Just about everyone’s trade balance with China is deteriorating
About the only thing I didn’t like about Floyd Norris’ Saturday New York Times article was the title “Not Everyone Is in the Red on Trade With China.” And to be honest, the title — which seems to allude to the by now outdated argument that China’s surplus with the US is offset by a deficit with the rest of the world — didn’t really match the content of the article, or fully match the conclusions that emerge from the useful charts that accompanied the article.
The article essentially argues that China’s the rise in China’s overall surplus is no longer simply a product of strong growth in Chinese exports to the US.
Norris notes that:
- China now runs a very large trade surplus with Europe
- China’s exports to the US are growing more slowly than its exports to Europe and the rest of the world. In part, that is because the US is growing more slowly than Europe and the rest of the world. But I suspect it also has something to do with the fact that the RMB has appreciated — albeit very modestly — against the dollar while it has depreciated against many other currencies.
Norris uses the Chinese trade data, but he also recognizes its flaws: the Chinese data overstates Chinese exports to Hong Kong and understates Chinese exports to the US and Europe, and thus understates China’s surplus with the US and Europe. And even graphs based on the Chinese data — see the graphics that accompany Norris’ article – tell the basic story behind the recent rise of China’s global trade surplus well.
Indeed the charts — though not the text of the article itself, highlight a third key point.
China’s trade deficit with the world (excluding the US and Europe) is now shrinking. The IMF’s regional outlook and the World Bank’s Asian outlook both specifically noted that China’s deficit with the rest of Asia is now falling. That is a change from the 2002-2004 period. Back then, the increase in China’s trade surplus with the US and Europe was largely offset by a rise in China’s deficit with the rest of the world. By contrast, the surge China’s surplus with the US and Europe over the past two years hasn’t been associated with a widening of China’s deficit with the rest of the world. Indeed, China’s exports to the world — once the US and Europe have been taken out — are now growing faster than China’s imports from the world, and far faster than China’s exports to the US.
Unless that changes, China’s surplus looks set to continue to rise. So too will China’s capacity to use its global surplus to finance the United States’ global deficit — not just the United States’ bilateral deficit with China. Some of China’s now large surplus with Europe gets channeled into the US bond market. Or at least used too …
21 Responses to “Just about everyone’s trade balance with China is deteriorating”
China has a large trade deficit with Taiwan. I often wonder if it has a strategic reason. China may deliberately lets this deficit be large and in the meantime captures the potential export markets of Taiwan. In the future, China may slow/block the import from Taiwan. Such a step would make the export companies of Taiwan allies of China in its intention to peacefully unify Taiwan with the mainland.
Taiwan also supplies lots of high end electronic components for final assembly in China — while the China is just the final assembly point for parts made elsewhere in Asia story is over-stated, it does have some truth. Taiwanese firms are huge investors in China as well.
Last week I saw a chart from Goldman suggesting that China (adjusted for HK re-exports) now exports more to the EU than it does to the US, which I found astonishing. One wonders if we won’t start to see a very substantial deterioration in the EU balance with China before long, particularly given the exchange rate effect….
There is an article in the FT today on yet another country looking to set up a SWF. This time it is Japan. It seems to me that the economic arguments for having a SWF are mistaken, but i’d like to get other’s thoughts.
The argument for SWFs basically go along the following lines:
- Country X has large foreign currency reserves, which earn low returns by sitting in treasuries
- Better returns can be achieved by actively managing these for reserves
- As a result of which the govt of country X can increase domestic spending with less need to increase taxes.
There is one key difference between central banks and other entities. Central banks have the ability to print new money. In fact, that is how they acquired the forex reserves in the first place, with the purpose of maintaining a weak local currency. Increasing investment returns on this hoard of dollars means that the CB has even more dollars to sell for local currency. If the CB couldn’t sell the dollars in its FX reserves for fear of rapid local ccy appreciation before the SWF exists, it can’t possibly sell them after the SWF exists.
Separately, the local ccy that the the CB receives from selling dollars are not revenues for the govt and so is irrelevant for the govt’s ability to spend.
