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LinkedInChina flirted with the radical step of letting its exchange rate rise to …. 7.987 on Monday. but apparently that was too much. Yesterday, the exchange rate closed at 7.991, back in the PBoC’s comfort range.
This year, the RMB has appreciated by maybe 1% against the dollar – and fallen by a lot more against the euro. In the meantime, China’s trade surplus continues to surge. It reached $14.5b in June, powered by a 25% increase in exports (y/y).
China’s first half trade surplus is about 50% bigger than its surplus in the first half of 2005, which itself was considered quite large. Assume that holds for the year. China’s trade surplus (with the world) would rise to $150b or so, up $50b from 2005. Its current account surplus would be even bigger – perhaps $200b. All that interest income on China’s $1 trillion in reserves! I will though concede there is something a bit strange with China’s current account number, since some of the income surplus should be offset by profits on foreign FDI in China.
What of the other big Asian surplus country – Japan. Is the resurgence in domestic demand leading Japan’s trade surplus to fall? Uh no. Its May trade surplus was up substantially from a year ago. And with the interest income on Japan’s massive holdings on Treasuries rising, its current account surplus should be growing too.
The impact of the resurgence of Japanese growth on the US trade balance strikes me as massively overstated. Japan has a big economy. But it doesn’t import that many manufactured goods, as least not relative to its GDP. And most of the goods that it does import don’t come from the US. You need an awfully big elasticity for 2% Japanese growth to generate a huge surge in the dollar value of US exports to Japan (around $55b in 2005). Particularly with the yen very weak in real terms. Japan needs to grow with a strong yen — not grow with a weak yen — to contribute to global rebalancing.
The rest of developing Asia — counting India — actually doesn’t have much of a surplus anymore. And Korea's surplus is falling. Oil imports. (Edited for greater precision)
Indeed, Bill Pesek makes a point that Americans who argue that since the US can never compete with cheap Chinese labor, it should therefore want China to keep its exchange rate low to keep the cost of US imports from China down might want to consider.
China is not just running a massive trade surplus with the US. It is also running a huge trade surplus with Bangladesh. For that matter, Chinese goods are taking market share in Africa as well. There supposedly is a store in Namibia called “China cheap.” No false advertising.
Of course, even as China competes with emerging economies who produce manufactured goods, it sucks up commodities from the world.
With oil fluctuating between $70 and 75 it is safe to say that the other big surplus region in the global economy – the arc of oil exporters that runs from Venezuela to West Africa to North Africa to the Middle East up through central Asia to Russia – has a growing surplus.
Contrast that with financial turmoil in a set of emerging market deficit countries – whether Turkey, Hungary or India. I suspect these countries will either see their deficits shrink (Turkey) or not grow as fast.
Rising surpluses in the surplus regions of the world economy. Financial turmoil in emerging markets with current account deficits.
The obvious implication for the global balance: rising current account deficits in other industrial countries.
Surplus in one place have to be offset by deficits elsewhere. And with two big oil importers – China and Japan – posting rising surpluses, that means even bigger deficits in other oil importers.
The only big question is whether the increase in the deficit of oil importers will come in Europe. Or in the US.
I would bet on a bit of both. But it would surprise me to see the US deficit expand more.
Everyone is talking about a forthcoming slowdown in US (non-oil) import growth on the back of a slowing US economy. Morgan Stanley’s house view seems to be that the US current account deficit has peaked. I am not as sanguine. I think they may be looking at only one side of the ledger. I expect that US import growth will slow, at least on a y/y basis. But that slowdown may be matched by a slowdown in US export growth. Boeing can only boom once. The lagged impact of the dollar’s slide to 1.25 (v. the euro) in 2003 will wear off. Chinese import growth may slow a bit. Its boom in the first half was a bit too fast to be sustained. The booms in consumption in India and Turkey will slow, if not disappear. The oil exporters have plenty of scope to increase spending. But what are the chances they will buy American?
Ben Bernanke: This trend cannot continue forever, as it would imply an ever-growing interest burden owed to foreign creditors… While it is likely that current account imbalances will be resolved gradually over time, there is a small risk of a sudden shift in sentiment that could lead to disruptive changes in the value of the dollar and in other asset prices.
