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LinkedInThe attached graph — used with permission — comes from an excellent November 12 paper by Goldman Sachs’ Hong Liang. It shows quite clearly that the recent surge in Chinese growth hasn’t come from a surge in domestic demand; domestic demand is actually weaker than it was in 2003 and 2004. Rather it stems from a bigger contribution from net exports.
The data for 2007 is an estimate, but the final data for 2007 will unquestionably show a significant ongoing contribution from net exports to Chinese growth.
Liang’s paper — "China’s Renminbi: An unbearable straightjacket for the central bank" — would make for an excellent Economics focus piece. It also touches on a set of related but often neglected points: the link between the RMB’s depreciation against the euro on the rise of China’ surplus with Europe; the PBoC’s rising financial losses (when its foreign exchange reserves are marked to market in RMB terms) from holding more reserves than China needs; and the dramatic fall in domestic foreign currency deposits.
The only way I can reconcile the fall in household fx deposits with the banks rising fx position is an increase in the fx that the banks are managing on behalf of the central bank.
Hong Liang’s emphasis on the contribution net exports have made to China’s growth is important for another reason. Many smart, intelligent commentators highlight the rise in Asian demand, arguing that Asia has been a driver of global growth. But a region’s net contribution to global demand is a function of the difference between demand and supply growth. Recently, Asia has contributed more to supply than to demand — leading Asia’ surplus to widen even as Asia’s commodity bill has soared.
Asia has been a huge source of demand for commodities. But when it comes to manufactured goods, Asian demand hasn’t kept pace with Asian supply. That implies ongoing growth in Asia’s surplus with the US and, now perhaps even more so, in Asia’s surplus with Europe.
China has decoupled to a degree from the US over the past two years. The US hasn’t been the engine of demand growth globally over the past two years. Net exports only subtracted 0.1% from US GDP in 2006, and they contributed 0.5-0.6% to US GDP in 07. US import demand has slowed — with real imports in 2007 growing more slowly than real consumption (in part due to the fall in residential investment). Europe, by contrast, has emerged as an engine of demand — growing more rapidly than the US. That has meant that China has shifted from relying on US demand to relying on European demand. Up until now, China has offset the slowdown in the pace of growth in its exports to the US with strong growth in its exports to other parts of the world.
For China to help support the global economy during a potentially rough period — and for the world’s imbalances to shrink on a sustained basis — China needs to grow entirely on the basis of domestic demand.
Even the entire Africa continent, relegated to the scrap yard by the Western bloc, is reviving economically due to massive Chinese investment and trade. What Brad Setser really protests is the permanent loss of US Global hegemony due to rising Asian competition in the political and economic spheres. A new multi-polar world order is rising. – Dave C.
http://www.ft.com/cms/s/0/31f6dc6a-ca1f-11dc-b5dc-000077b07658.html
Wen Jibao, China’s prime minister, forecast last month that trade between China and Africa would reach $100bn before 2010 – a more than 10-fold increase in a decade that should see China overtake the US and Europe as sub-Saharan Africa’s foremost trading partner. In the first nine months of 2007, trade flows surged to $50.6bn, up 42 per cent on the same period in 2006, driven by Chinese demand for the natural resources Africa has in abundance and African imports of manufactured goods the Chinese produce at low cost.
Asian demand for African commodities has brought about a revival in the terms on which the continent trades, contributing to stronger economic growth. This in turn has encouraged investors from elsewhere to look at Africa with different eyes, correcting what Standard Chartered calls the “undervaluation of African assets”.
As recently as 2004, nearly half of foreign direct investment (FDI) from China into Africa was concentrated in Sudan, where the Chinese National Offshore Oil Corporation (CNOOC) helped develop the country’s oilfields, hampering in the process US efforts to ostracise the Khartoum regime. Today, FDI from China is spreading across dozens of African countries as Chinese companies expand.
China’s largest acquisitions abroad have been in Africa, including the $5.5bn that Industrial and Commercial Bank of China paid for a 20.5 per cent share in South Africa’s Standard bank last year. At the other end of the scale, it is possible to find Chinese foot massage parlours in Chad, doughnut hawkers in Cameroon and vegetable producers in Khartoum’s market.
In total, an estimated 800 Chinese state companies are operating on the continent. They have mining operations in 13 countries and are prospecting in more. From Port Sudan to Luanda, they are building dams, oil refineries, roads and railways. By some estimates, Chinese contractors are winning over 50 per cent of all new public works projects in Africa, edging out competitors with higher overheads, although concerns about quality persist.
In a matter of a few years, Chinese funding of infrastructure, trade and development in Africa is surpassing lending by multilateral agencies such as the World Bank and the International Monetary Fund.
What are the dynamics of household FX deposits with the banks? What’s the source and motivation for these deposits? Why would they be declining?
Brad is not “protesting” anything, David. He is merely pointing to the facts. Really, try reading for a change.
