Four bits of information to help understand China a little better …
Energy use is subsidized – even though China is a net importer of energy. Even after increasing domestic gasoline prices by 17%, Chinese prices will remain below the world market price. The World Bank estimated that November price hike increased domestic prices to the equivalent of $78 a barrel. My very rough calculations suggest that the recent price hike consequently should raise domestic prices to a per barrel equivalent of the low 90s — perhaps more if exchange rate moves are factored in.
Exports continue to contribute significantly to Chinese growth. The latest, highly recommended World Bank Quarterly – written in large part by Louis Kuijs — calculates that net exports contributed 1.5% to Chinese GDP growth in the first quarter, and more in April and May (see p. 4). That is less than in 2005, 2006 an 2007. But it is still a positive contribution. Real import growth has slowed more than real export growth. The (small) fall in China’s trade surplus relative to last year is all due to the rise in import prices.
The World Bank’s data has one surprising implications: Net exports contributed more to China’s growth in q1 than to US growth (1.5% v 0.8%).
Given that China still manages its exchange rate primarily against the dollar and the RMB has depreciated v the euro because of the dollar’s slide, I guess that shouldn’t be a complete surprise. It does though suggest that the hard work of global adjustment hasn’t really even begun. The World Bank forecasts that China’s current account surplus will stabilize at around $370 billion in 2008 before resuming its rise in 2009 once the effect of rising oil prices wears off.
Both China’s government and its state banks are accumulating an amazing amount of foreign exchange. That shines through the World Bank’s analysis. Stephen Green of Standard Chartered reports that the hike in reserve requirements – combined with pressure to meet that requirement by holding dollars — has led China’s banks to increase their foreign exchange holdings by $160 billion.* Think a bit under $100 billion in 2007 (mostly in q4) and a bit more than $60 billion in the first four months of 2008. If China’s state banks were a sovereign country, they would rank second in the global “reserve” growth league table over the past twelve months – outpacing both Russia and Saudi Arabia. Only the People’s Bank would top them.
The state banks now are sitting on a huge pile of foreign exchange. Far more, incidentally, than the CIC. About $70 billion of the CIC’s $210 billion flowed back to the PBoC when the CIC bought Huijin’s stakes in the big state commercial banks. Another $20 billion was handed over to the CDB. That leaves $120 billion max – less than the fx the state banks have accumulated to meet the reserve requirement. I still haven’t quite figured out what the state banks have been doing with all this cash though; at least in late 2007, they don’t seem to have been buying foreign debt securities.
China isn’t quite to the foreign exchange market what it is to global demand for cement (or coal), but when all the various pots that China has filled with foreign exchange are counted, China’s impact on the foreign exchange market is really quite extraordinary.
Forget the idea that global banks are “offshore intermediaries” for China’s crummy state banks; today China’s central bank and its state banks are intermediating a lot of global funds that have found their way into China. China now effectively borrows from the world at high rates to invest in the world at low rates — all while taking on the risk of losses if the RMB rises v the dollar and euro.
China’s exchange rate regime doesn’t just influence the foreign exchange market; it also shapes a host of key domestic policies.
Anyone wanting to understand the channels through which China’s undervalued RMB has led to a rise in China’s savings surplus should read Andrew Batson’s account of how China is worried that spending too much on domestic infrastructure would add to inflationary pressures. Batson writes:
Confronted with two big natural disasters before the year is half over, China’s government is having to boost spending to rebuild damaged areas and strengthen infrastructure. But with inflation still high, officials are reluctant to pump too much money into the economy and are limiting the program’s scale.
China has the funds available to invest more at home, but it is choosing not to avoid overheating. However, it has another option to avoid overheating – namely letting the RMB rise and reducing the contribution of net exports to growth. China’s government could be using the funds it has raised by selling the bonds used to finance the CIC to invest in say higher quality schools; it is choosing instead to invest abroad on terms that imply a significant risk of further losses.
There are a couple of other channels as well – the World Bank quarterly reports that China has tightened controls on bank lending, and thus has been able to keep credit growth “contained” despite all the foreign exchange flowing into the central bank and the associated pressure for rapid money and lending growth. China has in effect forced the banks to invest China’s domestic savings in dollars (through the reserve requirement) and to lend to the central bank, loans that the central bank uses to buy dollars and euros. If the banks were shackled, they could lend more domestically.