To reduce its dependence on foreign capital, the United States should take action to increase its national saving rate. The most direct way to accomplish this objective would be by putting federal government finances on a more sustainable path. Our trading partners can help to mitigate the global imbalance by relying less on exports as a source of growth, and instead boosting domestic spending relative to their production. In this regard, some policymakers in developing Asia, including China, appear to have recognized the importance of giving domestic demand a greater role in their development strategies and are seeking to increase domestic spending through fiscal measures, financial reforms, and other initiatives. Such actions should be encouraged. For these countries, allowing greater flexibility in exchange rates would be an important additional step toward helping to restore greater balance both in global capital flows and in their own economies.
I think growth of the CAD will slow or maybe even reverse for a period. Most of the debt growth in the US over the past couple of years has been in real estate and the real estate bubble is popping. I don’t see another avenue for debt growth in the US outside of federal debt. One bad possibility is if a lack of borrowing demand in the US causes interest rates to drop back to low levels, which could ignite another round of real estate bubbles and boost the CAD up even higher.
And if Morgan Stanley or Bernanke believed otherwise to any significant degree could they actually say so?
Aside from the obvious, that’s what I really like about Roubini and Setser. They are beholden to no one and nothing except their own beliefs and consciences. If they are wrong then they are, as all good professionals should be, honestly wrong. It’s the kind of wrong that I for one find it particularly easy to live with.
I guess India won’t be adding much in the days to come. It has its own Current Acct deficit (it doubled Y-o-y)
Russia isn’t too interested either.
Its just china and Saudis now. China is in a bad shape really. Should someone pull the plug, their reserves will lose heavily in valuation losses.
the US government doesn’t dole out i-banking business on the basis of what i-banks research teams say about the United States, unlike some countries (China …). Berner and the rest of the MS team think the US CAD will peak soon for much the same reasons as Charlie. I don’t trust the banks on China — they all tilt toward Beijing’s line. But I suspect their US economics research is as unbiased as any out there.
They just have reputations to protect, and generally prefer not to make too bold a forecast, since, well, bold predictions about the US economy are more often than naught wrong. I.e. No one has made any money — or made any correct forecast — betting against the US consumer.
That said, i do sometimes think the i-banks US research teams are a bit too US centric. They are revising their US CAD forecasts down on the basis of the q1 data even as surpluses are being revised up (and deficits down) on the back of q2 data/ q2 market turmoil in the rest of the world. and the two forecasts don’t necessarily jive.
brad’s money line :
“I think they may be looking at only one side of the ledger. I expect that US import growth will slow, at least on a y/y basis. But that slowdown may be matched by a slowdown in US export growth ”
and what if we all
get caught
in a global
effective demand down draft ???
to avoid a down spiral
the key here is sequence right ??
the export surplus states
need
to up
their effective demand first
both the induced faster
import growth
and the domestic ex subing
then and only then
should uncle
cut his fiscal deficit
and household credit slurry
so far gentle ben
seems to prefer ass backwards
pain first pie later
there’s always
two paths adjustment can take
policy can
speed up the slow rollers
and
temporarily
take the system above trend
or slow the high rollers
and take the system temporarily below trend
bankers prefer below
humanist need to insist on above
Gcs:
“there’s always two paths adjustment can take … policy can speed up the slow rollers and temporarily take the system above trend, or slow the high rollers and take the system temporarily below trend. bankers prefer below, humanists need to insist on above”
an interesting way to look at the tension in the system. of course greenspan served as a banker who (effectively) preferred above trend. seems like he was running out of room to do this on his own, though. unless asian imports rise, or domestic demand there rises enough to substitute for US demand, the game may be played out.
maybe its really Hu Jintao who needs to start boosting the “slow rollers” in your metaphor. he isn’t any more obvious a “humanist” than Greenspan.
A bond that insures against instability: GDP-linked bonds should be a core element of government financing both for developed and creditworthy developing countries, write Stephany Griffith-Jones and Robert Shiller.
