possible that policy – restrictive policy – can err (too tight) such that the present value of lost output and potential welfare exceeds the present value of lost output, wasted resources and negative externalities therefrom, at some unknown point in the future. This equation will perhaps always remain unknown, and the precise point of indifference, always a mystery. But does that mean we should not try to aply our knowledge and experience? One can take a corner while driving at a reasonable speed, but prudence and responsibility to other drivers and possible pedestrians on the road demands one corner at an acceptable pace. Why should economic policy be any different, knowing what we know as economists, about finance, human nature, and economic history? One can cite productivity, IT revolutions, JIT investory & logistics, but are these sufficient embark upon and pursue reckless speeds around the corner? The outcome – witness Zimbabwe – can be catastrophic and dislocating not to mention a dealer of death to the countless unfortunate. How does this balance against a small undershoot in aggregate output??
It just seems that in trying to employ money-illusion to banish anything that smacks of naturally-ocurring market price destruction or output adjustment, we’ve painted ourselves into a financial corner from which there is but one escape….and it is not pretty at all….
Well said, well said indeed!
It’s not very difficult even for a layman in the street, like me, to figure out when assets are over priced. The current approach to monetary policy reminds me of neoconservative Michael Ledeen’s “creative destruction”, and the execution of the Iraq strategy, it reeks of over confidence. Is the line between the hawk and the dove that thin? It could be when we see the competitors gaining, it is our nature to push a little harder to see how fast we can make that next corner, a little faster, looking over our shoulder until inevitably we feel that rubber slip … and we slam back into 1929? Oh well, maybe we’ll get it right next time.
Balls to the wall!
History does rhyme..
“Unless we can house 10 mexican immigrant families in these million dollar McMansions in Phoenix, who can afford the property taxes and maintenance expenses on these grotesque and obscene McMansion homes.”
“Instead of always debating China”
This is Dr. Setser’s forum. If he wants to write about budgerigars in Brazil that is his prerogative.
Far more pertinent is why you continually insist on attempting to destroy what would otherwise be interesting debates amongst intelligent and interesting people. You have no more right to dictate what should be the topic of discussion here than if you were a guest in Dr. Setser’s home.
You really are an incredibly impudent chap. I’m not even sure what you think you are trying to achieve. You couldn’t have turned off more people with your madly chauvinistic and strident views if you had tried.
I agree with Cassandra. The Fed has stepped in to provide liquidity whenever the financial system has a rough spot. This, naturally, has encouraged speculation and the buying of financial assets – because everyone is confident, should things begin to tank, that the Fed will ride in and inject more liquidity and save them any great pain.
There was a time when the Forest Service fought all forest fires – big and small, naturally occurring and not. But it turned out that the smaller forest fires served a function – they prevented too much dry rot from accumulating, thereby preventing really massive forest fires laster on.
The rise in the financial class has created numerous problems, not least of which is an incredible inequality in wealth. It has damaged the work ethic, it has damaged the Middle Class, it has led to the indebting of America, etc. etc.
The Fed should just stop trying to micromanage the economy. Move the interest rate around in order to match inflation expectations or to reflect the money supply, but it should stop mimicing Greenspan’s attempt to be God or Atlas or whoever. Because, while JW is right that pain is not good, eventually using too many drugs to drive away pain will just kill the patient.
You write, “State-owned airlines pool their purchasing power through the China Aviation Supplies Import and Export Group which buys planes from Boeing and resells it to the state-owned airlines, and the whole system is designed to resemble US corporations”. – JW
Is that the way Continental and Delta airlines purchase their aircraft from Boeing and Airbus by having the US government involved in the purchase? Are any US Airlines even partially owned by the US government? Is President Bush involved in the purchase of civil aviation aircraft like Prime Minister Wen Jiabao. Frankly, it is absurd to even attempt to compare the Chinese economic structure with the United States. The Chinese openly proclaim themselves to be a “socialist market economy” which the United States even under the Democrats does not. Today, 35% of the Chinese economy is still officially state owned, and the CCP has absolutely no intention of privitizing core strategic sectors of the economy in energy, telecom, media, aerospace, and defense. For instance, the Chinese state has absolutely no intention of selling its strategic 70% ownership of China Mobile, China Telecom, PetroChina, CNOOC, Sinopec, etc. Contrary to the BS from the US corporate news media, the rest of the world does not want to be just like the Americans.
