Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

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Old habits die hard …

by Brad Setser
August 5, 2008

At the first hint of a slowdown, the US tends to take steps — like a fiscal stimulus package — to support domestic demand.

Though to be fair, the US has also loosened monetary policy, and one of the ways monetary policy helps support the economy is through a weaker dollar and stronger exports. Some of the smartest advocates of fiscal stimulus advocated it in part because they worried that cutting policy rates would might fail to generate the intended stimulus because of financial weakness while risking a true dollar crisis.

And at the first hint of a cyclical slowdown, China tends to take steps — slowing RMB appreciation, increasing export rebates — to support its export sector.

Keith Bradsher of the New York Times has joined the chorus writing about signs that China’s economy is slowing, and that Southern Chinese manufacturers who produce for export have been particularly hard hit. There certainly is no shortage of supporting anecdotal evidence. And with growing signs of weakness in Europe — and now signs that US export growth may be poised to slow — it isn’t difficult to believe that Chinese exports are poised to slow.

But as of now, I don’t see any solid evidence of a slowdown in the actual export data.

On average monthly exports in 2006 were about $17.3b higher than monthly exports in 2005. On average monthly exports in 2007 were about $21.7b higher than monthly exports in 2006. I plotted 2008 exports against the a forecast that assumed that 2008 monthly exports would be on average, $19b higher than 2007 exports. $19b is the average of the y/y increase in 2006 and 2007. Guess what? So far, exports have been above the resulting forecast.


Yes, June was weak relative to May — but May was unusually strong, as the usual holiday related dip didn’t occur this year. June is still right on trend.

I wouldn’t be surprised if exports do dip below this trend over the remainder of the year. China is too big an exporter not to be influenced by the global cycle — and the global economy certainly looks to be slowing.

But to me the big surprise is that China hasn’t felt more of an impact of the US credit crunch to date. US domestic demand isn’t growing. Chinese exports to the US are flat. And there still isn’t — at least in the data through June — any real sign of an overall slowdown in Chinese exports.

Sure the increase in exports so far this year is a bit weaker than in 2007 — and with prices up, the pace of increase in real exports certainly has slowed. But the y/y dollar increase is still stronger than the y/y dollar increase in 2006. By any standard other than the huge 2007 increase, that is superb performance.


  • Posted by Twofish

    Also a lot of my guesses as to what is going on in Chinese boardrooms involves reading the current Chinese management literature on best practices.

    The most recent regulations require that listed companies have 1/3 independent directors, and that the independent directors chair the audit, compensation, and nominations committees. It also encourages cumulative voting. Chinese corporate law is much, much more shareholder friendly than US corporate law, since the Chinese government tends to be the largest shareholder.

    One thing about BoA and foreign investment, is that the Communist Party obviously wanted BoA and GS to take active roles in corporate governance. They didn’t need to give BoA, Temasek, and GS seats on the boards of the big banks, but they did. Much of the reason is that the foreign banks and the Communist Party have basically the same interests in corporate governance (maintain control and make lots of money).

    The big danger in corporations is that senior management will turn it into a fiefdom that completely ignores the shareholders. Keeping control of a company in the hands of shareholders is a huge problem in any system.

  • Posted by Twofish

    sam: Chinese banks were the beneficiaries of hundreds of $ billions in bailouts from the government earlier this decade

    To be fair, one very strong argument for a government bailout in China is that the government was bailing out banks for making loans that the government were forcing them to make.

    sam: Does anyone really think Chinese manufacturers could compete with Caterpillar, United Tech, or GE without a currency subsidy?

    Depends on what area. Also, sometimes the best way of competing is not to compete. If you want to have a Chinese tractor manufacturer be world class, then give Caterpillar a stake in the company so that Caterpillar is working *with* the Chinese company rather than against them. That’s part of the theory behind foreign investment in the banks.

    sam: The Chinese government has long been subsidizing banks at the expense of the saver/depositor.

    Actually they haven’t. The current system only started around 2000 when lending limits were removed but borrowing limits were kept. Official policy in the early/mid-1990’s was actually hostile to the banks as the government forced the banks to make loans to SOE’s to keep employment up, so in the 1990’s, there was actually an anti-subsidy, which is why the banks ended up so much in debt.

    sam: Could the banks and funds (who were the first to take the capital-raising bait of US and EUR banks and bought the high of the private equity bubble) really be profitable without the yield curve subsidy.