‘appreciated by maybe 1%’ Maybe that’s for the best. When you depreciate you don’t just beggar thy neighbors, you beggar thy importers too. Importers eat maybe half the cost of dollar depreciation. That’s nice if they’re foreign-owned, but foreign subs account for just 30% of our imports. While a weak dollar boosts the current account, the hit to importers’ margins will offset that effect if you own them. Domestic employment spikes and then falls back, terms of trade change, and the net effect depends on import substitution and exchange rate passthrough. The Fed’s model has a separate distribution sector; their one big leap is assuming competitive distribution in a big-box world. Say we get broad dollar depreciation. Japan does 80% of its own importing, so they will share the pain. Germany’s about half-and-half. Other countries leave the importing to us. The extreme example is China*, which imports only 3% itself, so when the RMB breaks lucky number 8, we’re on our own.
* Tille’s old ’97 data; BEA’s ’01 FDIUS shows Chinese affiliates importing even less (!?)
“No one has made any money — or made any correct forecast — betting against the US consumer.”
At least not since Uncle Sam metamorphosed into Wilkins Micawber well over a decade ago.
A very good post Brad … I know that I am not by far a regular commenter but a regular reader for sure
.
Especially this …
‘What of the other big Asian surplus country – Japan. Is the resurgence in domestic demand leading Japan’s trade surplus to fall? Uh no.’
Makes you wonder does it not? Is the Japanese ‘recovery’ really driven by domestic demand ?
Japanese consumer sentiment in the April-June quarter worsened at the fastest pace in almost five years, the government said, as a result of increasing concerns about recent declines in Tokyo shares and rising prices.
Foreign investment in China’s manufacturing sector is stagnating, but that appears unlikely to affect the pace of the country’s economic expansion.
As Chinese lenders have become more wary about financing consumers’ automobile purchases, proprietary finance firms set up by foreign auto makers are stepping into the breach.
Rabobank and a World Bank arm signed a deal to be the first foreign stakeholders in a Chinese rural cooperative bank.
China’s central bank said it will allow money brokers into the domestic interbank market, with the aim of further developing the local interbank lending and bond market.
Meanwhile, forbes.com says:
“Germany’s balance of trade surplus in May grew to 12.9 bln eur from 11.2 bln in April and 12.1 bln eur in May last year, according to provisional figures from the Federal Statistics Office.
It said the current account surplus in May fell to 4.3 bln eur from 7.0 bln in April and 5.4 bln from May last year.”
I guess some recent acquisitions made by German companies were paid for in May, or is there some other explanation for a rising trade surplus and falling CA surplus?
are any of you as sick of
slowing but not into a recession chitter ???
about the us economy
a recession maybe even a real corker
seems in the cards as part of the great job holder household
reality check in the mail
“adjustment”
can’t u all hear the cry for
“pain pain pain ”
coming out of wall street’s back rooms even as the front desk is issuing “buy now rube ” forecasts ?????
——————
timing ???
well if i was a repug homey
type policy guy
i’d try like hell to squeeze
this mugging in
sometime
right after this november
and get us up roaring again
b4
the summer of 08
————–
btw
the invasion of china’s capital sector by our bankers
may require a
serious recession there
first
so again
another good/bad
reason
i hear wall street
chanting from the tower windows
“pain pain pain”
Brad–I agree that the counterpart of the US current account deficit is now the combined current account surplus of China, Japan, and oil producers, including Russia. However, natures of their currenct account surplus are diverse, and so, needed adjustments may differ.
China’s surging current account surplus is primarily due to its trade surplus, though the income account surplus coming from soaring foreign exchange reserves is rapidly increasing. As a young developing country, China should have deficit rather than surplus in the current account. Therefore, China needs huge increase in consumption while reducing trade surplus, which requires significant macroeconomic policy changes, including currency appreciation.
Japan’s current account surplus, around 3-4% of GDP, is now dominated by the income account surplus due to accumulated net foreign assets (largely private). Its trade surplus is less than 2% of GDP, and is expected to disappear in the future. Such is the situation in an aging developed economy like Japan.
Oil producers’ current account surplus is surging because their trade surplus is soaring thanks to rapidly rising oil prices. They should adjust their macroeconomic policies, including exchange rate policy, but I suspect they cannot do much, except for reducing oil prices through increased production of oil.
As you have always emphasized, a significant part of adjustment burden will fall on the US, whether it is through the dollar depreciation or through fiscal consolidation and household savings increase.
HK -
Compliments on reminding us of the differences between the surpluses of the varying countries.