Brad,
Excellent post. I know you covered a report that Jon Anderson from UBS put out a few weeks ago, how do you reconcile that both of these men are equally in touch with the market, but are coming out with different reads?
We had a roundtable with 5 old China hands last night in Shanghai discuss the recent inflationary pressure in the market, and this was one of the issues that we spent a fair amount of time on.
The general consensus from our standpoint was that while China is much less reliant on the U.S. than it was 5-8 years ago, it cannot act as buyer of last resort for long, and as such it will not be able to absorb all that it produces.
With that in mind, the question for us was to what extend the E.U. could absorb, and to what extent the E.U. would be hit should the recession in the U.S. be mild to severe.
I will be posting some of the notes on All Roads later today, so if anyone is interested in the thoughts of 5 people on the ground, I invite you to come by.
Keep up the great work Brad. I really enjoy your coverage and perspectives.
r
http://www.allroadsleadtochina.com
Stormy,
Brad is flat wrong. The economies of Pacific Rim nations continue to boom despite sagging demand and recessionary fear issues in the US Bubble Economy. The Chinese economy is primarily driven by vast infrastructure development, booming regional Pacific Rim trade that exceeds trans-Pacific trade, sound fiscal and monetary management policies, and rising consumer demand. By contrast, the Japanese economy has been stuck in neutral for the past decade despite huge trade and current account surpluses. Chinese import-export trade with the United States cannot account for more than 3-4 percent of US GDP, whereas US consumer overspending accounts for a record 72 percent of GDP. The trade linkages between Chinese exports and faltering US Economy are vastly overstated. The 2000 pound elephant in the room is conveniently ignored by Economists looking to scapegoat foreigners for domestic US mismanagement of the economy and monetary policy.
Brad,
I am not sure how they calculated domestic demand, but I doubt that included investment. Be reminded domestic consumption only accounts about 1/3 of Chinese GDP. Investment is major driver.
Also on export’s contribution to GDP, recent reserach shows the number is much inflated (http://www.economist.com/finance/displaystory.cfm?story_id=10429271).
investment is certainly included; it is the main reason why real domestic demand has grown by between 8.5 and 9.5% over the past few years.
the difference between liang and anderson is indeed interesting, though they converge more or less on their policy recommendations. liang is working off the trade data, which shows a growing contribution from net exports as import growth hasn’t kept pace with export growth. anderson was trying to reconcile the rise in exports to GDP with data showing that manufacturing value added hadn’t increased relative to GDP, and he more or less assumed the answer was value added in the export sector fell as china shifted from toys and textiles to electronics. as is always the case with China, a lot depends on what data source you use and what assumptions you make.
The fall in household dollar deposits reflects the dollar’s depreciation v the rmb, which has made holding rmb more attractive. domestic dollar deposits were initially a way of keeping money in china — China let residents hold $ in the domestic banks to help avoid incentives to hold $ offshore. Those incentives have disappeared. it basically is a currency play by Chinese households. Like others, they now want RMB. Back in 99, they wanted dollars.
All roads — I’ll look for your post. But i am afraid that China will soon need to start absorbing what it produces … growing off net exports gets harder when you get big, and China is now big. it also already has an enormous trade surplus.
On a personal note, over the past summer, in the deep heartland of China, Changsha city in Hunan province. As part of the “develop the West program”, a vast infrastrucure of state-funded highways, railways, airports was under construction. Everywhere in China today, there are construction cranes. The construction crane should be China’s national bird. Unlike Guangzhou or Beijing, foreigners from the West are few and far in betweeen in Changsha. Hunan province has few industrial products to export to the West, yet economic growth in the past year registered at a blistering 15 percent growth rate, even faster than Shanghai or Shenzhen. A friend of mine born in Changsha even remarked to me that Hunan province has little heavy industry yet everyone seems somehow to be earning more money. China’s booming economic is driven primarily by vast infrastructure development and investment. As hundreds of millions of workers transition from rural farms to urban employment, there is a huge one-time increase in productivity for the Chinese state.
Brad,
I agree that it is in the long term interest of China and perhaps the global economy for China to begin absorbing its own products. That is something we all agree on last night.
However, none of us felt that China was stable enough now to take that responsibility on and maintain for very long. We have some very big ??? as to what the real consumer side looks like here. there are a lot of over leveraged, under diversified, little emperors who have been blowing their parents savings on mobile phones. It is not really any more healthy than the sub-prime mess… it is just less visible.
In our best guess, China needs 3-5 years before it is capable of absorbing on a sustained basis.
Until then, it will export inflation, the US will import it, and if we are lucky things will slow gradually so that inflationary pressures can come down in China (pork, edible oil, diesel fuel, etc)…
r
http://www.allroadsleadtochina.com
“China let residents hold $ in the domestic banks to help avoid incentives to hold $ offshore.”