Stephen Green also reports that the government has CNY 2.5 trillion ($355 billion) on deposit at the PBoC, a sum roughly equal to 10% of China’s GDP. That is real money. There is no need for the government to have that large a cash cushion. China could finance higher levels of government spending by running down its cash balances rather than with new borrowing – or with more taxes. But if it did so, it would undermine one of the ways China has “sterilized” its huge reserve buildup.
Throw it all these points together than they tell a similar story: China’s determination to manage certain key prices – notably the exchange rate – has driven an awful lot of other policy choices. And China is now big enough that its policy choices matter for the world, not just China.
* Both Green and Wang Tao of UBS believe that the “Foreign assets: other” line on the PBoC’s monthly balance sheet corresponds with the dollar reserves the banks are holding. The banks also have foreign exchange from various swaps with the central bank (this was important in late 2005 and 2006, and to the best of my knowledge these swaps have not been unwound) and from the various recapitalization exercises. All told, they manage at least $300 billion — and probably more like $400 billion.
Energy use is subsidized – even though China is a net importer of energy. So what? China’s energy subsidy accounts for only about 1% of GDP, and the Chinese government retains too many US Dollars. The Chinese energy subsidy only impacts the profitability of state-owned PetroChina and Sinopec so it is none of the damn business of the US to tell other sovereign nations how to manage their domestic economies. The energy subsidy for rural Chinese farmers helps maintain the economic and political stability of the nation.
When there is a mob of angry people carrying pitchforks and knives in front of the building, who will care what some Ivory tower, Neo-liberal Economist in a Washington DC think-tank may moralize. Some day in the future, an mob of very angry people will be standing outside the gates of the Federal Reserve demanding monetary accountability for the soaring US inflation rate
This energy policy change today is very interesting. To me it’s most interesting because it should fuel even further inflation throughout other segments of the economy.
I understand the argument that it will dampen demand, but how about this? Now, many goods and services just got more expensive to make and transport so will that cost now be passed through to the consumer?
Very risky business in my opinion and very surprising that they would do this just before the Olympics - i.e. risk further domestic protests and social unrest esp. after the flooding disaster.
-Sonny
DC — methinks that some of the anger should be directed at China’s policy makers. You can debate whether US monetary policy is right for the US. But there is little question that US monetary policy is wrong for China.
It is of course China’s own choice to subsidize energy consumption. But as is often the case, China’s choice doesn’t just impact China. The more China demands, the more pressure on global prices. In this case tho there is a clear domestic interest group (the state oil companies) that feels immediate pain if domestic prices are kept well below market prices.
Incidentally, the US kept its domestic oil price down once too - and other counties put pressure on the US to raise prices to global market levels in much the same way there is now pressure on china and for much the same reason.
Brad, excellent post!
The more I learn about China allocation of resources, the more I think Chinese leaders are squandering and destroying wealth to a scale unseen in history. And to add insult to injury they are throwing all this wealth at the US to consume.
The more I learn the more I remain speechless.
The best monetary policy of the US is to destroy the dollar in a put a frog in a pot of water and heat it up slowly fashion. The US may have a consumption issue, but china has an employment issue. Which is the bigger problem?
I have this suspicion that the RMB is going to be revalued rather significantly soon. Since oil is denominated in dollars, an appreciation in RMB is going to cause a drop in oil prices.
Also, I don’t think that the contribution of exports to GDP is what has people worried. It’s the contribution of exports to employment.
Alessandro: The more I learn about China allocation of resources, the more I think Chinese leaders are squandering and destroying wealth to a scale unseen in history.
Hardly. Economic development is a very, very messy process, and looking over the last thirty years, China has done quite well. If you ask the question “why doesn’t China do X???” there’s usually a very sensible reason.
If you want to see an economic disaster look at the twenty years before that.
To DC: Chill. The United States is not in a position to demand that China do anything. They can ask nicely, and if the Chinese leadership things that it is in China’s interest, they’ll do it. If not. Not.
In the case of oil subsidies, the problem is that they aren’t sustainable. Once you burn through the profits the oil companies made when oil prices were low, you then have to pump state money into the companies, and that is a big taboo.
bsetser: Incidentally, the US kept its domestic oil price down once too
And removing the caps was due less to foreign pressure than the fact that price controls don’t work very well for very long.