Given that the economic reasons for SWFs don’t stack up, i can only think that the real reason for SWFs is political. It provides govts with defacto control of resources, technology, knowledge, etc beyond its boundaries of sovereignty.
My take on SWF economics point raised above:
CBs normally sterilize FX reserve accumulation by sales/issuance of government debt, which doesn’t affect the monetary base (however, they have the option of using reserve accumulation to affect the monetary base if desired).
(Enhanced) earnings on FX reserves increase the book value of FX reserves. Other forms of appreciation (FX rates or equity values) also increase their market value. Increases in FX reserve value require no additional sterilization – they increase the ‘equity’ value of the CB (in which the government holds CB ‘stock’), and the NPV of consolidated government cash flows. Thus, increases in the value of FX reserves, from whatever source, ceteris paribus, are a net increase in government ‘wealth’ (or a decrease in government insolvency). And increases in the value of FX reserves provide the CB/government with more market value firepower to retire the original sterilization bonds that funded the book value accumulation of FX reserves through intervention.
Effects on the monetary base and money supply can be separated from sterilization flows just as they are in the normal course. It’s a separate issue for the most part, but there’s no unique intersection resulting from increased returns on FX reserves. There is also an issue that some CBs operate with separate FX reserve funds, separate from the CB balance sheet, but linked to government revenues and cash management. SWFs are a direct extension of this balance sheet bookkeeping. In any event, CB revenues in fact are for the benefit of the government, ceteris paribus, because CB profits (they have bookkeeping profits) are distributed to the government.
I agree with your point that the value of FX reserves is essentially ‘trapped’ from being released until the CB is willing to sell at some exchange rate. (This latter point also applies to realizing the benefits through lower taxes).
“Last week I saw a chart from Goldman suggesting that China (adjusted for HK re-exports) now exports more to the EU than it does to the US”
For at least a year now, I have been pretty confident, that China’s next target is Europe. About a year ago there was a NY Times article with figures showing that China was overtaking the US in goods export at that time, and also showing that Europe had become China’s main export market. Someone here on this blog also quoted that article. And the reason why Europe still shows a surplus in trade and in the current account is that the statistics show the euro-area, which has a huge surplus with the UK and some other non-euro countries. The Chinese trade surplus with Europe grows steadily, as shown in the ECB monthly bulletins. If China could push the euro-surplus high enough, then it could diversify its reserves in a natural way.
I am interested to hear about this article, which does not appear in my UK paper edition of the FT. Thanks for mentioning it.
I agree totally with your doubts about the idea of a SWF for Japan. This article exemplifies the woolly thinking on this subject:
(1) “Such a fund would alleviate yen appreciation pressure”.
Appreciation?…where has this guy been lately? In fact, if Japan’s reserves are considered excessive, now would be a good time to buy yen and pay down some government debt, as the FT itself has argued in the past. His idea that a reduction in headline reserves by shifting some to a SWF might contribute to this effect is laughable.
(2) It would “promote the country as an international financial centre”.
What, like Abu Dhabi, the home of reputedly the largest SWF?
(3) It would be profitable and could provide an alternative to raising VAT.
Maybe, in the same way that increasing government borrowing and investing the proceeds in spread product and currency speculation would be. There are good reasons why governments do not normally do this.
(4) Japan needs to take more risk because it has an ageing population.
Conventional pension fund thinking would suggest precisely the opposite conclusion.
I want to associate myself with jkh’s comments, which seem right to me. the need for capital gains on the investment is greater if there is an expected currency depreciation. and from a flow standpoint, the central bank would rather not hold assets that have lower returns than its liabilities — something that becomes an issue if cash/ currency declines as a share of total CB liabilities and if the int. rate on sterilization bills is high. this is less of an issue for Japan.
i find it interesting that japan is talking of a SWF when it really hasn’t exhausted the potential means of getting higher returns on its existing reserves (i.e. they are mostly still in treasuries). then again the reserves are the MOF’s not the BOJ’s, and the MOF financed them by issuing MOF bonds, so if it wants to sort of do a singapore style transition into a GIC, the basic structure seems to there — basically, borrow locally to buy globally, and in the process, have the gov take the exchange rate risk.