One should not underestimate the value non-American political classes place on autonomy. For the governments of the world, particularly the world’s rising powers, a bond is not just an exchange instrument between present consumption and future consumption. Is is a sale of the borrower’s autonomy to the creditor. Piling up credits, even ones with an uncertain future exchange value, has psychological value in terms of the sense of increasing autonomy it gives the creditor. We may fret about the settling of accounts following a valuation loss on credit extended to the United States, but for the CBs lending funds to the U.S., the settling of accounts is between the government and its citizens–i.e. on debts the citizens owe themselves
Governments can live with the debts they owe their own people–and the people can live with the debts the government owes them (see the Japan government bond market for an extreme case of this forebearance).
In our dear debt-generating hyperpower, however, the mortgaging of the country’s autonomy is invisible and ignored. First, there is just so much autonomy to fritter away–each little loss does not seem so bad. Second, the loss of autonomy is pushed down into society, in the form of over-leveraged individuals.
Our concept of a rebalancing starts from a presumption that the current U.S. government would care about protecting America’s future autonomy. However, the present government, enraptured at the power of its military machine, has difficulty imagining an enfeebled, indebted America living from IMF target to IMF target. Furthermore, as they have democratized the loss of autonomy through abundant domestic credit, the U.S. government senses that at the end of the day, the citizens will be the ones scrambling to find ways to pay off the debts owed foreigners.
In sum:
Those extending credit to the United States buy an illusion of increased autonomy, which they value highly. Americans are selling their future autonomy, which, try as they might, they cannot bring themselves to care a lot about (though many readers of this blog think they should care).
One side values what the other side throws away as junk.
Is it such a mystery that rebalancing gets delayed?
“I will though concede there is something a bit strange with China’s current account number, since some of the income surplus should be offset by profits on foreign FDI in China.”
—Show me a corporate treasurer converting Rmb profits into hard currency to take out of China and I’ll show you someone who will soon be in search of a new job.
“The rest of Asia actually doesn’t have much of a surplus anymore.”
Huh?
Year-to-date trade balance
_ _ _ _ US$ Bn _ _ _ % change yoy
Surplus economies
Indonesia _ _ +13.1 _ _ _ +23.7%
Malaysia _ _ +11.2 _ _ _ _+6.5%
Korea _ _ _ _ +4.9 _ _ _ _ -49.5%
Taiwan _ _ _ +6.3 _ _ _ +1,070.0%
Singapore _ _ +13.7 _ _ _+170.8%
Sub-total _ _ +49.3 _ _ _ _ +35.1%
Deficit economies
Philippines _ _ -0.8 _ _ _ _ -54.5%
Thailand _ _ _ -1.4 _ _ _ _ _-77.9%
Hong Kong _ _ -8.5 _ _ _ _ +44.6%
Sub-total _ _ _ -10.7 _ _ _ _ -23.5%
Total _ _ _ _ _ +38.6 _ _ _ _ +71.4%
NB Jan-May except Philippines Jan-Apr
“With oil fluctuating between $70 and 75 it is safe to say that the other big surplus region in the global economy – the arc of oil exporters that runs from Venezuela to West Africa to North Africa to the Middle East up through central Asia to Russia – has a growing surplus.
Contrast that with financial turmoil in a set of emerging market deficit countries – whether Turkey, Hungary or India. I suspect these countries will either see their deficits shrink (Turkey) or not grow as fast.
Rising surpluses in the surplus regions of the world economy. Financial turmoil in emerging markets with current account deficits.”
Basically, what you say is true, one man’s current account surplus is another man’s deficit, but let us not dump all countries with deficits into the same pot, as there are important differences.
Some emerging market countries have benefited greatly from higher commodity prices and may even run trade surpluses despite higher oil prices. If they then run budget deficits that may be due to structural problems in their domestic economies or indeed poor political choices that were made before energy prices took-off.
I certainly tend to think of Turkey, S. Africa, Argentina and Hungary as being countries that could be much better off than they are, but for populist tendencies that undermine their future growth through poor political decisions, past and present.
Corruption and weak institutions (usually one follows the other) are a much larger factor than energy prices.