On a separate issue, have you even considered that your support of Greenspan’s credit bubble policies might be simply wrong. We have more than enough McMansion homes and Ultra-luxury condos that represent several trillion dollars of misallocated capital that will likely be defaulted on over the next several years with the Housing bubble collapse. Unfortunately, there is absolutely no cure from the capital misallocation effects from an economic bubble. Prudent monetary policy would never allow a Economic credit bubble to inflate in the first place.
re: “The rise in the financial class has created numerous problems”
“…there is a fundamental change that is happening in markets. The market is becoming less about prices – the bids and offers – and more about financial products and services.No longer can a corporate or economic report be issued, where stock and bond traders in the past could say with almost certainty how those prices should react, where today those traders have to wait until the vested interests and controlling parties spin their story. That’s not a market; it’s a game…” http://www.billcara.com/archives/2006/11/further_views_on_the_canadian.html#more
‘Is China the next bubble investment?’ http://www.app.com/apps/pbcs.dll/article?AID=/20061105/BUSINESS/61104008/1003
Actually, the Chinese trade surplus was $23.8 billion, which is more like “nearly $24 billion” than “nearly $23 billion”. The trade friction from this will however be limited by the fact that the increase in the Chinese trade surplus was partially caused by the same factor that brought down the U.S. deficit in September: lower oil prices.
Stefan — right you are, on the number. But key force for “friction” is China’s sustained 30% y/y export growth (and around 175 y/y export growth to the US). The us deficit is a bit smaller b/c of oil, china’s surplus is a bit bigger — but the basic dynamics of China’s goods export machine seem unchanged.
http://www.ft.com/cms/s/573e28bc-6f52-11db-ab7b-0000779e2340.html – “Free trade is the real election casualty”
http://www.slate.com/id/2153271/ – “The Lou Dobbs Democrats: Say hello to the new economic nationalists”
The Department of Commerce does very actively promote US exports, and the purchase was done by a state-owned enterprise.
You are confusing ownership with management. The PRC has no intention of relinquishing control of most state-owned enterprises, but it also has no intention of the government managing those enterprises. The role of the state in the listed companies is to be a shareholder whose goal is to maximize profit of the corporation rather than to give direction. Hence you have a socialist (largely state ownership) market (decisions made on the basis of profitablity) economy. The role of the market is to get around the economic calculation problem that dooms most socialist systems.
This works in China because you have enough state entities that you can effectively have competition between entities that are owned by different parts of the state. China doesn’t copy models wholesale, but it is interested in selective borrowing, and it’s managed to borrow a lot of ideas of US corporate management within the context of state ownership.
And none of this was really planned. If you look at the policies of the early-1990′s, it was a middle way that could have either involved mass privatization or not, and the more uncontroversial reforms of improving corporate management were done first. By 1999, it was obvious to most people that mass privatization was both unnecessary and politically difficult.
Of course the Chinese economy is different from the US, but the Chinese government made a *conscious decision* to reject the Japanese-style, German-style, or South Korea-style industries and model the Chinese corporations like those in the United States. The main thing is the prohibition of bank ownership of stock.
I make my decisions based on what I see, and what I see in Austin looks like a reasonably healthy economy. There aren’t *trillions* of dollars of high priced mansions. If the housing crash causes a depression in the next two years, sure I’ll reconsider just like I reconsidered my opposition to RMB appreciation when the Chinese surplus numbers didn’t go the way I expected.
I see a lot of analogies here, and the thing that you have to be careful about analogies is that they don’t prove anything. You can talk about “pressure” or “forest fires” building in the economy, but is that a good description or are you using the wrong model?
The way I try to figure out if I’m on the right track is to predict and to look at facts that validate or refute the predictions. My prediction is that in two to three years, housing prices will decrease, but it will be a soft landing and there won’t be blood in the streets.
Moving the tech stock bubble to a housing bubble and slowly deflating that one is much less bad than what happened in US-1929 or Japan-1989. I do think that if Greenspan had followed the tight money policies that some have suggested here that you wouldn’t have had a housing bubble, but you would have had something far worse.
“The way I try to figure out if I’m on the right track is to predict and to look at facts that validate or refute the predictions. My prediction is that in two to three years, housing prices will decrease, but it will be a soft landing and there won’t be blood in the streets. ”
Great so in 2 or 3 years we’ll be able to test your prediction and see whether we’re on the right track. That’s fine if your prediction pans out, but if it doesn’t, then today you’ve just made a bad situation worse.