Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

China’s Reported Tourism Deficit Got Big, Fast

by Brad Setser Thursday, July 28, 2016

Several times I have alluded to the suspicious rise in China’s tourism deficit. The tourism deficit more than explains the rise in China’s services deficit, and the rise in the services deficit explains why the increase in China’s current account surplus hasn’t tracked the increase in China’s goods surplus.

Why the suspicion? Simple. Tourism imports soared in 2014, at a time when all other Chinese imports were either falling or experiencing a slowdown in the pace of growth.


The actual data on tourism “visits” tells two stories.

There is a big falloff in Chinese tourism to Hong Kong and Macau, falling retail sales in these traditional destinations for Chinese tourists, and soft Asian sales of “luxury” goods.

But there is also no doubt destinations like Thailand and Japan (remember the yen move) saw a big increase in arrivals from China.

Sum it all up though, and the number of tourists travelling abroad in 2014 looks to have increased by about 10 percent (from 100 to 110 million or so) in line with past growth. Look at this Goldman Report.* With an increase in nominal spending per tourist it is possible to imagine tourism growth of say 20 percent. Not 80 percent. 2015 seems similar. Visits to Hong Kong and Macau fell.

So what is going on in the balance of payments (BoP) data? No doubt many things. China seems to have revised its methodology for “counting” tourism in the balance of payments in some way, leading to a jump in both imports and exports in 2014. Tourism imports rose by a giant $100 billion in 2014 (with a slowing economy) after growing by $40 billion in 2013. Tourism exports were adjusted up too, but not by nearly as much.

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Just How Big Is China’s External Surplus? Measurement Matters

by Brad Setser Wednesday, July 27, 2016

Here are two views of China’s (goods) trade. Both use the exact same data.

The first presents China’s goods exports and imports as a share of the rest of the world’s GDP:


The second presents China’s goods exports and imports as a share of China’s own GDP:


From the point of view of the world, the gap between China’s goods exports and its imports is as big as it has ever been. And China’s exports were, until recently, rising as a share of world GDP.

From the point of view of China, exports have become less important as a share of China’s own GDP. And so have imports

Though I would note the “rebalance” away from exports came immediately after the global crisis, when China engaged in its massive credit fueled off balance sheet stimulus that juiced investment. Since 2011 or so, both China’s exports, net of processing imports, and its manufacturing surplus have both been fairly stable as shares of China’s GDP (exports net of processing are about 15 percent of China’s GDP, and the manufacturing surplus is 8-9 percent of China’s GDP).

Stories that suggest that China has become significantly less competitive in manufacturing strike me as off, particularly now that the RMB has depreciated from its high last summer. China’s surplus in manufacturing reflects the balance between exports, where growth has slowed subsequent to the renminbi’s 2014-15 appreciation (though it could pick up again now that the appreciation has largely been reversed) and China’s imports. Export growth and export job growth has slowed. But manufactured imports—including imports of components—are falling sharply as a share of China’s GDP. More and more of the components in goods that are assembled in China are also now made in China. I would bet the imported content in Huawei’s network equipment is modest. The IMF found in 2015 (see Box 10) that China hasn’t lost all that much global market share in labor intensive exports even as it moved up the electronics value chain.

And the goods needed to meet China’s own demand are increasingly made in China.

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Italian Banks, Pre-Stress Test

by Brad Setser Sunday, July 24, 2016

From afar, it seems like the wheels of European policy may be moving towards some kind of near-term fix for either Italy’s banks—or, more likely, for the specific problems of Monte dei Paschi di Sienna.

The risk here is obvious. The intersection of Italian politics and European rules is pushing for the most narrow of solutions, one that will not recapitalize the broader Italian banking system. At least not quickly.

The recapitalization need even under pessimistic assumptions is actually fairly modest, as such things go. Less than Spain spent on the two rounds of recapitalization that were required to solve Spain’s banking crisis. Maybe less than the €30 billion Germany injected into Commerzbank and a few others in 2009, or the massive “bad” bank it set up for Hypo Real Estate (Hypo Real Estate was not retail funded, and even now, it seems like it has some performing subordinated debt—who knew). Probably less, relative to the size of Italy’s economy, than the €22 billion that the Dutch put into ABN-Amro.