Also one thing to mention is that oil prices are not necessarily subsidized. During the 1990’s when oil prices were low, the state prices were considerably higher than the market prices leading to huge profits from the SOE’s and lots and lots of smuggling as people bought cheap oil on the world market and resold it as expensive oil.
So far, markets have taken the view that the end of China’s oil price controls will signal a drop in global demand. I wonder. If I understand corretly, the policy has been to force the local oil companies to charge lower prices. This would have made them reluctant to import oil and created local scarcity. Lifting the price caps thus may increase China’s oil imports and consumption.
I think it would be a mistake to conclude, based on the national income accounting, that because exports contributed only 1.5% to China’s growth, an absence of net export growth would have little effect on growth of the overall economy. A decline in exports would probably lead to follow-on declines in domestic investment that could seriously hurt the overall economy.
Hey Brad,
Let’s talk about hypocrisy. The US consumes 20 million barrels of oil everyday, the Chinese consume 7 million per day. The US imports 70% of its oil requirements, the Chinese import 30-40% of their oil requirements. The US consumes more energy on both a per capita and absolute total consumption basis. Yet, Hank Paulson has the temerity to maintain that higher oil prices are mostly the fault of Chinese overconsumption. Goldman Sachs wouldn’t have any involvement in energy speculation driving oil prices higher, would they?
Twofish,
The gasoline price in China was just raised 18% over a period when oil prices rose 50%. PetroChina’s profits dropped 30% in the last quarter year-on-year, but it isn’t like they are losing money. State-owned PetroChina is merely making less profit than they would if the market was deregulated.
I don’t understand China’s policy. Why the convern about export based employment? In th extreme case, if China stopped buying dollars, and thus exporters could not sell their goods, couldn’t China just buy the goods from the exporters directly? Why buy dollars that are going to have their value inflated away?
DC — I rarely agree with you. But your points on US oil consumption resonate. The US consumes like a net oil exporter, but it hasn’t been one for like 40 years …
Libra and others — If China wanted to increase employment, a policy of more government investment in domestic infrastructure and less subsidization of external consumption of Chinese exports almost certainly would work better than the current policy. the great irony of china’s current boom is that it hasn’t created many jobs.
Libra: I don’t understand China’s policy. Why the convern about export based employment? In th extreme case, if China stopped buying dollars, and thus exporters could not sell their goods, couldn’t China just buy the goods from the exporters directly?
Yes provided that things didn’t move too quickly. It take time to shift consumption and employment. This is the main reason I think that China is appreciating the RMB gradually. It takes time for the economy to adjust.
DC: Yet, Hank Paulson has the temerity to maintain that higher oil prices are mostly the fault of Chinese overconsumption.
Just because someone is hypocritical and self-serving doesn’t mean that they are wrong. In the end, it doesn’t really matter whose “fault” it is.
DC: Goldman Sachs wouldn’t have any involvement in energy speculation driving oil prices higher, would they?
If they did then they lost a lot of money today because China’s announcement caused the price of oil to drop. Of course of you are conspiracy minded, you’d argue that GS was behind that. Taking that to its logical conclusion, GS is responsible of oil prices rise, fall, or stay the same.
(Funny that no one talks about evil speculators driving down the price of oil, when in fact a speculator can make as much money with falling prices as rising ones.)
The amount of capital it would take to move oil prices is far beyond what GS has. The people that control oil prices are the Saudis and the Russians. One other thing, in the West, people are shielded from oil price spikes because there is an active futures and derivatives market. In China, there isn’t an oil futures market so the government has to take the role of absorbing price shocks.
Libra asks ” if China stopped buying dollars, and thus exporters could not sell their goods, couldn’t China just buy the goods from the exporters directly?”
They are the wrong goods for domestic consumers. The investment in unsustainable export will soon be exposed as wasted.
bsetser: If China wanted to increase employment, a policy of more government investment in domestic infrastructure
China is already spending 40% of GDP in capital investment. I seem to recall a lot of economists saying that this was a bad thing around 2003-2004.
Also, it’s a glass half full/half empty thing, but to me a 1.5% contribution to 11% growth doesn’t strike me as significant contribution. Most of Chinese growth comes from construction and investment.
bsetser: the great irony of china’s current boom is that it hasn’t created many jobs.