    Heck yes. The yield curve subsidy is not the difference between profit and loss. It’s the difference between profit and totally obscene profits. The Chinese banks are making huge amounts of money. At some point the subsidy is going to disappear, but the banks are going to fight like heck to keep it.

    sam: Debt deflation as zombie companies default on loans may ensue, and Chinese banks will make US banks now look like paragons of prudence.

    I really don’t think so. People are people, and both Chinese and US banks will take the money and run if they are allowed to. The difference is that the Chinese government has been keeping a much tighter grip on the banks than the US government. The nightmare scenario for the Communist Party is a repeat of what happened in 1998 in Indonesia so they have been doing a lot of work to make sure that Chinese banks are well run.

    People have this idea that Chinese banks must be necessarily be more badly run than American banks, but there is no reason to believe that. US banks are well run only because there is a sophisticated regulatory system in place, but if that breaks down (and it did break down quite badly) then Americans banks can be as badly run as Chinese ones.

  • Posted by Dr.Bubb

    When will …the world get dollar fatigue?


    If you were China, and you wanted to strengthen your currency
    – by switching some reserves OUT OF DOLLARS and INTO GOLD.

    When would you do it?:

    + Before the Beijing Olympics?
    + After the Beijing Olympics?

    No prizes for the right answer

    Benefit: you can lower commodity price inflation
    Cost: less exports to the US- but they are fading anyway

  • Posted by Dr.Bubb

    Also, if you don’t think Wall Street creates real economic wealth, why has it been around for so long?

    So of it does “add value”- like the primary fundraisings, at times.

    The rest extracts value, like a tax on America’s wealth, until the toxins it pumps out implode, like a disease reaching its peak and fading, ala subprime securities.

    But now America’s wealth is so impaired by decades of wasteful mal-investment (in an outmoded suburban living arrangement), it can no longer afford a Wall Street of its present size. Wall Street will have to shrink to survive.

  • Posted by Dave Chiang


    Answer the question honestly, as presently regulated, has Wall Street done a good job of properly allocating capital throughout the US Economy? There are literally tens of thousands of abandoned McMansions littered across the states of Florida, California, Nevada, and Arizona. If you choose to answer disingenuously, why should there even be any economic consideration for a federal taxpayer bailout of Wall Street’s wrecked balance sheets. There has been little if any consideration for the “moral hazards” and the economic implications to the US government’s own balance sheet from repeated taxpayer bailouts of private Wall Street firms. Even S&P was forced to admit that the Federal Debt would have to be downgraded to perhaps below China’s AA-rating if Fannie Mae’s debt was assumed by the US Treasury. As noted investor Jim Rogers has commented, “Investment Banks have failed throughout US history without the United States economy collapsing, why is it that now that Hank Paulson will bailout every Wall Street bank that gets into trouble”.

  • Posted by Twofish

    DC: Answer the question honestly, as presently regulated, has Wall Street done a good job of properly allocating capital throughout the US Economy? T

    Compared to what? Compared to the magical, fairy dust economic systems that people come up with. No. Compared to any real system that has ever existed, it does quite well.

    DC: “Investment Banks have failed throughout US history without the United States economy collapsing, why is it that now that Hank Paulson will bailout every Wall Street bank that gets into trouble”.

    Jim Rogers needs to read about the panics of 1797, 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893, 1896, 1901, 1907, and 1910. Since 1914, when there has been a central bank, there has only been one massive disaster and that was in 1929.

  • Posted by Glen

    Dr. Bubb mentions some of the usual fear suspects, where we can all disagree as to whether China would or could take such routes.

    One thing I find extremely interesting/important in that context is a matter Twofish has often touched upon here.
    The ‘consensus’ on what to do in Beijing…. or the liberty of the CPC leaders to do as they please.. it really isn’t there as much as most Western observers think. It never was probably, but seemingly less than ever.

    Maybe you can argue that it is there at the top levels in terms of foreign policy, power projection and long terms strategic goals (it seems so), but in terms of China’s internal developmental strategies and economic policy…and thus the “who benefits” question, nah!

