China’s June exports: still chugging along, despite all the talk to the contrary
Chinese policy makers are worried by the slowdown in y/y export growth. Never mind that 18% y/y growth during a US slowdown isn’t bad — or that China’s monthly trade surplus topped $20 billion in June despite very high oil prices. Policy makers are more focused on the difficulties facing some of China’s textile firms than still high inflation. The result: a growing sense that China plans to slow the pace of RMB appreciation and relax various lending curbs.
I though don’t see much evidence that China’s export machine has slowed by much. At least not yet. Some forward looking indicators suggest a slowdown. And rising transportation costs could potentially cut into China’s exports too. Reducing the “miles” a product travels is one way of reducing the world’s oil consumption. But there isn’t yet much sign of a real slowdown in the data.
Remember, in real terms, net exports contributed more to China’s q1 growth than to the United States’ q1 growth.
Sure, year over year export growth was down a bit in June, at least in percentage terms. But May was unusually strong. That likely reflects an increase in working days this May relative to last May. And more exports this May meant a bit fewer in June. Goldman (Hong Liang, I would assume) is right on this (in the FT):
However, several economists cautioned against reading too much into trade figures for one month, as they can be volatile. Goldman Sachs, the investment bank, said it made more sense to combine May and June figures, which together showed a strong growth rate for exports of 22.6 per cent, in line with last year’s trend.
Above all the slowdown in export growth is mostly a product of a higher base, which means the same dollar increase translates into a smaller percentage increase. China’s June 2008 exports were $18.1b more than its June 2007 exports. That is a bit less than the $22b increase between June of 2005 and June 2006. But the US also slowed dramatically over the last year; China isn’t immune to big shifts. And the $18 billion increase is far larger that the $3.9b increase between June 2001 and June 2002, the $8.5b increase in 2003, the $16.1b increase in 2004, the $15.4b increase in 2005 and the $15.4b increase between June 2005 and June 2006.
Let me put it a bit differently. Sustaining a constant percentage increase in exports over time implies that the y/y increase in dollar terms has to rise. That is why is simply isn’t realistic for China to expect to be able to sustain 30% y/y growth for long now that it exports over $1.2 trillion of goods. The math just doesn’t work. Export growth of close to 20% off a $1.2 billion base implies a $240 billion plus year over year increase in China’s exports. That is more or less that we are seeing.
The fall in China’s surplus isn’t a reflection of a slowdown in export growth, so long as export growth is measured in dollar terms. It rather reflects a huge rise in China’s import bill, as the price of China’s commodity imports has soared. Consider the following graph, which shows total exports and imports on a rolling 12m basis. A rolling 12m sum may miss some recent changes, but I don’t see much sign of a slowdown in exports.
Andrew Batson – whose reporting I generally quite like — argues that China’s trade surplus has likely peaked. The surplus over the last 12 months is a bit under $250 billion, less than the $260 billion registered in 2007 (though well above the $177b in 2006).
With growth in exports slowing while imports are accelerating, it now seems clear that China’s trade surplus peaked around the beginning of this year and is set for a gradual decline. China’s global trade surplus in goods came in at $57.62 billion for the second quarter, down 13% from a year earlier.
I am not convinced. Higher oil prices will cut into the surplus for a bit longer. But if oil prices stabilize, import growth will slow. And so long as the y/y increase in China’s exports is running at close to $250 billion, there is actually a plausible argument that Chinas surplus will resume rising — particularly if China can substitute Chinese made components for imported components.
That, incidentally, is what the IMF forecasts in the WEO. The logic here isn’t hard to see. The RMB remains exceptionally weak v the euro, which is why exports to Europe are up 25% y/y, way more than exports to the US. The US will eventually pull out of its current troubles, supporting Chinese export growth. And the oil exporters will start spending more. Higher oil prices might lead to less “trade” to minimize shipping costs. But that might work to China’s favor, at least in part — manufacturers might adjust to higher shipping costs by replacing imported components with Chinese components rather that shifting final assembly out of China.
The $250 billion y/y increase in China’s exports (comparing July 2007 through June 2008 to July 2006 to June 2007) also puts the complaints of China’s textile exporters in context. Some Chinese producers are getting squeezed — and more may get squeezed going forward. But they are fundamentally getting squeezed by China’s success moving up the value chain, which is putting pressure on wages and on the RMB. Both China’s trade surplus and its export growth remains remarkably strong, all things considered — if measured in dollars.