But Italy’s government clearly doesn’t want to bail-in the heavily retail holders of Italian subordinated debt. Monte alone has about €5 billion in subordinated debt, and over 60 percent of that seems to be held by retail investors. A smaller subordinated debt bail-in late last year was politically controversial.

And Europe wants Italy to respect the banking and competition rules, which have been interpreted to require some form of subordinated debt bail-in. There are ways around the ”banking union” Bank Recovery and Resolution Directive (BRRD) bail-in requirement (8 percent of liabilities, a sum that implies a substantial write down of the subordinated debt). Europe’s rules already include an exemption for a precautionary recapitalization to address difficulties identified in a stress test. Getting around the state aid requirements seems harder, though perhaps not impossible if some of the flexibility used in the global financial crisis remains.*

The easiest way to protect the retail investors in the subordinated debt and to avoid violating any European rules, obviously, is for the banks to continue to carry the bad loans on their books at an inflated mark. There is a reason why nothing much has been done.

The current stress tests are rather narrow. They only will cover a subset of the Italian banks now supervised by the ECB. On their own, they will not force a broader solution.

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Fiscal Stimulus, Korean Style

by Brad Setser Sunday, July 24, 2016

Korea is one country that unambiguously has fiscal space right now. Low government debt. The on-budget deficit was, until recently, more than offset by the off-budget surplus in Korea’s social security fund. With a slowing economy and a massive (almost 8 percent of GDP in 2015) current account surplus, Korea unambiguously should be running an expansionary fiscal policy. Read Summers and Eggertsson.

But I do not quite see how “paying down debt” can be part of a true fiscal stimulus package.

Nor do I see how a fiscal stimulus can do much to spur the economy if it doesn’t create a new borrowing need. The Wall Street Journal:

“Unlike the heavily debt-funded supplementary budget last year, this year’s supplement will narrow the estimated deficit marginally, thanks to a partial debt repayment by the government. The finance ministry expects the country’s sovereign debt to stand at 39.3% of gross domestic product in 2016, lower than its initial estimate of 40.1%”

Emphasis added.

It seems like Korea’s stimulus will be financed by “surplus” tax revenues, not new debt.

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East Asia’s (Goods) Trade Surplus

by Brad Setser Friday, July 22, 2016

European and U.S. politics have gotten a lot of attention this summer.

But one of the biggest shifts in the global economy over the past two years has been the powerful return of Asia’s trade surplus. A $50 billion monthly (goods) surplus in China is quite big. China’s annual goods surplus is $600 billion, more than it has ever been as a share of world GDP.*

Other major economies in northeast Asia are also running significant surpluses. Korea and Taiwan have large surpluses in goods trade, and Japan has swung back into surplus as well. The combined surplus of all of Asia now tops $700 billion.


One note: In the graph, I netted Hong Kong’s deficit from China’s surplus. I suspect some goods sold to Hong Kong end up in China.

If you think this is all because of lower oil prices, think again. Northeast Asia’s non-oil goods surplus is also up. The timing of the rise though is a bit different. The non-oil surplus rose in 2014, before the big move in global commodity prices.


You can see the underlying sources of China’s trade surplus when it is disaggregated by region. In dollar terms, China’s bilateral surplus with its main markets for manufactures in the advanced economies (I included Hong Kong here along with the United States and the European Union because of transshipment) increased after the global crisis. The rising surplus with the large advanced economies was offset by a rising deficit with the world’s commodity exporting economies.

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China Sold Reserves in June, Just Not Very Many

by Brad Setser Thursday, July 21, 2016

Both of the key proxies for China’s actual intervention in June are out.

The PBOC’s balances sheet shows a $15 billion dollar fall in reserves.