Bombardier, Chinese Firm Plan Regional-Jet Effort: Canada’s Bombardier Aerospace and the leading Chinese government-owned aerospace manufacturer signed a strategic cooperation agreement intended to help each company develop new regional jet models.
Japan must take more risk now for future generations: The administration of Shinzo Abe is investigating the formation of a Japan Investment Corporation that would manage a portion of Japan’s nearly $1,000bn of foreign exchange reserves.
“Canada has reached a trade agreement with India, one of the world’s fastest growing economies, which will guarantee fair legal treatment for each other’s investors. The deal, which will encourage Indians and Canadians to invest more money in each other’s economies, reflects a deepening of ties with India, a country with economic growth that could one day outstrip China’s…” http://www.theglobeandmail.com/servlet/story/RTGAM.20070616.windiatrade0616/BNStory/National/home
“…Even in a long term structural perspective I do not see the Euro replacing the dollar as the global reserve currency, that honour is going to go to the Indian Rupee…” claus vistesen
Michael Sesit penned a Bloomberg editorial today and is rather sanguine about SWFs (from the point of view of the recipients of investment). However, Machiavelli would have had a word or three of advice to recipient nations regarding the potential for abuse and leverage by their erstwhile benign benefactors. Of course beggars can’t always be choosy, but it seems to me that the potential nefarious threats of shareholders and creditors alike using their investment positions for influence outside the realm passive investment returns are sufficiently real to worry about powerful nation-states with ultra-large investment holdings pursuing the same.
Now, no one wants to deny peoples (through their govts) the right to invest and grow their assets legitimately, but perhaps Bretton-Woods 3 would – by multi-lateral accord – address the very legitimate concerns regarding potential sovereign abuse by SWFs. Possible ways to address this are: non-trade-able tranches of Govt Debt that must be held until maturity; non-voting classes of equity or a-priori agreements to grant votes to non-profit shareholder authority (or Larry Summers!); separate transparent reporting and filing procedures; firm agreement NOT to use ownership influence or control for any political means whatsoever or for influencing any aspects of corporate governance). These would go a long way to assuaging fears – real and imagined – that SWFs represent a benign, stabilizing force in markets, rather than vehicles that might at some point in the future morph into something resembling a secretive Swashbuckling Buccaneering Hedgefund that creates and exacerbates financial market volatility. Recent experience with Dr Sakikibara’s massive “raid” on dollar shorts, and the huge profits therefrom should give policymakers urgent cause for nailing down some code of conduct before SAFE of ADIA engineers some similar market operation for parochial benefit at the expense of creating systemic volatility.
re: “If China could push the euro-surplus high enough, then it could diversify its reserves in a natural way.”
i’m intrigued… so if BWII evolves into ‘BWIII’, w/ dual (dueling) global reserve currencies and europe cranking up its nascent (mortgage?) debt machine to feed the beast, what does that entail?
Cassandra: Please do elaborate, and share more info for those who do not know the details, on your point: “Recent experience with Dr Sakikibara’s massive “raid” on dollar shorts, and the huge profits therefrom should give policymakers urgent cause for nailing down some code of conduct before SAFE of ADIA engineers some similar market operation for parochial benefit at the expense of creating systemic volatility.”
The IMF adopted new currency policies that will identify countries that manipulate their currencies in ways that give them an edge in foreign trade.
China’s banking regulator said it will punish eight domestic banks for improper oversight of loans that allowed two state firms to funnel money into the country’s red-hot stock market and property investments.
JSP – I was merely saying that IF an official govt organization – the BoJ – was willing to step in and buy USD for Yen in virtually unlimited size to change the course of the market for the benefit of Japanese export Co’s (and its own P&L account) and hold it as “a trade”, ostensibly because they could, we should be skeptical of claims that SWFs are by definition benign. I personally may trust the Norwegians implicitly for their political sobriety and honestness (and work on the mid-east Oslo accords), but they are I believe unusual in this regard and the exception. And of course there the east Asian authorities , and Bank Negara – the “Bill The Cat” of Central Banking. IF the intentions of the SWFs are benign, the surplus nation sugardaddy’s should have no problem signing up to a charter to defines what they can and cannot do with their hordes (including dollups to delegated managers). THAT would be stabilizing.