Chinese citizens can hold not just US Dollars in Chinese state banks but almost any other major currency. Relatives of mine in China hold bank accounts in Chinese yuan, Malaysian Ringit, Hong Kong Dollars, and US Dollars. For legitimate business or personal expenses like a overseas vacation, it’s now very easy to convert from Chinese yuan to any other currency. In Hong Kong, the Chinese yuan is now exchangeable as the US Dollar at any bank.
“there are a lot of over leveraged, under diversified, little emperors who have been blowing their parents savings on mobile phones. It is not really any more healthy than the sub-prime mess… it is just less visible”
I agree that there are alot of spoiled little emperors today in China. But splurging on a mobile phone is financially alot less costly than taking on a typical sub-prime loan for over $200,000 at 8 percent interest. Overall, especially the elderly, the Chinese are huge savers. Even younger Chinese typically don’t like debt. After buying their condo flats, most of my relatives in China strive to pay the mortgages off as soon as it is possible. Overall, although credit cards are more available today, China is still mostly a cash society.
The cuts off the base line at 8%. Look at the whole graph and the result is that next exports add 2-3% to GDP growth
Q: Excellent post. I know you covered a report that Jon Anderson from UBS put out a few weeks ago, how do you reconcile that both of these men are equally in touch with the market, but are coming out with different reads?
Hong Liang is a she
Anyway, if you look at the numbers, they actually come up with pretty much the same numbers. It’s just that the spin is different. The consensus estimate is that about 2-3% of China’s economic growth in the last two years is due to net exports. Which means that about 8% of China’s economic growth over the last two years *isn’t* due to net exports, and that net exports in China can fall to zero without causing a crunch.
This is why the policy recommendations are similar.
I have a problem with David Chiang posts is that they sound a bit too much like posts about the Japanese economy right before everything fell apart.
The fortunate thing I suppose is that I’ve never met anyone in the Chinese government that talked in quite that tone. There are about five or six things that could kill the Chinese economy, and fortunately everyone that I’ve met who has any real power is worried about them and trying to fix them.
China will soon need to start absorbing what it produces …
That would be a fine development. But don’t you think the Chinese are smart enough to figure that out for themselves? I imagine they will work to expand domestic demand when they think it is time to do so.
You don’t need to physically travel to China to see the immensity and immense development of the country. Using Google Earth one can visit most Chinese cities, get numerous views of them, and come away absolutely amazed at this humongous nation in development (take a look at Harbin, at Canton, etc., etc.). It should scare the average American a bit, but most are not aware of it.
There is no consumer like the U.S. consumer and China will feel it and will not develop a consumer society like the U.S. even though it has a huge population of domestic consumption.
One other important point…. Net exports is not the same thing as net exports with the United States. Until 2003, China had a persistent trade surplus with the United States, but until 2004-2005, it had a trade deficit most of the rest of the world.
It’s likely that China will continue to have a trade surplus with the United States indefinitely, but the big impact of adjusting the RMB will be to increase imports from the rest of the world.
The explanation that I’ve heard that makes sense is that in 2002-2004 there was a massive expansion in capacity in the PRC, which meant that raw materials that used to be imported were now produced locally and that net export picture was more due to a drop in imports than a rise in exports. The trouble with this explanation is that exports rose more than imports, which also rose, so that this explanation needs a bit of tweaking.
One interesting thing is that protectionist sentiment in the US is lower than I’ve ever seen it, so there is really no political process from the US to revalue the RMB for the sake of the United States, and I don’t think that an RMB revaluation would really change the US-China trade balance. It *would* change the China-South East Asia trade balances.
Also, the RMB will appreciate, the debate in China right now is over how fast and how it fits in with the rest of the economic policies that are happening.
The current-dollar GDP of the US was 13,843 billion dollar in 2007, up 5% from the 2006 current-dollar value. The same increase in the Chinese current-value GDP is 28% in dollars. That is a 23% growth differential (the absolute dollar value increase is already more in China than in the US). If they could keep this trend (and this is a very big if), then the Chinese GDP would reach the US’s level in 6-7 years. I think that this is such an opportunity, that the Chinese leaders would not like to miss.
“I have a problem with David Chiang posts is that they sound a bit too much like posts about the Japanese economy right before everything fell apart.”
It’s one thing to read a news report and another to see reality with your own eyes. I agree there is a “real” bubble in certain sectors of the Chinese economy. Even my relatives in China agreed with my assessment over the past summer that there was a stock market bubble. The bubble has since popped, but the Chinese economy powers ahead. The interior provinces of China still require more state-driven spending for infrastucture. Who else will build highways, airports, and railways besides the central government in the poorer, interior provinces in China? The private sector won’t and can’t expand unless the state takes a leading role for economic and industrial development.
The economic imbalances in China are not as severe as in Japan before their bubble cracked. A million dollars per square foot for land in downtown Tokyo was alittle unreasonable. Tokyo Japan was worth on paper more than the entire state of California.