And the State Administration on Foreign Exchange (SAFE) data on foreign exchange settlement by the banking system (the PBOC is treated as part of the banks) shows $18 billion in sales from the banking system (using sales for clients, not net settlement).

They paint a consistent picture. The gap between the modest sales reported in the data and the rise in headline reserves ($13.4 billlion) is almost certainly from the mark-to-market gains on a portion of SAFE’s book. The portfolio of high quality bonds should have increased in value in June. Friends who read Chinese say SAFE has admitted as much on its website.

The more interesting thing to me is how modest the sales were, at least when compared to other periods of depreciation (against the dollar) in the last two years.


Either the carry trade unwind is over or the controls work. Or somehow this most recent depreciation hasn’t produced expectations for further depreciation, even though the crawl down against the basket has been pretty stable.

It is a puzzle, at least to me.

For the conspiratorially minded, the banks do look to have sold foreign exchange from their own accounts in June, as they did last August and this January. But the sales from their own account were modest—$5 billion versus $85 billion last August and $15 billion in January. And the settlement data for forwards also shows a modest reduction in the net forward book of the banks in June. Net of the change in forwards, total sales in the settlement data look to be just under $15 billion.

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How Many Reserves Does Turkey Need? Some Thoughts on the IMF’s Reserve Metric

by Brad Setser Tuesday, July 19, 2016

Turkey has long ranked at the top of most lists of financially vulnerable emerging economies, at least lists based on conventional vulnerability measures. Thanks to its combination of a large current account deficit and modest foreign exchange reserves, Turkey has many of the vulnerabilities that gave rise to 1990s-style emerging market crises. Turkey’s external funding need—counting external debts that need to be rolled over—is about 25 percent of GDP, largely because Turkey’s banks have a sizable stock of short-term external debt.

At the same time, these vulnerabilities are not new. Turkey has long reminded us that underlying vulnerability doesn’t equal a crisis. For whatever reason, the short-term external debts of Turkey’s banks have tended to be rolled over during times of stress.*

And, fortunately, those vulnerabilities have even come down just a bit over the last year or so. After the taper tantrum, Turkey’s banks even have been able to term out some of their external funding by issuing bonds to a yield-starved world in 2014, and by shifting toward slightly longer-term cross-border bank lending in 2015 and 2016 (See figure 4 on pg. 35 of the IMF’s April 2016 Article IV Consultation with Turkey) And while the recent fall in Turkey’s tourism revenue doesn’t look good, Turkey also is a large oil and gas importer. Its external deficit looks significantly better now than it did when oil was above a hundred and Russian gas was more expensive.


Turkey doesn’t have many obvious fiscal vulnerabilities; public debt is only about 30 percent of GDP. Its vulnerabilities come from the foreign currency borrowing of its banks and firms.

There is one more strange thing about Turkey. Its banks have increased their borrowing from abroad in foreign currency after the global financial crisis, but there hasn’t been comparable growth in domestic foreign currency lending. Rather, the rapid growth has come in lending in Turkish lira, especially to households.

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The Outsized Impact of the Fall in Commodity Prices on Global Trade

by Brad Setser Friday, July 15, 2016

Global trade has not grown since the start of 2015.

Emerging market imports appear to be running somewhat below their 2014 levels.

Creeping protectionism? Perhaps.

But for now the underlying national data points to much more prosaic explanation.

The “turning” point in trade came just after oil prices fell.

And sharp falls in commodity prices in turn radically reduced the export revenues of many commodity-exporting emerging economies. For many, a fall in export revenue meant a fall in their ability to pay for imports (and fairly significant recessions). For the oil exporters obviously, but also for iron exporters like Brazil.

Consider a plot of real imports of six major world economies: Brazil, China, India, Russia, the eurozone and the United States, indexed to 2012. The underlying data isn’t totally comparable. I used seasonally adjusted real goods and services imports from the National Income and Product Accounts (NIPA) data for Brazil, India, Russia and the eurozone. For China I used an index of import volumes, and smoothed it by taking a four quarter average (necessary, alas as the seasonality overwhelms the trend, even though it doesn’t make the data for China fully comparable with the data for the others countries). And for the United States I wanted to take out oil imports, and the easiest way to do that is to look at real non-petrol goods imports.

