China’s exports — No visible slowdown
The release of China’s July trade data was overshadowed by far more dramatic developments in the markets. What is a $24.4b surplus accumulated over a month compared to the decision of the world’s central banks to inject over $200b into the world’s banking system over two days?
But China’s July surplus is still remarkable. Some had expected that the end of certain export rebates would have pulled some July exports forward, increasing the June surplus and cutting the July surplus. But that didn’t seem to happen. Others expected that concerns about the safety of Chinese products would cut into China’s export growth. That too didn’t happen.
Year over year export growth actually accelerated in July. Import growth was up too, in part because of rising energy prices (oil imports increased 39% y/y – see Richard McGregor in the FT). Watch China’s surplus really soar if oil should ever fall back to $40 a barrel, let alone $25.
The following graph shows the y/y rate of increase in the monthly data
The monthly data jumps around a bit (especially because the usual February fall in China’s exports came in March this year) — but the broad trend is that Chinese export growth seemed to be slowly slowing from late 04 to mid 06, but the pace of export growth jumped up again in late 06 and has stayed strong in 07. A chart that compares the y/y change in a rolling three month sum shows the same basic pattern (it too is distorted by the unusual February/ March pattern).
I find it interesting that Chinese export growth and US export growth seem to move together. That to me, suggests that they responding in similar way to similar forces – global growth, and moves in the $/ euro and RMB/ euro. Remember –as He Fan right notes – that so long as China ties its currency to the dollar, dollar weakness becomes RMB weakness and dollar strength becomes RMB strength.
However, Chinese exports have clearly responded much more strongly to dollar and RMB weakness than US exports. If China sustains the y/y export and import growth rates of the last three months, its 2007 trade (customs basis) surplus would reach $300b. Even if exports slow a bit, I don’t quite see how China’s surplus will be much below $275b.
Beyond that, I don’t have much to add to what Michael Pettis already wrote.
Pettis teaches finance at Peking University – he knows China. He also knows a lot of about emerging economies. He was a New York investment banker specializing in emerging market debt for a long-time. His book on emerging market debt — The Volatility Machine — is one of my personal favorites.
And he recently started a blog: China Financial Markets.
I probably won’t always agree with Mr. Pettis. I, for example, worry a bit more about the long-term cost of the large US trade deficit than Mr. Pettis does, and thus weight the costs and benefits (to the US) of Chinese financing of the US a bit differently than he does. But I have a tremendous amount of respect for his analysis.
Pettis argues that China can only stop the expansion of its trade surplus if it (re)gains monetary control, and that requires a revaluation big enough to end expectations of further RMB appreciation and to suck in enough imports to slow the growth of China’s surplus.
I continue to believe that China is caught in a trap in which trade surpluses are both the cause and consequence of monetary expansion. Until something is done directly to change the terms of the trap, I believe China's trade surpluses will continue to stay high, and will probably rise in the next few months as Christmas deliveries kick in.
In Pettis’ view – at least as I understand it — a trade surplus today leads to more money growth, more bank lending, more investment, more capacity, and thus a bigger trade surplus tomorrow. Something needs to break that chain or the trade surplus will continue to grow. There may be something to his argument – so far, at least, strong money growth in China hasn’t led to (much) inflation or let to a real appreciation that slows China’s export growth. That is the big puzzle about China.
His solution: a 10-15% revaluation.
“China can engineer a sudden and unexpected maxi-revaluation of at least 10-15% (as I explain in the June issue of Far Eastern Economic Review). This would not have as big an impact on exports as the financial authorities fear, but it might boost imports and would almost certainly reverse or at least slow down hot money inflows.”
I though don’t think that a 10% revaluation would be anywhere near large enough to end expectations that the RMB will appreciate more. Especially if it is a 10% revaluation against the dollar at a time when the dollar is sliding against a range of currencies.
And apparently I am not the only one in New York who thinks 10-15% wouldn't be enough.