The talk coming out of China now has me worried that China is unwilling to allow the RMB to appreciate if China’s trade surplus is flat (or falling) and export growth is slowing. Yet if China slows the pace of RMB appreciation to keep its exports up over the course of this year — and if, as a result, China can keep its surplus from falling by much — that has major implications for the global economy. Oil averaged about $70 a barrel last year. It should average $125 a barrel in 2008 if oil stays around $140 for the rest of the year. That’s a big increase. If China imports about 4.1 mbd (BP’s latest number), China’s 2008 oil import bill will rise by about $85 billion. Sustained $140 oil would imply a $100 billion increase in China’s oil import bill relative to 2007.
If China’s surplus stays close to constant and the oil exporters combined surplus rises, the deficits of other oil-importing economies have to get bigger. Either the US or the European deficit has to rise. Places like India and Turkey just aren’t big enough to offset the overall rise the oil surplus. It would be far healthier for the world economy if the country with the biggest surplus saw its surplus fall. Yet right now it is likely that many of the countries with the biggest deficits will instead see their deficits rise.
Bottom line. China’s surplus should be falling, given that the US economy has slowed dramatically (cutting into exports) and that oil has increased by so much. Instead its surplus is flat. That almost assures that an unbalanced world isn’t going to come back into balance.
Brad,
I just put up a post on this as well, just without the technical analysis.
One point I would like to explore is whether or not anyone is tracking volume of goods and correlating that to the dollar figures.
I know the dollar figures are important, but I think that it is equally important to know just how the volumes are changing to see what is really going on at the factory floor.
enjoy the coverage as always.
r
http://www.allroadsleadtochina.com
[...] For a much more analytical breakdown of the trade statistics, see Brad Setser’s coverage at CFR. His post adds a lot of needed perspective SHARETHIS.addEntry({ title: “China’s Exports [...]
Slowing down the RMB appreciation may have something to do with recent JPY weakness (and KRW)?
Brad,
If some GCC countries stop pegging their currencies against the dollar, will China’s ability to manage its own currency be affected? Abu dhabi, which is closest to such a move, is probably not the biggest holder of foreign reserves, so the consequences should not be huge. Yet, is this something China should worry about?
Thanks
Why
Well, if the Gulf depegs, bets on RMB appreciation might go up. That effect tho is likely to be small.
The Gulf by contrast should worry that China will revalue/ allow more appreciation before they have hedged their assets. A stronger RMB cuts into the purchasing power of their dollar holdings. The Gulf tends (still) to be overweight US and Europe and underweight Asia — in part b/c of limits on buying Chinese assets.
Finally, yes, volume growth matters. and there is reason to think that volume growth has slowed by a bit more than nominal export growth — because prices are rising. Note tho that import prices are also way way up — so the nominal import growth data paints a misleading picture about volumes. I should look at the World BAnk quarterly to see what kind of deflators they used.
The q1 surplus was flat in nominal terms, but after they adjusted for price effects, the bank found that exports were still contributing positively to growth — b/c import volumes weren’t growing much, it was all a price rise.
The British Telegraph Newspaper continues with Part 3 of the series “America and China: The Eagle and the Dragon”. Mick Brown and the photographer Alec Soth continue their investigation into the contrasting fortunes of the US and China by exploring the world’s fastest-growing city - Chongqing. A sub-provincial city within Sichuan Province, the municipality of Chongqing is located with the deep interior of China, far from the export industrial zones of Shenzhen or Shanghai. Contrary to US economic perception, domestic capital investment and consumption are the primary drivers of Chinese economic growth. In public testimony by Hank Paulson and Ben Bernanke, Chinese exports are somehow supposedly stealing US Economic growth and prosperity. The British Telegraph Newspaper completely destroys that economic myth. LOL.
America and China: The Eagle and the Dragon Part Three: onward and upward
http://www.telegraph.co.uk/portal/main.jhtml?xml=/portal/2008/07/12/sm_china12.xml
The thrusting tower blocks of Chongqing stand testament to the headlong economic growth that is changing the lives of millions of Chinese. Located in the far west of China, on the banks of the Yangtse river, Chongqing is a place that few people in the West seem to have heard of. But it is the fastest-growing city in China - and therefore, one might safely conclude, the world. This startling fact gives the city a certain dynamic, apparent from the moment you step out of the airport and climb into one of the small yellow taxis with their neat black-and-white chequered strip (a nod to New York) revving up at the kerb.