It is a political choice to subsidize energy imports despite high world prices as some Asian countries have chosen to do, so it is not surprising to me that their current account deficits swell during such times. But that is a made at the home policy, not an immutable fact stemming from an oil exporting country’s current account surplus.
That Iran chooses to import 25% of its gasoline needs (from India), and sell it domestically at a loss, instead of adding value and refining it at home and creating employment as well as developing engineering skills and know-how, is also a domestic policy decision not caused by the US’ net energy imports or current account deficit. Of course, they are related, but one does not cause the other.
Also, emerging market countries running current account deficits could have used lower global interest rates and a benign external environment to pay down debt, and covert it into local currency debt, instead of taking on more US dollar denominated debt. Some like Brazil and Russia did. Turkey has always been an accident waiting to happen á la Argentina, so it is no coincidence that they get slammed both by higher oil prices and higher global interest rates at the sametime.
But these differences aside, I do agree with you about “Rising surpluses in the surplus regions of the world economy. Financial turmoil in emerging markets with current account deficits.” As unfashionable as the Washington Consensus was and the IMF’s advice is, get your financial house in order, is never out of style. Too bad the US cannot follow their own words of wisdom? ; – )
“HK -
Compliments on reminding us of the differences between the surpluses of the varying countries.”
Sorry HK, responed to Brad’s post without seeing yours first. My mistake. Did not want to repeat what you already said.
I will throw this anecdote out with regards to current account surpluses and deficits.
The flow of drugs from emerging markets to consuming markets is a push-pull supply & demand equation. Demand can drive prices up, whereas lower prices and more supply can also stimulate demand. But at the end of the day you need to have a willing consumer, not just supply. At no lower price do users have to consume just because there is willing supply at an affordable price.
That’s not to be confused with beer. When beer is cheaper than water then of course the market is telling you which to drink with its price signals! ; – )
To be specialised in planes and rockets, the two travel modes using the most energy, in times of high oil prices is just PLAIN stupid.
Europe and USA will suffer from their specialisation in planes (and rockets).
I don’t know in the USA, but in France tourism is starting to suffer from high oil costs. Sooner or later high oil prices will have an impact on plane use, and sooner or later this will impact plane sells.
Of course it may force companies to buy new fuel efficient planes, but that works only if those companies are not bankrupt because of vanishing consumers.
All in all the most oil efficient economies should fare better and the USA are not the most oil efficient economy of the world.
Please do not get me wrong, plainly the USA needs to curb its energy appetite. And just as disturbingly, we have witnessed western Europe going in the wrong directly, urban sprawl onto greenfield development sites away from the public transport network, forcing people into their cars to shop in big box stores that are at the sametime gutting smaller, local merchants in the city’s center. Ouch, can we never learn from other’s mistakes?
But when we talk about energy use versus the size of the economy we absolutely have to distinguish between energy used in production and manufacturing versus energy used for consumption, recreation and leizure activity!
I am more concerned about the efficiency of the former, while the latter is a lifestyle choice that is based on discretionary income, even if a portion of the domestic economy relies on that discretionary spending as well.
THe good part for europeans is that they are heavily specialised in trains and in cars using little oil. That should help them export more than the USA.
DOR — I should have been more precise, and said rest of developing Asia. My set of countries includes India (a big deficit country) and excludes the NICs. Malaysia and Indonesia (with oil and gas) are offset by Thailand and India.
If the Europeans can develop more fuel efficient planes, they should sell quite a few.
But yes, as you say, there seems to be little reduction in the enthusiasm for developing economic systems which are based on the environmentally unfriendly shipment of tangible goods and people over long distances to centralized locations that have to be accessed by cars. That includes industrial agriculture and food systems. If you can walk to the grocery store, you are still investing in quite a bit of petroleum simply by buying food products that rely so heavily on massive energy inputs.
is this mr bill’s soul
peeping out
i haven’t read his comments
b4
“I certainly tend to think of Turkey, S. Africa, Argentina and Hungary as being countries that could be much better off than they are, but for populist tendencies that undermine their future growth through poor political decisions, past and present”
quite a broad brush stroke …..