Increasing productivity by capital investment doesn’t create new manufacturing jobs, and if anything it eliminates them as you build a machine that can do the work of ten workers. It increases incomes, which then can create new service jobs.
Good piece with lots of good questions.
Clearly, China is still a mixed economy with many statist or even “communist” things remaining. Why is it so easy to depict PRC policy as irrational?
Some 10 years ago I had to write a critique of a book by Nicholas Lardy about the imminent collapse of the Chinese banking system. That was very easy, if you understood the history of the Chinese banking system. These “banks” were just construction sites with to be demolished buildings still standing and titles not even trfsferred to the future developers. Claims on the state banks were not even claims on separate legal persons. Of course the state could never let them fail (for all the reasons applicable to big banks everywhere plus the fact that claimants did not have to be bailed out, because their claims were already on the state. The recapitalization was an internal accounting exercise of the state, but with very important consequences for the mechanism of supply of credit to the state firms and the influence of provincial party officials over lending, a first step towards system of feasibility-based - rather than administrative provision of non-equity funds to the overmanned state sector (as well as the introduction of the concept of “equity”). All of this takes time. China has been conducting the equivalent of brain surgery on itself. Many of the phenomena we observe are consequences (sometimes unintended and unexpected, and then corrective action is taken), of a very slow, deliberate process of economic reform without a clear blueprint as to the outcome and with its own rationality.
But there are a few boundary conditions which the ruling group must respect: (1) internal order (2) being seen as closing the standards of living gap with Taiwan, HK and Singapore, not only in the coastal provinces but also in the interior(3) absolute financial external autonomy, especially in the face of increasing import dependency for the “domestic” economy. Observers should also know that the leadership has to live with a lot of waste (multiple investment project, industrial firms biding gainst each other for raw materiale, etc, following from the decentralized nature of the “state&party” and the still rudimentary effects of a western type of “rule of law”. I guess that China’s policies in all these areas will stay on automatic pilot (perhaps appreciate a bit against the Euro and Yen but that would be it) until we have a new US president. As far as China is concerned, a big RMB adjustment is a favor that can wait until early next year, when a new administration may be able to make credible commitments. And the concept of credible commitments are an intellectual staple for everyone in the leadership, courtesy of Mr Kornai. Pity perhaps for the rest of the world, but a recession outside China would not hurt as much as in the past, would in fact reduce pressure on the world’s commodity supplies.
Is China’s savings rate as a percentage of GDP trending up? Is the savings distribution among households, business, and government changing at all?
Rien Huizer: Good post.
Twofish,
China hikes prices a tiny bit and the price of Oil gets hammered big time … yeah … that right … Goldman Sachs Paulson says energy speculation isn’t a factor … LOL
Alessandro Says:
June 19th, 2008 at 4:56 pm
Brad, excellent post!
The more I learn about China allocation of resources, the more I think Chinese leaders are squandering and destroying wealth to a scale unseen in history. And to add insult to injury they are throwing all this wealth at the US to consume.
The more I learn the more I remain speechless.
well, for chinese leaders, very long term geopolitical goals are above short or middle term economic and monetary interests
they prefer to lend to the US (and other westerner) consomers for them to buy chinese goods as long as will be needed to destroy US (and western) production means.
When criticizing Chinese policy or actions, it is wise to keep in mind three differences between us and them. The Chinese
1. are smarter than us (as Kissinger ruefully observed).
2. play the long game. Often VERY long.
3. usually end up with the money. (19th. century Western invasions of China were at least partly due to growing trade imbalances.)
Chinese civilization is actually an amalgam of different Asiatic tribes. The Han Chinese have assimilated the people and ideas from everyone who came to China: Huns, the Mongols, Manchurians, and even Jews. Even the ethnic Korean population in Northeast China will tell you that they are Chinese first. All Chinese people are actually mongrels. The only 1 of the 7 Jewish tribes to have disappeared vanished into China. Elsewhere, the Jewish tribes have managed to maintain their distinct cultural identity across Europe, the Middle East, and Africa. The Jews were never persecuted by the Han Chinese. In fact, the Jewish tribe simply intermarried into the larger China population, and after several generations, the homogeneous Jewish tribe ceased to exist. However, the Jewish blood and some cultural identity have become a part of Chinese history and heritage. The Great-Great Grandfather of my mother’s friend born in China was Jewish. In more recent years, Jews migrated from Europe to escape the Nazi persecution during World War II. A single Jewish synagogue remains in Shanghai today. Chinese civilization is historically open to the people and ideas from the outside world. But those Western carpetbaggers who don’t contribute to Chinese society aren’t welcome.
zebla: they prefer to lend to the US (and other westerner) consomers for them to buy chinese goods as long as will be needed to destroy US (and western) production means.