Driving around Chongqing I felt as I was in some urban version of one of those speeded-up nature films in which a seedling blossoms into a flower in a matter of seconds - mile after mile of new tower-blocks, plazas and apartment buildings, the sky thick with cranes (China’s national bird, as the local joke has it) for as far the eye could see.
It is estimated that new construction in Chongqing adds about 140,000 square metres of usable floor space each day for residential, commercial or industrial use, and at times it felt as though I was driving through an endless building site, as if not one but a whole series of cities were springing up sequentially. Property prices in Chongqing have risen more than 45 per cent in the past four years.
There is an argument that international trade has been used as a channel to get hot money into China. So the trade surplus number should be overestimated.
Andrew Batson is engaging in the same sort of wishful thinking that got the United States into its current economic stagnation.
His statement, “Most economists deem a fall in China’s huge trade surplus to be inevitable, and largely desirable,” shows that he is simply echoing the wishful thinking of others.
There is no reason to think that China’s trade surplus has peaked. As you have been pointing out, they are accelerating their reserve accumulations in order to increase their trade surpluses.
I think that you will be proved correct in your prediction when you wrote, “Either the US or the European [trade] deficit has to rise.”
Howard
DC - I might suggest that you read some of my older posts a bit more closely. I have never argued that net exports are main driver of Chinese GDP growth. At their peak, net exports were contributing between 2 and 3% to an overall growth that was over 10%. Statistically, domestic investment and consumption were more important. No one has ever argued the contrary.
What has been argued is that it is unusual for a country in the midst of an investment boom to also get a 2-3% contribution to growth from net exports (investment booms usually produce deficits), that a 2-3% contribution from exports to growth is a large contribution from net exports for a large continental economy (the US is getting 1%, and there are a ton of stories now about how important exports are to growth), and the sustained 2-3% contribution from net exports has pushed China’s trade surplus up to a very large level.
it would be great for global adjustment — given that China has one of the strongest global economies and others are much weaker — if China could sustain say 8-9% growth even if net exports were subtracting from Chinese growth, i.e. I want China to contribute to global demand growth, but not just be a net contributor to resource demand.
Howard:
Bill Gross from PIMCO thinks, the US federal deficit will need to rise sharply, because domestic consumption is stalling:
“gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.”
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm
Brad,
Unfortunately the June data is not the only sign of China exports slowing. PMI indices are generally great leading indicators and the new export order component on the June PMI fell to 50.2 — that is the second lowest level in the history of the index and suggests a small level of export growth. I realize that the CLSA PMI index was a bit rosier but it is not as broad as the government measure. I’d be interested in your thoughts. Thanks.
Brad writes, “I want China to contribute to global demand growth, but not just be a net contributor to resource demand.”
With developing nation status, China has absolutely no legal or moral obligation to contribute to global demand growth until per capita income level reach ever Portugal, Greece, or Spain. Despite 2 dcades of rapid economic growth, over 15 million Chinese still live in dire poverty. Moreover, the US government has never provided any foreign aid economic assistance to the Chinese impoverished. The US government continues to support the de facto separation of China by supplying massive quantities of high-tech weapons to Taiwan, and the CIA finances the independence activities of the Dalai Lama.
Am I the only reader of this blog continually incapable of following DC’s train of thought? The lack of continuity between his posts leave me completely boggled maybe 50% of the time. I’ve written and canceled some variation of this around ten times and at last my reluctance has is overcome by frustration.
alex — could you send me the PMI data. i tried to acknowledge in the post that some forward looking indicators suggest further weakness in exports. i would expect that China’s surplus would dip further (as exports slow on the back of a global slowdown/ oil imports push up overall imports) over the course of the year, but then i would expect the surplus to resume rising (barring further adjustments in the RMB), as the global demand growth resumes and oil prices stabilize. the factors pushing up imports strike me as temporary, while the underlying forces driving exports seem to me to remain in place — tho they are currently trumped by cyclical factors.
if the PMI presages a major further slowdown in exports, I’ll revise my views. the h2 data will be critical, as that is when Chinese exports typically surge.
does Dave Chiang work for the chinese gov’t? how does the extreme poverty of barely 1% of 1.3 billion people translate to a right to abuse a currency exchange rate and detract from global growth? you are delusional.
Gregor Neumann:
Your reasoning in #11 is entirely correct. By taking away investment opportunities for American businesses, foreign government mercantilism is reducing Investment in the productive sectors of the American economy. For a while, the lower interest rates caused by mercantilism increased investment in housing and in the retail sector, but with the housing crash, those investments have largely come to an end.