Import Vols

I see five things in this data:

(1) The 20-30 percent fall in Brazilian and Russian imports from their 2012 levels, which rather obviously is mostly tied to changes in their terms of trade. Brazil and Russia are fairly large economies, and these are giant falls.

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China’s June Trade Data

by Brad Setser Thursday, July 14, 2016

One small thing to remember: For China, the yuan value of its exports matters more than the dollar value of its exports. And the yuan value of China’s June exports was up slightly (buried in the Reuters story: “Exports in yuan terms rose 1.3 percent”).

One other thing to remember: China’s export prices are falling. For lots of reasons. But it is clear that Chinese exporters have not held their dollar prices constant and pocketed the gains from a weaker currency. Export prices, in yuan terms, have been running about 5 percent below their 2015 levels.

The information that allows the export price index for June to be inferred isn’t yet out, but if you project May prices into June, it is possible to estimate the June rise in export volumes. I get a modestly positive number. And looking at the year-over-year changes in the trailing 3 month averages (all monthly trade data has a lot of noise, so I always try to smooth a bit), China’s exports look to be growing significantly faster than say U.S. exports.


As one might expect based on exchange rate moves.

(As an aside, the jump in export volumes in early 2013 is fake; it reflects over-invoicing, and the fall in early 2014 is equally fake, as the over-invoicing falls out of the data. The strong 2014 and weak 2015 are in my view real.)

And if you like your data pure, without any adjustments, the same basic story shows up in the data showing the year-on-year changes in monthly volumes that China directly reports. The last data point in this series is from May, and I used a 3 month trailing average.

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Can Europe Declare Fiscal Victory and Go Home?

by Brad Setser Monday, July 11, 2016

Rules are rules and all.

But the application of poorly conceived rules is still a problem. Especially in the face of a negative external shock.

The eurozone’s fiscal policy is, more or less, the fiscal policy adopted by its constituent member states.

Wolfgang Schauble (do follow the link) should be happy: Europe’s fiscal policy is almost entirely inter-governmental.

The eurozone’s big five—Germany, France, Italy, Spain, and the Netherlands—account for over 80 percent of the eurozone GDP. Summing up their national fiscal impulses is a decent approximation of the eurozone’s aggregate fiscal policy.

And, building on the point I outlined two weeks ago (and that my colleague Rob Kahn echoed on his Macro and the Markets blog), 2017 could prove to be a real problem. Bank lending now looks poised to contract, and eurozone banks face (yet again) doubts about their capital. And the sum of national fiscal policies—best I can tell—is pointing to a fiscal consolidation.

In the face of the Brexit shock, standard (MIT?) macroeconomics says that a region that runs a current account surplus, that has a high unemployment rate, that has no inflation to speak of, that cannot easily respond to a short-fall in growth by lowering policy interest rates (policy rates are, umm, already negative, and negative rates are already, cough, adding to problems in some banks), and that can borrow for ten years at a nominal interest rate of less than one should run a modestly expansionary fiscal policy.

The eurozone as a whole clearly has fiscal space. The eurozone’s aggregate fiscal deficit is lower than that of the United States, Japan, the United Kingdom, and China. Adjusted for the cycle, the IMF puts the eurozone’s overall fiscal deficit at about 1 percent of GDP (without adjusting for the cycle, the eurozone’s overall deficit is around 2 percent of GDP). Even without any cyclical adjustments, the eurozone now runs a modest primary surplus, and simply refinancing maturing debt at current interest rates should lead to a lower headline deficit.

But the eurozone isn’t a unified fiscal actor. Right now the countries that could run a bigger fiscal deficit without violating the eurozone’s rules have said they won’t, and the countries that are already running deficits that violate the rules are facing new pressure to comply with the rules. The aggregate fiscal stance of the eurozone thus is likely to be contractionary.

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