“As unfashionable as the Washington Consensus was and the IMF’s advice is, get your financial house in order, is never out of style ”
sounds way too close
to national review
their callous
petty rentier pespective
is a disgrace
i hope i’m wrong about mr bill
but “fashionable “….
whether in or “un”
and the cavalier Rx :
when in doubt
tighten your hi fi …
cause its never out of style
hey aren’t we talking about
policy choices
effecting
millions
of “humble little souls” here
“souls” possibly existing
on the edge
the right policy can sustain
and the wrong policy destroy ????
Brad, any particular reasons that India and Turkey may see declines in consumption, other than inability to borrow for same?
China’s oil imports surged 15.6% year to year in the first half, indicating Beijing’s problems in curbing energy use.
China’s pending introduction of international accounting standards, coupled with the country’s rapid growth, is aggravating a pressing shortage of accountants.
“”hey aren’t we talking about
policy choices
effecting
millions
of “humble little souls” here”"
Yes, we are talking about populist choices being made in poorer countries that cannot afford these bad policy choices, and yes, it is always the most vulnerable that suffer the most as they have fewer assets and alternatives to fallback on. That is a truism, not an insight.
But if you witness the disgrace that was Mexican elections you will not find one serious policy debate at any level.
S. Africa? Organized kleptocracy putting assets into the hands of a very small minority of black business leaders at the expense of foreign investment under the guise of righting past wrongs.
Hungary? Too proud to listen to outside advice. They always know what’s best thank you very much. When change starts to bite, turn populist and run larger deficits. That is the easy way and too often taken.
Argentina? A perpetual defaulter of debt. Snubbing their noses at the IMF while pandering to special interest groups. An absolute disgrace the way they ripped up commercial contracts and favored domestic creditors over foreign debtors.
Turkey? A country that has a young population and the potential to grow quickly, who has every chance of being inside the EU someday if they could put aside secular issues and concentrate on the economic issues instead. But Turkey has been so close the abyss so many times that I have lost track of how often they have been saved by the Grace of God and a bridge loan from the IMF.
Shall we talk about populism in Venezuela or Equador or the rule of contract law and independent courts? Squandering high current revenues from oil & gas and commodities, while addressing very few of their structural problems, so one day sooner or later they will be right back to impoverished and under-developed as usual.
Their populist politicians will be long gone, their excess returns skimmed off the top and invested somewhere safe, but their legacy of mismanagement will remain, and once again it is their poor who will suffer the most.
So, yes, domestic policy choices do matter, perhaps more than external events. But I like your prose! ; – )
“populist choices being made in poorer countries that cannot afford these bad policy choices”
Why poorer countries ? It seems to me bad policy choices are no priviledge of poor countries. I remember some rich countries invading far away other countries, building fat cars for fat people, having no public health care one the most expensive healthcare on earth and one of the worst health of the rich countries … etc etc. And in all rich countries the demographic problem about to hit the pension shemes are unadressed.
Of course it’s easy to find worse in countries battered by civil wars, but walking the easiest road forgetting about the future is not something that poor uneducated people (or countries) invented.
In case no one noticed no hurricanes until now. Yet the NHC forecast many.
Either it got it wrong (long term climate prediction is tough business)
or higher oil prices may still be ahead.
I wonder how high oil has to be and for how long for saoudi arabia, Iran to get armies better equiped than Tsahal.
“”"populist choices being made in poorer countries that cannot afford these bad policy choices”
Why poorer countries ? It seems to me bad policy choices are no priviledge of poor countries. I remember some rich countries invading far away other countries, building fat cars for fat people, having no public health care one the most expensive healthcare on earth and one of the worst health of the rich countries … etc etc. And in all rich countries the demographic problem about to hit the pension shemes are unadressed.
Of course it’s easy to find worse in countries battered by civil wars, but walking the easiest road forgetting about the future is not something that poor uneducated people (or countries) invented.
Written by DF on 2006-07-13 04:55:17″”
of course, poorer or lesser developed countries or however you define them did not invent poor decision making, they just have less assets & alternatives to help them recover from their mistakes and if you have not noticed there is considerable donor fatigue, and when these so-called advanced economies or the developed world suffer from their own poor set of decisions they will be even less inclined to be generous to those that have less and arguably more to lose. again I think that is a truism, not an insight.
but if the US economy goes into the proverbial crapper, I would imagine it will not only drag a few poorer countries down with it, but I would not expect any tears or offers of aid from those more fortunate…