As you point out, the result of less Investment is that the government needs to run ever-increasing deficits just to try to produce enough Aggregate Demand.
Economists, as exemplified by Batson, live in a dream world in which the mercantlist countries reduce their trade surpluses on their own causing a reduction in the trade deficits drag on Aggregate Demand and causing an increase in Investment. According to their wishful thinking, the mercantilist countries (starting with China) will spontaneously abandon mercantilism. Our current presidential candidates are living in the same dreamworld due to the poor quality of advice that they are getting from their economists.
However, don’t despair. God has a way of providing for America. The energy crisis is actually a very promising development.
The United States could get a huge boost in Investment as a result of the energy crisis. I am especially encouraged by T. Boone Pickens’ commentary in the Wall Street Journal for investment in wind power ( http://online.wsj.com/article/SB121556087828237463.html?mod=opinion_main_commentaries ). Obama seems to like wind power also. And McCain is talking about taking away the impediments to development of nuclear power.
If the government helps out by: (1) doing what Pickens suggests to move electricity generated by Rocky Mountain wind power to other markets, and (2) doing what McCain suggests to take away legal and government impediments to nuclear power and (3) providing tax incentives for turning wind-generated or nuclear-generated electricity into a gasoline substitute, then we should get plenty of increased investment in domestic energy production that could be just what the doctor ordered for our economy.
Howard Richman
http://www.trade-wars.blogspot.com
Dave said “China has absolutely no legal or moral obligation to contribute to global demand growth”
I disagree about the moral aspect. I would argue that sensible growth is in Chinas self interest, if it wants the reach the goal to get its entire population out of poverty.
I am living in a European country that is providing financial aid to China. And it is a common debate here, why we are giving money to develop a country that has 1.3 trillion dollar in FX reserves and is running a huge trade surplus every year.
For some reason China thinks it is OK to invests billions for hosting Olympic Games while 15 Million people live in dire poverty, as you write. We see a massive imbalance of wealth within China and we see a massive imbalance in wealth world wide.
If China would reach the per capita income of Portugal (roughly $23.000) it would need to expand it’s GDP by a factor of 4.4 ($5.300 today). This would equal about 47% of the today’s world GDP.
While this tells us something about a massive wealth imbalance in today’s world, we also have to recognize that growth at all cost will not work on the long run. Many developed countries are learning it the hard way these days.
I guess you would argue that it is impossible to support the poor regions of China by taking most of the money from China’s prosperous regions, because this would stall the necessary demand and limit any incentive to trade. It takes time to balance the prosperity within China and trade is the key to do so.
The same is true on the global level. I think we have a moral obligation to support underdeveloped regions of the world. So I am in favour of my country supporting China by aid and trade. But if China insists on growing “without moral obligation”, there is a price to pay for global trade. I strongly doubt that this is a way to reach your goal.
China’s trade surplus must equal its net capital outflows. Two interesting questions - how much of the official outflows are offset by inflows, and how much of China’s current surplus is really overvaluation of exports (as a means to move capital into China past its capital controls).
This is all similar to what Japan did for decades, and I think the end will be the same - serious pressure from other countries to loosen China’s capital controls and reduce its currency interventions. A good start would be to eliminate the outrageous fiction that Treasury continues when it refuses to brand China as a currency manipulator.
Brad - If China reduced dollar purchases, I continue to believe the effect would be positive on the U.S. economy. (BB initially shifts left, so currency depreciates, but IS shifts out, so new equilibrium is at higher interest rate but also higher output.)
bsetser: there is actually a plausible argument that Chinas surplus will resume rising — particularly if China can substitute Chinese made components for imported components.
I don’t think so. What China mostly imports are raw materials and high technology capital goods. I don’t see those being replaced by local manufactures.
I think that China’s surplus has peaked since it can’t increasing the trade imbalance without bad macroeconomic effects and the results of depegging the RMB are starting to kick in.
In particular, rising oil and food prices give China a very strong incentive to appreciate the RMB in order to keep producer prices from increasing.
Neumann: For some reason China thinks it is OK to invests billions for hosting Olympic Games while 15 Million people live in dire poverty
Building stadiums means lots of jobs for construction workers, hotel workers, travel agents, etc. etc. The roads and infrastructure for the Olympics will be useful long after this summer.