Chinese politicians really doesn’t care directly how their policies affect the United States, just like US politicians don’t care how much how much their policies affect China.
To Godfree: Remember that China is growing so quickly because it is recovering from centuries of political and economic mismanagement. Chinese often look at the long term, because if you look at the short term, things are *sooooooo* depressing that you just feel like giving up.
To keep things in perspective, people jump when the Shanghai stock market drops 6%, but my parents had to deal with famine, civil war, totalitarian governments, and brutal foreign occupation armies. The only way you can keep yourself from going into a small corner and smoking opium until you die is to think that things will get better someday.
Also Chinese aren’t generally smarter than Americans. The current leadership is merely “not incompetent” and some of the previous people were horrifically bad. Also I’d much rather have dumb people in smart political systems than smart people in dumb political systems.
Chinese savings has increased dramatically, both relative to GDP and absolutely. That allows China to finance a very high level of domestic investment and lend to the US. whether China will– after taking into account future losses on things like its loans to the US and a new generation of bad loans — be able to generate a positive real return across that high level of savings is an open question.
anon: Is China’s savings rate as a percentage of GDP trending up? Is the savings distribution among households, business, and government changing at all?
China’s savings rates among households has remained constant over the last thirty years. Savings rates among businesses shot up dramatically after 2000, and this was because of economic reforms that resulted in businesses having money to save. Something that makes China-2008 very different from China-1998 is that state-owned enterprises are now revenue producing rather than revenue draining.
Also, reading some more I got a very good explanation for why the government increased the price of oil. The big losers in price caps were the big oil companies, and their share prices were getting hammered, and increasing the price of oil was intended in large part to prop up the stock market.
One other thing about the US political system. There is a very strong distrust among voters for people who seem too smart, and the US is the only nation I know of in which “intellectual” and “elite” are considered insults. One side effect of this is that in order to be elected, politicians have to pretend to be stupid, and so a lot of American politicians look much dumber than they actually are, since it takes a huge amount of intelligence to pretend to be stupid.
Of course, sometimes politicians really are stupid (i.e. the Iraq War), so it is vital to figure out which is which. One reason you need to be careful is that its easy and quite dangerous to underestimate a brilliant person pretending to be stupid.
Twofish, apart from your cryptic remarks about dumb systems and smart politicians (the US I suppose?), you r hitting the nail on the head re the gas price increase and the composition of savings. It is not with the consumers (similar to Singapore, incidentally). And given the large grey area between private and public in the business sector we rally do not know if public sector savings are really (1) at the disposal of the public and their representatives or (2) in he process of being exproprited, or, (3) already expropriated but not according to the books. I guess one should not expect accounts uniformly with US levels of realism and sophistication (like for instance an icon like Enron) in China. Not enough trained accountants, too many smart people pretending to be dumb.. Perhaps the vanguard of consumers is even plunging into debt, looking at all those new apartments where the courtyard apartments used to be. Of course these apartments will always appreciate.
Do you think it looks pretty stupid for President Bush to be attending the entire Beijing Olympics in August considering the dual US wars in both Iraq and Afghanistan? The current body count is 4000+ dead and 40000+ seriously injured US soldiers with missing arms and legs, brain damage, etc. What is the rest of world going to think about the US President on vacation for the Beijing Olympics? Wherever Bush travels, it seems that his little Bubble world travels along with him. For security, one-hundred thousand Paramilitary Chinese security will protect Bush while at the Beijing Olympics. When President Bush last visited Shanghai last time for the APEC summit, the entire city was literally shutdown for security. Shanghai Pudong was literally an entire ghost town. That is what President Bush can do for any city in the world.