The cuts off the base line at 8%. Look at the whole graph and the result is that next exports add 2-3% to GDP growth – Written by Twofish on 2008-01-30 11:08:03
That’s equally if not more misleading than cutting off the graph.
The growth rate of exports must considerably exceed the growth rate of GDP in order to produce a total GDP growth rate of 11%.
“If they could keep this trend (and this is a very big if), then the Chinese GDP would reach the US’s level in 6-7 years.”
The Chinese economy is somewhere in betweeen the official $1.5 trillion GDP based on exchange rates, and the $8 trillion GDP using purchasing power parity (PPP). The Chinese economy has to be larger than 12 percent of the US Economy when one considers that the Chinese economy consumes 40% of the world’s cement, steel production, copper, aluminum, tin, etc. Within a decade I believe the Chinese GDP will definitely overtake the US Economy, but the Chinese per capita income will never reach parity with the United States. Too many mouths to feed. The 2020 global economy GDP pecking order will be 1. European Union 2. China 3. United States 4. Japan 5. India.
In 2007 the official current value Chinese GDP was 3.43 trillion dollar at current exchange rate (given is People’s Daily, last week).
DC: It’s one thing to read a news report and another to see reality with your own eyes.
Always remember that you are seeing a small fragment of reality, and many of the important things are invisible. What does a hundred billion dollars of debt, or a stock market that is about to crash look like anyhow?
DC: The economic imbalances in China are not as severe as in Japan before their bubble cracked.
They aren’t, but that’s only because you have a lot of worried people that are trying to keep those balances from getting out of hand. If you stop worrying, then things can get bad really, really quickly.
Anonymous: That’s equally if not more misleading than cutting off the graph. The growth rate of exports must considerably exceed the growth rate of GDP in order to produce a total GDP growth rate of 11%.
So the GDP growth rate goes down to 8-9%….. Not the end of the world.
Overall nationwide Chinese per capita income is around $1000, with a 1.6 billion population, that equates to a 1.5-1.6 trillion GDP based on current exchange rates. But comparing economies at different stages of economic development is like comparing apples to oranges. That is why you get estimates from the World Bank, IMF, US government, the EU, and the Chinese government that are all over the map from 1.5 – 8 trillion GDP.
Exports are growing faster than GDP;
Investment is growing faster than GDP
Consumption (private) generally has grown slower than GDP.
Hong Liang (a she) cut off the graph to highlight the large increase in the incremental contribution to Chinese growth from net exports. totally kosher. She was interested in explaining the recent acceleration in Chinese GDP growth.
@ twofish – thank you for correcting me on that. should read economists, not men, and I find it interesting that even looking at the same numbers, two intelligent economists can spin differently.
@ David (1) US Subprime did not bankrupt the entire middle class. a stock market plunge here will. (2) the elderly are not being taken care of. Social security offers payouts that are very low and the recent inflation is really hurting. (3) The Chinese economy is facing natural barriers that I think will curb growth significantly. If the Guangdong province was predicting a 20% shortfall in power before the snow, there are non-weather barriers to growth occurring. Water is an ongoing problem, arable land is depleting, and those are just a couple of the problems we know about.
I don’t see anything crashing, but passing the U.S. in 10 years would require a major U.S. correction, and I do not see that happening either.
r
http://www.allroadsleadtochina.com
“Always remember that you are seeing a small fragment of reality, and many of the important things are invisible. What does a hundred billion dollars of debt, or a stock market that is about to crash look like anyhow?”
Just also remember that everyone in the US news media has their biases. They don’t tell you the honest truth, they are merely trying to pick your wallet for their paid sponsors. No one on CNBC or Business Week even spoke about a Dot-com or housing bubble until after prices absolutely collapsed. How is it possible that all of these high paid economist professionals got it totally wrong?
The optimists on CNBC are still flat wrong about the US Economy. Unfortunately, the only way to cure the effects from an economic bubble collapse is to never have let it inflate in the first place. Just ask the Japanese after over a decade of relative economic stagnation.
Chinese oil consumption has grown pretty much in step with the GNP growth. Oil supply may fall short of Chinese growing demand, and to some extent stunt their growth potential in the near future.
“(1) US Subprime did not bankrupt the entire middle class. a stock market plunge here will.”
How is that possible when stocks are not the primary asset holdings of the average Chinese, whereas the American home is the primary asset of the US middle class? In Japan, after their stock market bubble imploded, many Japanese speculators were wiped-out, but the Japanese middle class was left still standing. Did you know that the typical Japanese family has over $200K in savings?
“(2) the elderly are not being taken care of. Social security offers payouts that are very low and the recent inflation is really hurting.”
This is true that inflation is really hurting the elderly, there will be elderly that slip through the cracks. Generally Chinese society is more resilient due to a stronger family structure than US society. The Chinese have been through much worse than this across the centuries and survived.
“(3) The Chinese economy is facing natural barriers that I think will curb growth significantly.”