In a world of comprehensive trade and capital flows, one might ask what is so special about the intersection of government intervention and the equity markets. It’s a slippery slope from FX intervention to current account surpluses and then to gluttonous reserves and finally to shortages of investment opportunities. But if a country and its central bank navigate this slope, then why not then take a flyer off the big ramp into the stratosphere of equity returns?
The same dimensions of government and equities arise in the case of public pension systems. The Canada Pension Plan, which invests vigorously in equities (including private equity), is one model that warrants study in terms of its effective separation of investment policy from current government policy. This is done through constitutionally written safeguards. (It is a model that should be studied much more closely by those now looking at the US Social Security System as a macro investment alternative to the individual account idea). This sort of structure might be considered as well for reserve investment organizations.
But perhaps a more crucial aspect lies in the distinction between foreign exchange reserves and public pension funds per se. The policy thrust for outsized foreign exchange reserves seems more opaque and potentially sinister at the macro level, than the relatively clear objective of meeting minimum standard, micro actuarial liabilities, citizen by citizen (libertarian oriented folk might still have a problem with the latter). Consider the difference between an actuarial liability profile for a pension plan, and the same in the case of foreign exchange reserves (i.e. when do we think we are going to use all this dough to start buying ‘stuff’ rather than investments?)
Conflict of interest risks associated with equity involvement might be addressed, but there are overarching risks associated with the purpose of the money. The asset-liability management problem and the asset mix problem dominate the equity selection problem, just as they would in any investment organization. And they probably complicate potential conflicts. Unfortunately, this horse (analogy switch), without its equity apparel, left the barn some time ago.
Everyone’s trade balance is deteriorating? No wonder Wassenaar has gone tts up. In these new competitive dual-use markets, all that sovereign capital will be very helpful in extracting technology-transfer concessions. When China gets a toehold in those industries it won’t be long till the Podunk Police Department can afford its own ballistic missile defense system.
“NUCLEAR SUBMARINES, Heavy Battle Tanks, Fighter Jets and Aircraft Carriers… For three decades and more, Russia has been, and today still is, India’s largest trading partner…” http://www.india-defence.com/reports-3319
“…President Luiz Inácio Lula da Silva… visiting India in an effort to quadruple trade to $10 billion and talking of a special partnership… Apparently, China is a problematic trading partner for Brazil… Chinese investment rolled in far more slowly than anticipated, while cheap goods flooded the domestic market…” ttp://www.iht.com/articles/2007/06/17/business/sxpesek.php
“Orders from Middle East countries potentially worth more than USD40 billion are on the agenda at the Paris Air Show this week, setting the stage for a ramping up of competition between US and European aerospace companies. “With oil prices surging from USD50 to around USD70 a barrel this year, the Gulf oil states now have cash to fund defence modernisation and they want to spend this money quickly,”…” http://www.janes.com/defence/air_forces/news/jdw/jdw070618_1_n.shtml
I didn’t have to read further than the title (though I did, of course). I just smiled.
Yes, the situation is moving right along as some of us projected a few years ago. Dave Stanley (DOR) could fill in some of the remaining blanks…
Economic Hydrology Theory (EHT) really did work as predicted. And I posted it on your fine blog in 2002 or 2003. I still have the original document.
You’re to be respected for keeping up with all that is happening.
Wait until China ramps up sufficiently on high technology and R&D internal feed to suck up chunks of those global markets. That’s the next leap.
All the best, Brad.
RE SWFs & China (amoung others). There is no doubt that Malaysia’s Negara was in fact using its privileged access to other CBs in the 90s to actively speculate in foreign exchange. And it took large punts. That is until other CBs stopped sharing info with them, and a few strategic bets went historically wrong against Negara. I think the final loss was close to $17 billion, but I have no links, sorry. I can only imagine what damage these SWFs could do given their size now compared to in the 90s?