Update: While inflation in China has been far lower than in some other countries that peg to the dollar — the UAE and Qatar, for example — Chinese inflation is now rising, led by a strong rise in food prices. I would still argue that inflation hasn't generated a significant real appreciation, but if the current acceleration in inflation continues, it could.
US Government in technical default on debt
The U.S. has hit and gone through the debt ceiling of $8.965 trillion that was set by Congress in March of 2006.
re: “strong money growth in China hasn’t led to (much) inflation”
“Inflation in China, the world’s fastest-growing major economy, accelerated to the highest level in more than 10 years… Consumer prices jumped 5.6 percent in July from a year earlier, after gaining 4.4 percent in June… Wage gains, energy costs and expectations of price rises have broadened inflation pressures beyond food cost increases, the central bank said last week.” http://www.bloomberg.com/apps/news?pid=20601087&sid=aULbmv8o173U
funny — i was debating whether to qualify the inflation statement with something to the effect that there are some signs this may be changing, but opted not to break up the flow. relative to say russia or the high inflation gcc countries (UAE/ qatar) i would still argue that the overall price increase in china has been moderate, and insufficient to produce much of a real appreciation — this is the first year where chinese inflation has been higher than us/ european inflation. but there clearly has been a bit of an acceleration.
re: “Something needs to break that chain…”
“The quality of Chinese home loans is worse than in the United States… Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan ($396.2 billion) of mortgage lending… “At least there has been a credit check system (in the United States) but in China anyone can borrow money to buy a house”…” http://www.reuters.com/article/ousiv/idUSHKG13669020070812
BLOG:”Update: While inflation in China has been far lower than in some other countries that peg to the dollar — the UAE and Qatar, for example — Chinese inflation is now rising, led by a strong rise in food prices. I would still argue that inflation hasn’t generated a significant real appreciation, but if the current acceleration in inflation continues, it could. ”
My comment: One way to look at inflation is as follows: (1) For a given period compute the percent variation in TOTAL REAL SUPPLY, i.e. at constant prices (where total real supply is the sum of real GDP plus Real Imports). (2) For the same period compute the percent variation in TOTAL NOMINAL DEMAND, current prices (where total nominal demand is the sum of consumption, investment, and exports. (3) Inflation ex post turns out to be very close to the DIFFERENCE between th growth in Total Nominal Demand AND the growth in Total Real Supply.
From the above one may conclude that raising real food imports substantially will go a long way to reduce inflationary preassures. Likewise, a real RMB appreciation of some 30% will result in substantially higher imports from the rest of the world; and of course, a substantial decline of Nominal exports in favor of domestic consumption.
“…as those who grasp the fine points of China’s economy are clear, high inflation, particularly when mainly made up of soaring prices of food and basic consumer goods, will increase China’s political risk. This is because, firstly, the number and proportion the poor who are extremely sensitive to the price of basic consumer goods, has greatly increased. In the 1980s and 90s, the peasants, who account for a majority of the population, were not sensitive to the price of food… The situation now is very different. 200 million peasants have moved in to the cities, scores of millions of SOE workers have been laid off, scores of millions of farmers have lost their land, while at the same time a group of people have made fortunes through so-called “restructuring” and “land development.”…” http://piaohaoreport.sampasite.com/blog/default.htm
Pettis sounds like a throng of other Wall Street types who rely not on manna from heaven but from China in the form of cheap official credit. I tend to dislike these “Cheneynomic” arguments of deficits don’t matter. As the subprime episode demonstrates, maybe you do have to repay debts sometime after all–what a novel concept.
Re: Satish — US Government in technical default on debt
Where did you get this information? I thought that the default was expected sometime in October.
you can see the data for total public debt outstanding
in the link below.The limit is 8.965 tn
http://www.treasurydirect.gov/NP/BPDLogin?application=np
re: “relative to say russia or the high inflation gcc countries (UAE/ qatar)”
given massive disparities between and within each of those nations, the estimation, interpretation and consequences of food price inflation alone has to be equally distinct, whether the common cause is China’s export of the inflation which is now proliferating in its own economy.