Just a note on China’s inflation rate of approx 10%. If you take out food, the inflation rate is under 2%.
Huizer: And given the large grey area between private and public in the business sector we rally do not know if public sector savings are really (1) at the disposal of the public and their representatives or (2) in he process of being exproprited, or (3) already expropriated but not according to the books.
One of the basic problems in reforming centrally planned systems is how do you convince company managers to make a profit if they think that any profits are going to be removed from them. One of the very early principles is that the state would only take profits from companies through taxation (and in exchange companies will not get direct state subsidies), and it is only through very careful thought that this will be changed.
One thing that has been vital to this effort is having legal rules that very precisely indicate when and how the state can take profits from SOE’s, and when and how they can’t. Even in the absence of formal legal rules, the fact that actions set expectations and precedents constrains the actions of the Chinese leadership.
For example, PetroChina and SinoPec got money dumped into them by relaxing price controls rather than by a direct state subsidies since that sets up an expectation that in the future the government will deal with similar situations by relaxing price controls rather than by direct subsidies.
Some people prefer the devil theory of inflation: “It’s all Peak Oil’s fault.” This approach ignores the fact that the evidence of inflation is represented by “actual” prices in the marketplace.
The “administered” prices of the world’s oil producing countries would not be the “asked” prices were they not “validated” by (MVt), i.e., validated by the world’s Central Banks.
Twofish,
thanks for your interventions….
…Do you think that China would reach global suprematy more “by chance” as kind of collateral effect than because this is conscious goal?
If the dollar were really overvalued (or undervalued), (or any other countries exchange rate); wouldn’t speculators quickly drive its price down (or up), to approximately its purchasing power parity (PPP) level???
I.e, the PPP expresses, in relative terms, the purchasing power of currencies within their respective countries.
E.g., assume the U.S. dollar/U.K. pound PPP (from our standpoint) was equal to $2.00. This indicates that $2.00 could buy commodities in the U.S. having an exchange equivalence to the volume of commodities that could be purchased in the U.K. for one pound.
The commodities involved would presumably be those included in weighted price indexes of the respective countries. Obviously comparison of identical commodities with identical weights is not being made.
Isn’t the equation: PPP = Base year rate of exchange X Current U.S. index/Current U.K indexes X Base year U.K. index/Base year U.S. index.
Bilateral calculations yield correct cross rates. The base year rate represents a “normal” or equilibrium rate. The equation adjusts the indexes of the two countries to the save base period, e.g., 1982=100
to bsetser - When are you releasing your next book on a History of Modern Chinese monetary policy? I get this vibe you’re setting us up for one. I would gladly buy it when it would be released.
DC - Comrade, the Party released new talking points this week, did you get them?
prefer anon,
If the Chinese were seriously intent to destroy the US, they have the best secret agent mole at the US Federal Reserve that deliberately debauches the monetary value of the US Dollar into toilet paper. Otherwise known as Helicopter Ben for his “cheap money” monetary policies, the Federal Reserve is printing the United States into financial oblivion. Throughout entire world history, the fastest way to destroy any empire is the monetary destruction of the nation’s currency. That is the way the Roman Empire collapsed, the pre-Hitler German government collapsed, and how the pre-Communist Chinese and Russian governments collapsed. Too bad we have a Federal Reserve Chairman who understands “absolutely nothing” about a “sound money” monetary regime in world history. The Enronization of the US Economy continues …
zebla: Do you think that China would reach global supremacy more “by chance” as kind of collateral effect than because this is conscious goal?
I don’t think that there is currently a conscious goal or desire by China to reach “global supremacy.” There is a desire for China to be a great power, but there isn’t any desire that I can see for China to acquire the global supremacy that the United States has.
China is interested in wealth and power for nationalistic reasons. This puts limits on China’s ambitions, since there isn’t that much desire to make the world look like China. I don’t think that there are that any Chinese who think that the Chinese method of government is universally applicable to places outside of China.
By contrast, the United States is interested in wealth and power for universal reasons, and the American political and economic leadership truly believes that the world would be a better place, if the nations of the world look more like the United States. This means that the US has to be constantly intervening in the affairs of other nations.
Personally, I think it is very unlikely that China will ever have the type of global supremacy that the United States has now for two reasons.