In a globalized economy, there are alot less natural barriers. Need more iron ore, buy iron mines in Latin America and Australia. Need more farmland, buy land in Central Asia. Need more oil, buy oil fields in Africa. Almost all of Africa, Latin America, Central Asia is being scoured for natural resources. Don’t laugh, but the Chinese are seriously considering the moon as the next frontier for natural resources in the coming century
twofish isn’t worried because *waves hand* the _people that matter_ are worried (unlike DC); tada…
why am i not so encouraged?
I’m not worried, but Bernanke is worried. Everytime CNBC Jim Cramer pounds the table and curses, Bernanke jumps into action slashing interest rates. Bernanke has sold his soul to the devils on Wall Street.
Great for my short position on the US Dollar
not so great for the rest of the world’s (including and perhaps esp. PBoC’s) long positions in USD; that btw is what i never understood about your rhetoric, it doesn’t seem add up (not that it has to, mind you – i’ll defend your right to be opportunistic/irrational)… but, so you’re really comfortable cheering against PBoC?
oh and looky, looky… see who dissented?
Brad Setser is flat wrong.
China’s reliance on exports to U.S. for growth is a myth
http://www.financialsense.com/editorials/saxena/2008/0125.html
China’s fate is not ultimately dependent on the US economy, which is clearly slowing down. However, these skeptics should remember that today the US only accounts for roughly 20% of Chinese exports which are still rising (Figure 1). So, a decline in US consumption and the ensuing slowdown in its imports will not cause the Chinese economy to come to a screeching halt. Furthermore, it is worth noting that today, Japan, Europe and the US combined account for less than 50% of China’s exports. In other words, due to globalisation and the integration of the world’s economy, China now exports more to the developing nations and on top of this their market-share is still rising.
Pallj — “Chinese oil consumption has grown pretty much in step with the GNP growth. Oil supply may fall short of Chinese growing demand, and to some extent stunt their growth potential in the near future.”
Yes, but who said that the US and more generally the West should use most of the oil? There will be a competition for finite oil supply and other commodities. China has a lot of dollar, the US has a lot of debt. Who will have more chance to get the oil? Of course, the US has all the navy ships and weapons to protect its oil interests, but that is another story.
DC — please read my post; i noted that China is increasingly relying on exports to europe. moreover, even if you subtract 2-3% of GDP from China’s current growth, it will still grow at around 8%. to get something worse, the export slump would need to be correlated with an investment slump.
what i am arguing is that the acceleration of china’s growth from 05 to 07 was tied to exports not to acceleration in domestic demand growth. domestic demand contributed less to overall gdp growth in 07 than in 04.
Guest: twofish isn’t worried because *waves hand* the _people that matter_ are worried (unlike DC); tada…
Guest: why am i not so encouraged?
Worried leaders is an encouraging sign. If you look at the great economic disasters of our time, it’s always about something that no one was worried about. Problems that people worry about get fixed. The more you sweat, the less you bleed.
(1) US Subprime did not bankrupt the entire middle class. a stock market plunge here will.
Doubtful. Chinese gamble on stocks but most people have large cash reserves. A stock market crash is not going directly bankrupt most people and I don’t see any knock on effects like Japan.
(2) the elderly are not being taken care of. Social security offers payouts that are very low and the recent inflation is really hurting.
Chinese elderly tend to rely on their kids for support.
(3) The Chinese economy is facing natural barriers that I think will curb growth significantly
None of the environment impacts are severe enough to kill growth. As far as food, there’s plenty of arable land in Kansas.
We kansans are more than happy to sell our grain to the world as well …
AC
I did not mean to imply that there won’t be any “oil left for China”, just that there will be such a price increase that it could significantly slow GDP growth in China (and in many other places as well)
I read someplace that the Chinese government has put a ban on price increases on several goods, amongst them oil, but I can’t see them sustaining that over any long time.
Brad,
Interesting charts on the Russ Winter blog regarding China taken from a report by Asianomics. Do you have any comments on those charts/report?
roubini is saying that china growth will fall to 6-7% where from? i don’t see it.
that’s nuthin’ compared to Winter:
“…Fixed capital formation is now 41% of GDP. This makes zero sense now, and is probably 8% too high in normal times. These are not normal times, and I expect that to plunge taking away ALL of China’s GDP growth, perhaps even pushing it negative…” http://wallstreetexaminer.com/blogs/winter/?p=1375
Hi
Thanks Brad, I’m just a small town old guy and I’ve felt if China can now take the gains and turn them in providing the same things Ike did for the US, well that 20% can be quickly taken care of by the Asian market. I still think that after the summer games China might be more inclined to stand up to the US and maybe not buy any more of the US funny money. I think I understand the problems they are facing but they a lest admit to them, the first thing countries need to do to start correcting them.