“The cost of the minimal food basket… added 3.6 percent during a month. Russia’s Federal Statistics Service calculates this indicator to be aware of financial standing of the poorest. Indeed, the minimal basket includes food that would suffice to maintain existence close to physiological survival… In Russia, pensioners are the sole category of population with consumption matching the offer of this basket… the abrupt movement of these prices could trigger the feeling of complete price chaos…” http://www.kommersant.com/p793709/inflation_minimal_basket/
“…foreigners make up about 85% of the population and 99% of the private work force… there are 4.5 million foreigners here, compared with 800,000 Emirati citizens… About two-thirds of the foreigners are South Asians… when thousands of migrant construction workers walked off the job last year, blocking traffic and smashing parked cars, it became clear that the nonnatives were restless…” http://www.nytimes.com/2007/08/06/world/middleeast/06dubai.html?_r=1&hp&oref=slogin
“The sudden appreciation of the Indian rupee to a nine-year high against the Qatari riyal (QR) is a further blow to middle and low-income Indians here who have already been suffering due to the rising cost of living…” http://www.middleeastforex.com/index.php?section=609
About USD as the worlds reserve currency:
I do not think that countries that are not tied to USD would like the status quo regarding USD as reserve currency to change. At least this can well be the case if they see USD loosing value long into the future. This will basically reduce the increases in the price of oil (and other commodities) and thus reduce inflationary pressure from that direction.
For example China may well be willing to affirm the role of the USD as the reserve currency (as a recent article stated). This does not mean that they intend to keep their own currency tied to the USD forever, though.
i’m wondering when we will hear more about education price inflation. Afterall, higher education is where many of the world’s most influential people first learn how to: 1) take on relatively huge amounts of debt and: 2) develop a faith that, in spite of a complete lack of any guarantees, ‘the system’ will provide them with the means to find someone/thing else to pay it off. But with many 100’s of millions moving off the land into existences and dependencies that require both spending power and education to find the jobs they need in order to make a living, I would think at some point we may have to pay much more attention to education economics - especially as that industry becomes, presumably, more central to overall economic growth.
I was one of those expecting a slowdown so I was disappointed, but I will reserve judgement till year end.
Personally, I dislike the idea of a sudden revaluation, and I think that people in the economic community really don’t have a good sense of the financial chaos and risks that a sudden, surprise revaluation would cause.
What is interesting are the July CPI numbers. There are basically two narratives going on here. One is that the inflation is due to demand shocks. The other is that inflation is due to monetary supply expansion. The second one is significant for RMB appreciation.
I really don’t have a clue right now which one (if either) is correct, but what I’m really looking for is some empirical test to distinguish between the two. (i.e. if it is due to monetary expansion that you ought to see X.) The other thing that I’m looking for is the consequences of being wrong. What happens if you do policy X on the assumption that it is a monetary issue and it isn’t versus what happens if you assume that it isn’t a monetary issue and it turns out to be.
Twofish, presumably, if inflation is due to monetary expansion, the monetary aggregates should lead inflation.