1) Even in the most optimistic scenario, China is not going to be a developed nation until at least 2050, and perhaps for quite a bit longer than that. Several decades is enough time for several radical reshapings of world history.
2) For China to be the global hegemon, it means not only that China has to rise, but that a lot of other nations have to sink, and coming up with a scenario in which China rises, but the other major powers in Asia such as India or Russia don’t also rise, is very difficult.
One thing that Beijing realizes is that if the US self-destructs, it will take China down with it.
DC: Throughout entire world history, the fastest way to destroy any empire is the monetary destruction of the nation’s currency. That is the way the Roman Empire collapsed, the pre-Hitler German government collapsed.
Actually it isn’t. Monetary collapse in the Roman Empire happened as a result of general economic collapse rather than the case.
The case of Germany in the 1930’s is rather more interesting. The Weimar government *didn’t* collapse because of hyperinflation. Hyperinflation in Germany happened in 1923, and by the late 1920’s, the government had successfully fixed that. What caused the government in Germany to collapse was the contraction in the world after 1929, and that the way that was fixed in both Germany and the United States was massive public works projects.
DC: Too bad we have a Federal Reserve Chairman who understands “absolutely nothing” about a “sound money” monetary regime in world history.
You need to read Bernanke’s works on the causes of the Great Depression. He might be wrong, but he has thought a lot about it. One should point out that if he is right and you are wrong, then the policies you advocate would be quite disastrous.
yes of course,
by now, China is much too weak
I agree too with your conclusion: our present game is interdependance
I also have noticed Godfree response (24):
“The Chinese…..play the long game. Often VERY long”
Great summary post, of the issues you’ve been writing about the last couple of weeks. I’d love to see one on the scenarios for this current apparently unsustainable trajectory to unwind.
isn’t it ironic how the west always comes up with something to screw china up. in the XIXth century it was opium. now it’s the carry trade.
Brad- a conundrum I thought you might be able to help me solve. A colleague and I were looking at US-China bileteral trade data as reported by the US and as reported by China. This was spurred by my hypothesis that the bilteral surplus would be over-reported by China relative to its reporting by the US due to the incentives by Chinese corporates to over-invoice exports and under-invoice imports in order to bring more USD into the country to bet on the exchange rate. I postulated that the magnitude of this difference might give us some perspective on the size of the “hot” money inflows that is being disguised by the trade balance.
To my extreme surprise, the results came out the exact opposite! We only looked at January through April data for 2008, but, for that period the US reported 98.6B in imports from China and 23.7B in exports to China, while China reported 74.3B in exports to the US and 28.0B in imports from the US. In other words, China reported a trade surplus 28.6B SMALLER than the US did. This pattern is evident in each individual month, so it doesn’t look like any one off factor. Both the US and China report bilateral data individually with Hong Kong, but even if you aggregate that in (perhaps you could argue some trade gets confused as to whether it originated from China or HK), this doens’t change things much.
Of course you might ask whether there are definitional reasons, or perhaps differenes in exchange rate at time of leaving source and arriving at destination, etc. However some other interesting data:
The China-Canada data shows the same result. China underreports its bilateral surplus relative to Canada reporting its deficit (for the Jan-April period the numbers are 2.0B vs 9.4B). This is notable since China and Canada are about the same distance away as China and the US (if wanting to isolate transportation issues). However if one compares the bilateral trade data out of Korea and Taiwan to the US bilateral data, they are both very close to in-line. This suggests that the distance isn’t much of a factor, and to some extent neither is seasonality (though would be best to compile a few years’ data to verify this).
Also, we took a look at China vs Korea bilateral data. In this case Korea has a trade surplus with China and neither country is in North America/part of NAFTA. But we still see the same effect, though in this case China reports a bigger trade deficit with Korea than Korea reports a surplus with China.
In other words, preliminarily it looks like China is systematically underreporting its trade balance with trading partners. Further study is warranted.
One thing to add is that the China-EU data seem to be relatively close. This covers a lot of major trading partners, which might suggest China overall is systematically underreporting its surplus.
sharpemind — the US counts imports that flow from China through HK as imports from China. China counts the same flow as exports to HK. China’s data tends therefore to understate Chinese exports to the US and the eu while overstating exports to China.
the US data likely also understates US exports to china, as some exports to Hk are likely then onsold to China.
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