jo6pac
If Russia does the same watch out
Can anyone explain if china has got overcapacity of manufactured goods or is there enough domestic demand to absorb all the goods by themselves. Oil is big question mark because
oil price is high even at 1st quarter( demand falls to lowest in 2nd quarter and it takes 2 to 3 months for delivery). If chinese work for slaves then there is no problem to world. If capitalism is all about profits and optimum, needed investment
things are different story. I don’t know how things will unravel
David,
The current energy crisis is a prime example of why your line of thought would not support China. It simply cannot get the coal from point A to point B. Oil, ore, etc. will all have the same problems. There are natural barriers to this kind of growth, and coal is just the first material that could not be moved quick enough. there are going to be others as transportation resources are reallocated. The short term solution to this building and retrofitting boats, something they have been working on for 6 months.. but long term, this is not sustainable as price inflation will enter the picture.
As far as Chinese taking care of their elderly, the Chinese gov’t just put out their own report that 50% of elderly over the age of 60 are living on their own. Shanghai has 600 elderly care centers (many with wait lists), and the Shanghai Charity foundation is working on a meals on wheels program. the days of the close nit Chinese families huddled over dumplings are a thing of the past.
with regard to the market, the numbers being reported are not fully disclosing the details, and they will not be a good predictor of what happens should the market decided to take a 40% header. One conversation I recently had revolved around the fact that your average Zhou will not get cleared out of the market until the larger players are… state owned companies, regional companies, people with pull, etc.
r
allroadsleadtochina.com
Seeing as how Walmart is posting sales numbers above projections in the midst of this economic slowdown (particularly for the retail sector), I have a feeling that US demand for “cheap goods” from China is less elastic than The Economist seems to think. Demand for consumer goods in China and its SE Asian neighbors is increasingly acting a stabilizer for the region to help it sustain shocks from West, but in the short-term lets not minimize the importance of US consumers when discussing export led growth in China.
i have some sympathy for the broad lines of winters arguments — notably the argument that china’s very high rate of investment is unsustainable and poses rises, and a sharp fall in investment in china would produce the mother of contractions. that said, i have a little trouble seeing the trigger when Chinese real interest rates are basically negative on the lending side (which means that depositors have very negative real rates). the vulnerability is there, but i wouldn’t currently expect it to translate into something extremely troublesome. for now, it seems to me the risks in china still point toward overheating and too much inflation rather than too little demand and deflation.
jRc — I think you are right. I read reports that in December, Wall-mart sales were pretty good. If money-less people in the US turn more to cheap goods (mostly from China), the US import from China perhaps will even increase.
Brad — I read the other day that according to Meryll Lynch, one of the main problems of China is underinvestment. They said it in connection with the weather-related chaos in China, so they mean infrastructure. I also think that investment in infrastructure, environment, and even human welfare (health, pension system etc.) can be the next engine of growth when/if the exports cannot grow fast enough.
Guest: Fixed capital formation is now 41% of GDP. This makes zero sense now, and is probably 8% too high in normal times.
Hong Liang has written a number of reports in which she argues that large amounts of fixed capital formation makes a great deal of sense. The basic argument is that capital investment is still very profitable.
Allroads: The current energy crisis is a prime example of why your line of thought would not support China. It simply cannot get the coal from point A to point B.
This is why fixed capital formation is highly profitable. Once you build something that gets coal/oil/steel whatever from point A to point B (like a slurry pipeline or a power line), you end up making lots of money.
Allroads: As far as Chinese taking care of their elderly, the Chinese gov’t just put out their own report that 50% of elderly over the age of 60 are living on their own.
Which agency and what is the exact statistic? The trouble with statistics from the Chinese government is that Chinese state agencies love to quote numbers, but you have to look very, very closely at those numbers to see what they mean. For example, just because someone lives on their own doesn’t mean that they aren’t getting checks from their kids. Also 60 is rather young. What are the numbers of people over 70? over 80?
Allroads: with regard to the market, the numbers being reported are not fully disclosing the details
You can take like fifty different statistics and then cross-check then with people out on the street to see if they picture makes sense. Something easy to do is to be friends with urban families and have some sense of what their finances are like. It’s rather unlikely to me that a drop in the stock market will cause most families to go broke because most urban families have very little debt.
The two numbers that suggest that something seriously bad won’t happen are the total amount of money invested in stocks and the total amount of money invested in everything. Most investment is still in bank deposits. Those two numbers are difficult to fudge and they are so different that you’d have to fudge a huge amount before it changes the conclusions.
Allroads: they will not be a good predictor of what happens should the market decided to take a 40% header.
A forty percent drop in Shanghai gets the market back to March of ’07. If you invested before last year and the market drops 40%, you are still way ahead.
The market dropped 40% between ’04 and ’07 and nothing seriously bad happened other than bruised egos. If the people I know invested in the stock market are typical, they think of it like gambling which means that no sane person is going to put all their savings into the market, especially since there is a popular perception that the game is rigged.