“…Citic Securities’ shares jumped 8.5 percent today to a record 82.48 yuan on the Shanghai stock exchange, valuing the brokerage at $32.5 billion. That tops Lehman Brothers’ $30.4 billion market value based on yesterday’s closing price…” http://www.bloomberg.com/apps/news?pid=20601087&sid=atPJRmFlozN8&refer=home
“…Cayne is prospecting for investors in China and may sell a minority stake to Citic Group, Forbes magazine reported on Aug. 9, citing an unidentified person close to the Beijing-based company. Some investors even consider the firm a possible takeover target…” http://www.bloomberg.com/apps/news?pid=20601087&sid=aR93zkFUEeQ4&refer=home
“…Mr Setser said China did not appear to have any exposure to the US subprime mortgage market…” http://www.ft.com/cms/s/00a4caf6-49b3-11dc-9ffe-0000779fd2ac.html
“…The perceived risk of owning Sallie Mae bonds has climbed eightfold since the buyout was announced. The cost of SLM credit-default swaps, used to speculate on the company’s ability to repay debt, was about 294 basis points Aug. 10… up from 36 basis points April 12… The cost of insuring $10 million face value of debt has risen to $294,000 from $36,000…” http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeV5WANGTmPU
To RebelEconomist: The trouble with that view is that M2 has always exceeded GDP growth since 1978. Which is a curious fact about the Chinese economy, that I haven’t see analyzed much.
About Citic. I’d argue that the fact that Citic has a higher valuation than Lehman Brothers is a sign that the Shanghai market is overpriced.
Twofish,
I meant lead in time!……If a blip in money supply occurs before a blip in inflation, then it looks as if money drives prices, rather than the other way round. By the way, did you see this Bloomberg story:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mukherjee&sid=azCchuARU82g
I don’t think that you can expect the medium run growth of M2 to track GDP though. Banks are only one of several ways of saving and borrowing, so the growth rate will depend on shifts between these vehicles. In particular, broad money plays an important part in the state collectivisation of overseas saving in China, ie people save in banks, the banks buy sterilisation bills and the authorities buy dollar bonds (although the causality could be reversed).
“The European Central Bank injected more than €155bn (£105bn) of liquidity into markets because unemployed workers in Detroit are defaulting on home loans…” http://www.ft.com/cms/s/5626527e-49fe-11dc-9ffe-0000779fd2ac.html
Rebel: If we use “precursor blips” then what we have here is clearly a food related issue and not a monetary issue. There hasn’t been any sort of massive expansion in money supply in the last six months and the fixed asset investment hasn’t gone up. In addition producer prices haven’t gone up either.
By contrast, world corn prices have doubled in the last year.
One other thing that I’m surprised no one has mentioned is that we are dealing with year-to-year figures so that if there was a massive spike in food prices in May, then it is going to affect all further inflation figures.
The Mukherjee article was superficial. It was your standard “A says A, B says B” without going into much deep analysis. I wish newspaper article writers would learn about this great new invention called “hypertext” that would allow them to link a summary to a full report in which the people they quote can go into detail about why they believe what they do.
Over the weekend, I contributed to the enormous US trade deficit by purchasing a made-in-China Apple MacBook and iPod Nano. The iPod Nano was free with a mail in rebate under a special deal. All the news media talk about finding alternative suppliers misses the point that US corporations are unable to find an alternative supplier to China. India with crumbling infrastructure and 30% malnutrition rate among its children is NOT the world’s next economic superpower. No other nation in the world has the combination of developed physical infrastructure, low cost assembly labor, rapid technology development, and huge economies of scale to manufacture 70% of the world’s cell phones, 60% of the world’s air conditioners, 90% of the world’s microwave ovens, 80% of the world’s notebook computers, 80% of computer hard disk drives, etc. Contrary to popular belief that all Chinese factories are labor intensive sweatshop operations, the newest electronics factories in Chinese export zones building the iPhones and iPods are massive, state-of-the-art facilities that employ the latest technologies for manufacturing. For instance, some facilities in Dongguan and Shanghai span hundreds of acres employing tens of thousands of workers that produce the 200 million iPods sold by Apple last year alone around the world.
http://money.cnn.com/2007/08/14/news/economy/trade/index.htm?postversion=2007081408
The trade gap with China, which has been getting increased attention as of late, rose to $21.2 billion, up 5.7 percent from May and up 7.7 percent from a year earlier.