Neumann: We also have to recognize that growth at all cost will not work on the long run.
How else are you going to get China to Portugal’s levels if you don’t grow?
Neumann: But if China insists on growing “without moral obligation”, there is a price to pay for global trade.
I’m a bit more practical. Nations (China, the United States, Portugal, Germany) simply do not do things out of moral obligation, they do it out of self-interest. You can get someone to give you a few pennies by making them feel guilty but to get them to give you tons of money, you have to have them make tons of money from the deal.
If you don’t want to buy Chinese goods because it isn’t in your interest to do so, then don’t.
Don,
I wish you were correct, but I suspect that you were wrong when you wrote in #20 that China, like Japan in 2004, would reduce its currency interventions if confronted by “serious pressure from other countries.” China has been under tremendous pressure from both Europe and the United States for more than a year and they have successfully resisted it.
The difference is that Japan in 2004 considered the United States and Europe to be a counterweight to Chinese domination of Asia. Therefore, Japan did not want to destroy the United States economy. While China sees the United States as standing in the way of its national ambitions. They would like nothing better than to destroy the economy of their chief geopolitical rival.
Howard
Richman: China has been under tremendous pressure from both Europe and the United States for more than a year and they have successfully resisted it.
One difference between China and the United States that really is a cultural difference is that Chinese tend to think in terms of centuries. For the US, one year is a long them. If you want to pressure China to do something, you have to think in terms of decades rather than months.
Richman: They would like nothing better than to destroy the economy of their chief geopolitical rival.
Then it is very odd that China is spending more money on the US military than on the Chinese military, holding almost $2 trillion in debt that would be worthless if something really bad happened to the US, and sending tens of thousands of its future business and political leaders to be educated in the United States.
Other than Taiwan, there is really no geopolitical situation in which there is any basic conflict between the US and China, and China has no real interest at this point of displacing the US, even if this were possible which it is not any time in my lifetime.
Brad,
I believe that the pmi report that Alex referred to is from Li and Fung. They are available at: http://www.lifunggroup.com/research/china_pmireports01.htm
Nice link to the Daily Telegraph (not a newspaper that would be expected to be sympathetic to the Chinese) from DC. The following quote is especially revealing:
Lei Jing….saved 50 per cent of his income. ‘You never know what will happen,’ he said. ‘For Chinese people responsibility is very important.’ He had heard that it was common in the West for people to live beyond their means. ‘I think that must make them feel more anxieties and pressures.
That is why a country in the midst of an investment boom also has a 2-3% contribution to growth from net exports.
TwoFish: “Other than Taiwan, there is really no geopolitical situation in which there is any basic conflict between the US and China”
The upcoming confrontation between the United States and China over Taiwan is huge! Then you could add China’s pattern of supporting some of the most murderous anti-democratic regimes in the world in North Korea, Burma, and Sudan. According to Michael Ledeen, China has been enlisting support among its people through its nationalistic policies. See Michael Ledeen’s piece on this topic ( http://trade-wars.blogspot.com/2008/06/michael-ledeen-calls-china-facist-state.html )
Twofish: Then it is very odd that China is spending more money on the US military than on the Chinese military, holding almost $2 trillion in debt that would be worthless if something really bad happened to the US…
What they get in return for collecting about $1.3 trillion is US industry. They have already stolen up to 2.5 mnaufacturing jobs and they are currently working on stealing our appliance, automobile, aircraft, and mining equipment industries.
TwoFish: and sending tens of thousands of its future business and political leaders to be educated in the United States.
I agree that they take a chance of their people getting educated in American values when they send them to the US universities. But they are also gaining much technical know-how and are in a better position to steal our technology. The July 10 New York Times ( http://www.nytimes.com/2008/07/10/washington/10spy.html?_r=1&pagewanted=2&th&emc=th&oref=slogin ) had an interesting article on China’s systematic campaign of espionage. Here is a relevant quote:
“On the military side, Mr. Brenner said, China is especially interested in improving its naval capability against any threat from the United States and obtaining intelligence that might be important in a military confrontation in the Taiwan Strait.”
Howard
I was surprised to learn that retail investors in the US can buy CNY trhough an ETF: CYB.
Though the yield is negative.
The US consumer has slowed, but is so far holding up pretty good, considering the circumstances.
It may be that the Chinese are worried about a more drastic slowdown in 2h 2008, in the US and also Europe this time.
“Ducunt volentem fata, nolentem trahunt.”