The failure mode that killed the Japanese economy was banks invested in the stock market, and that doesn’t seem to be happening much in China. Yes, I’m sure that someone is doing it against regulations, but you look at how much investment is needed to cause a problem (about $100 billion) and its not something that you can do without someone noticing.
Also, one thing I dislike is people saying “we don’t know how the Chinese economy would react to X.” If you don’t know, then find out, and if you see a problem, then fix it.
D.C. – “Chinese import-export trade with the United States cannot account for more than 3-4 percent of US GDP, whereas US consumer overspending accounts for a record 72 percent of GDP. The trade linkages between Chinese exports and faltering US Economy are vastly overstated.”
I would like to see you back up the first sentence with data references.
72 percent is a bold statement. I don’t believe that you can support that one with hard facts. Not at all.
When is the last time you counted containers on a train or at a port of entry? Do you have any idea how many containers of goods are inbound to the USA from foreign-based production sources including China?
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Brad – “That has meant that China has shifted from relying on US demand to relying on European demand. Up until now, China has offset the slowdown in the pace of growth in its exports to the US with strong growth in its exports to other parts of the world.”
Brad, I would not have worded the comparison in that manner. U.S. and European corporations flew into China early on and set up shop as negotiated with and allowed by China’s national leadership. The U.S. corporate shift was a little fasterr in terms of corporate transference of production sourcing, but not by much. While this isn’t discussed in depth very often, it is worth a detailed research effort.
I do not believe that China has relied solely or primarily on U.S. or European economies and related demand. Rather, China has enjoyed the massive benefit of increased trade with the U.S. and Europe as well as all other nations including the relaxation of associated national trade policies and WTO entry as a icing on the cake. China has accommodated U.S. and European desires and Asian demand for China-based source production of intermediate and finished goods, and concurrently allowed its firms to further support domestic suppliers in those same global markets without the cover of multinational fronts.
China isn’t relying any one nation for its economic well being. Rather, the largest consumer nations in terms of net demand were relying on China-based production of intermediate and finished goods. Similarly, the largest production nations have transferred considerable intermediate and finished goods production to China directly or indirectly.
Declines in U.S. consumer and business demand consumption domestically in the U.S. and abroad (for services and goods) will have an economic output impact on China, no question, but China has broadened its global economic interests to the point that it is competitive as a source of production for most consumer and business goods traded internationally. This did not occur recently as this is what China put into play early on.
Plant production in China is still running hard, but the majority of that effort was never targeted solely nor primarily for the United States of America. That effort, with and without multinational corporations onsite, was targeted for the world…not just the USA and nations of Europe.
This broader point should not be overlooked or undersold in any discussions regarding China’s economic role in the world.
China isn’t the issue. Multinational source production is the issue. And multinational corporations know how to balance their spreadsheets and adjust their marketshare globally should the U.S. economy decline temporarily or permanently with regard to the products that such corporations market to the world.
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Movie Guy: China isn’t the issue. Multinational source production is the issue. And multinational corporations know how to balance their spreadsheets and adjust their market share globally should the U.S. economy decline temporarily or permanently with regard to the products that such corporations market to the world.
That’s pretty accurate. One thing that I find interesting in my daily life is how national borders are disappearing. National borders are almost starting to become like borders between US states. Relevant since you are dealing with different taxes and laws, but not this giant wall that they were even a decade ago.
I think that cheap telecommunications are as important to this as tariff reductions. It really changes your sense of the world when you are calling London from NYC every fifteen minutes.
Hallo
I have the following mechanics concerning Chinese export/import-myths:
1. US: recession–> US demand: down = global Us-demand: down.
2. –> export of all rest-world-exporters to US: down–>rest-world income: down–>rest-world demand: down = total global demand:down
3. the ‘down of total global demand’ will be concentrated in the world factory number 1, in China
4. China will feel the impacts of US-recession overproportional.
(Walmart factory in China, that produces for the whole world, will see, that the orders even from Africa will go down)
5. All depends on the deepness and duration of US-recession.
- If US (and so rest-world) will go the hard way and bring the houdini-part of the financial economy back to reality, then I would prognose the global recession number 1.
The hope would be: hefty pain, but short term pain
- If US thinks (and probably finds some)there is a way out, without taking the full hit at one time or without going down as deep, as the reality demands, then we will see what: soft pain, but long term pain; something very not appetizing.
(I would prefer the hard way: clean the house and then go on.
But that is only because I don’t have the numbers, that Bernanke has: numbers sometimes change perspectives)
globumedes
”.
(ps. on names: Twofish wrote: “Hong Liang is a she
Is she a she because of “Hong” or of “Liang”? Or because of “Hong Liang”?
DC is right on the consumption numbers, generally speaking — consumption is around 70% of US, and imports from China are aroud 3% of US GDP (@$400b). I can look up the exact numbers, or they can be found on the bea website (they have a useful interactive table function). 3% though isn’t small — tis roughly equal to US oil imports (tho the oil import bill is now rising faster than imports from cHina). the key though is that it is not balanced — US exports (goods and services) to china are small relative to uS impots, and relative to Chinese purchases of US Debt.