“Nasdaq is set to launch tomorrow what its executives are calling one of the most significant developments on Wall Street in decades - a private stock market for super-wealthy investors… Any private firm can list on Nasdaq’s new platform… and raise money by selling stock to an elite group of shareholders. These companies would remain private and not have to make public their financial statements or submit to federal regulation, such as the Sarbanes-Oxley corporate accountability law. Once a tiny influence on the markets, private money has gained unprecedented power on Wall Street… said Howard S. Marks, chairman of Oaktree Capital, an investment firm that was the first to list on the private market developed by Goldman Sachs called GSTrUE… The private market… shields companies from regulation and from wild swings in their share prices that are caused by a temporary drop in earnings or a bad rumor. In just a few years, Nasdaq officials predict, stock offerings on private markets will far exceed IPOs on public exchanges…” http://www.washingtonpost.com/wp-dyn/content/article/2007/08/13/AR2007081301170.html?hpid=topnews
“The collapse of a bridge under construction that left at least 29 people dead in a Chinese tourist town rekindled concerns Tuesday about rushed, shoddy building amid China’s torrid economic expansion… China should “learn a lesson” and accelerate the inspection of unsafe bridges, the newspaper quoted Xiao Rucheng, secretary-general of China’s Institute of Bridge and Structural Engineering, as saying…Following the accident, a local county deputy party secretary was sentenced to death for accepting a bribe from a childhood friend in exchange for the bridge-building contract” http://thestar.com.my/news/story.asp?file=/2007/8/14/apworld/20070814213945&sec=apworld
the citic report is interesting — there certainly have been rumors that chinese investors were looking at bear, but i hadn’t heard a specific name. was citic also linked with bear in the past or was it one of the big state commercial banks — my memory is foggy.
The flip side of these private markets is that they let the rich be stupid with their money.
Problem perhaps being that many would say it isn’t really ‘their’ money and that, invested stupidly, can create havoc in the ‘real economy’ while still adding to their own wealth.
“Facing lawsuits from investors and criticism for filing for bankruptcy protection in the Caymans for its two failed hedge funds, Bear Stearns has hired legal powerhouse of David Polk & Wardwell, which has been charged with investigating the funds’ stakes in the subprime mortgage markets. An unnamed law firm representative says partner Robert Fiske and Lawrence Portnoy will lead the investigation…” http://www.institutionalinvestor.com/Article.aspx?ArticleID=1402499&LS=EMS137121
re: “my memory is foggy” doubt it but:
“U.S. brokers are known for buying equity in Middle Kingdom banks. With China Construction’s move on Bear Stearns, have the tables turned?… A whole caravan of Western players including Bank of America (BAC), Citigroup (C), HSBC, Goldman Sachs (GS), and American Express (AXP) have ponied up more than $20 billion in all to buy equity stakes in Chinese banks over the past couple of years… That’s why a report in the Wall Street Journal that China Construction may invest anywhere from $2 billion to $4 billion for a sizable equity stake (perhaps as much as 20%) in Wall Street broker Bear Stearns (BSC) seems so surprising. China Construction lacks the kind of balance sheet - and the competitive muscle in lending and equity underwriting - to go against the big boys in U.S. investment banking. A deal, if it comes, is really about helping the Chinese lender strengthen its position at home. So why pay for a strategic partnership with Bear Stearns when so many other Western lenders have forked over serious cash for the privilege of linking up with a big Chinese lender?…” http://www.businessweek.com/globalbiz/content/apr2006/gb20060418_875360.htm
if you might know the status of this?
Viacom/ Bear Stearn - “…which companies are presently under the sole control of Viacom, are to be jointly controlled by Viacom and Bear Stearns…” http://ec.europa.eu/comm/competition/mergers/cases/decisions/m717_en.pdf
and re: “Mr Setser said China did not appear to have any exposure to the US subprime mortgage market”
If it may have been exported to Canada…
I’m extremely skeptical that the CCB bid on Bear-Sterns is for real. Among other things, Chinese banks can’t engage in domestic securities business which means that there are zero synergies.