2fish — I disagree with you re: national borders. the border between the “RMB” and the “dollar” is a national border, and it matters very much. the government on one side of the border intervenes massively to keep the value of its currency down, thereby influencing a host of corporate decisions.
national borders also matter immensely for the oil business — see the rise of national oil companies, which often have a monopoly on conducting business inside the borders of their country.
tis hard to argue that borders no longer matter went governments — who are defined by borders — are adding to their assets at an unimaginable rate.
Guest — “4. China will feel the impacts of US-recession overproportional. (Walmart factory in China, that produces for the whole world, will see, that the orders even from Africa will go down)”
Even during a world-wide recession, people still buy things and consume. It is possible that they will switch even more to
cheaper goods, which are mostly Chinese-made.
This blog is so Pacific-centered..
Brad’s remarks on the trade links between China and Europe are always dismissed.
D.Chang, Brad is talking about China’s exports TO EUROPE, not the U.S.
Please take note that right now the EU is the largest world economy with a GDP of 18.2 trillion dollars nominal, versus 13.8 for the US and 3.4 for China
“hard to argue that borders no longer matter when governments — who are defined by borders — are adding to their assets at an unimaginable rate.”
Intriguing duel of interpretations.
To paraphrase William Jefferson Clinton, it depends on how the word “matters” matters.
Governments who are defined by borders politically are apparently decreasingly defined by them economically.
Governments matter to currencies, but borders may (China) or may not (US) matter to currencies.
And of course borders have mattered less and less to private sector economics over time.
Americans who haven’t travelled abroad, and that includes a majority of US citizens, don’t appreciate how small the world is today. At a Changsha City hotel deep within interior China, one can sit at a bar drinking American Budweiser beer, access one’s Verizon e-mail account from your laptop as easily as in your home, and watch ESPN sports on television broadcast in English. And if your still bored, you can access the Roubini RGE website blog which isn’t censored by the Chinese government. In the past summer, I was in Changsha, Guangshou, Shenzhen, and Beijing. The major US mainstream news outlets are NOT censored by the Chinese government (ie. CNN, NYT, MSNBC, WSJ, etc.)
RBC, 31.01.2008, Moscow 14:49:38.Russia’s GDP went up 8.1 percent to nearly RUB 32.989 trillion (approx. USD 1.35 trillion from USD 0,986 trillion in 2006) in 2007, the Russian Federal State Statistics Service reported today on the basis of preliminary calculation of GDP growth.
Unbelieveably, calling Guangzhou or Beijing China is 5 times cheaper today than a domestic phone call in New Jersey. From my cell phone on the road, through Pingo.com which automatically recognizes your cell phone number, calling China anytime from anywhere is now only 2 cents per minute. Within New Jersey, the Verizon monopoly still charges me 10 cents per minute for a domestic call.
Hallo
off topic
“Tracking the subprime cisis – update 3″
UBS per 28.Jan.08
1. estimated write-down; (unchanged)
a. Subprime and Alt A, b. LBO, c. ABCP (not incl. 1.), d. CMBS: total 471bn; part of banks 225bn; total market 4150bn
2. anounced write-downs (+11bn)
152bn = 2/3 of total estimated losses of 225bn
3. Not included: CDS maket
ft.com: “In total, we estimate that global losses in CDS markets and the underlying credits they insure would be $365bn-$425bn”
http://www.ft.com/cms/s/0/486fb178-c2b9-11dc-b617-0000779fd2ac.html
4. Total: 1 + 3 = ~840bn
5. What’s about this number?
Fiction or reality?
6. Credit crunch:
840bn minus 150bn(gov.) = 690bn;
Credit market will crunch by factor 10 (money creation); means: 6.9trl.
7. How hard is this hit? How much destruction will it have?
globumedes
Both Brad Setser and, apparently, Hong Liang are behind the curve here. Exports were not an important driver of China’s growth until 2004, after which their contribution increased sharply. However, that surge petered out towards the end of last year: see the World Bank’s latest China Quarterly Review. In any case, the relevant measure here is net exports. And the figures show that the big rise in China’s surplus was due more to a slackening in the pace of import growth than to a super-acceleration of exports.
That much is history. The much more interesting question is how China’s policymakers get themselves out of their current fix. Reflate after the snowstorms and risk seeing price (and asset) inflation spiral upwards? Or return to the previous tightening stance and risk a serious downturn – and a truly terrifying surge in NPLs – just as global growth is weakening? Read the official pronouncements, and the answer appears to be both!
One thing, however, does seem clear: Beijing’s efforts to keep everything going level and steady until the Olympics – in my view, the central priority of recent policy – face serious challenges. The question now is whether they can continue to defer until September the inevitable reckoning.