    I do rather a lot of interviews with Chinese economics/political science scholars in or on the periphery of the advisory groups to Government, and the answers to questions about China’s post-Olympic policy changes ranges from New Left to New Right chartered courses, but most frequently “right now we really have no idea either”.

    More and more, when asking top International bankers, when the microphone is off and answers are less or not political at all, I get the same sense. People are guessing, and when people don’t know – then you get more fear. When you don’t know – suddenly the “finance internal drive and growth policies by decreasing the dollar propping” scenario seems more plausible to many. Nevermind the difficulty or potential backlash from this.

    Everyone sees that Hu Jintao currently feels it necessary to give in to factions in the party/SouthEast and inland exporters needing stimulus, but for China the impact here is minor in the greater scheme of things so far.

    Everyone can also envision that the growing frustrations (more and more outright anger) among both urban (migrant) and rural poor plus the elderly being largely deprived of security must be addressed in some way. That leads to majority assumptions that there’ll be a marked increase in Chinese fixed asset invesment that targets especially such concerns as well as further education, further improvements for farmers/rural communities. The disagreement goes to whether this increase will be big enough to signal an actual policy change. These constituents obviously are weak in everything but numbers.

    At the same time you have Hu’s pledge to political reforms after the Olympics. What will that mean – if anything? The slightest changes here can cause major behind the scenes fighting.
    You have new high profile voices coming out of Beijing in seemingly open support for Shenzhen’s (seemingly) quite dramatic accountability and multi-choice election plans which clearly corresponds well with previously articulated goals from Hu and Wen Jiabao. And of course you have local governments and many in the top brass who will fight this development tooth and nail to keep their priviledges.

    Seriously, post-Olympic decisionmaking will be very, very interesting.

  • Posted by Rien Huizer


    Well put.


    Of course, whatever the outcomes of changes in the institutional framework may be, they will be very Chinese. My reference to Europe (see also Glen’s piece with attention for unmet demands of groups that will never “get rich”) was in reference to an often used (by by economists too) and (too) simplistic dichotomy; Europe (of course the continent) vs the anglo-saxon model. Now there is a fair bit of variety in both categories but it involves clusters like common law vs civil code/statute law (plus different role of the state in law creation and juridical function ans structure) two party systems/ plurality vs proportional representation/typically coalition government high degree of individual risk mnagement (health care, unemployment) vs high degree of state risk assumption (but: several Anglosaxon countries, UK, Australia, Canada, NZ have health systems that are more government-driven than continentals like Holland.

    Anyway, it is anyone’s guess but political reform (not necessarily democratization) is necessary to arrive at a functioning public adminsitration system. for the whole of the country. That should involve greater separation of party and state (very difficult to do and very risky not to do) and administrative (not entirely separate but high priority) reform of the rural sector. I did not mention some form of political pluralism outside the party (there is a fair bit of real politics (not only career-making) going on at the moment but it is hardly official and the more there is that seeps out, the harder it would be for the leadership to do a public conversion to pluralism and its attributes (fredom of political organization, press, metings etc (some of these things re still imperfect in a modern place like Singapore) But again h point is not the high profile “democrcy” thing, but a better alignment between public administration and the emerging market economy.

  • Posted by TR

    David Chinag says: “What Western Neo-liberal Economists fail to understand is that even textile manufacturing jobs represent a huge advancement from subsistance farming for migrant Chinese workers.”

    Really? Not the ones I have read. You must get most of your economic knowledge from real klutzes.

  • Posted by Judy Yeo

    Frankly, I partly agree with the post-olympic political and economic adjustments trend; not that the present economic stats are really all that reassuring. When everyone comes down from the irrational highs of the olympic adrenalin rush, the what next question might just bring some dusty bugs out of the woodwork. Chinese banks have their own worries even if they have individually dodged the subprime slime . Mr Pettis has lots on that on his site .


    sure the seperation of party and state makes for good government but sometimes that has merely been the effect of factionalism . In some more remote areas of china that has led to a situation that updates the old saying that the “mountains are high and the emperor is far away”, just think of those cases of modern day slavery in brickwork “factories”.


    not sure if you’re still reading this thread but just a thought; could the growing wealth gap and the resentment that stirs transform rhetoric to policy?

  • Posted by Twofish

    Glen: I do rather a lot of interviews with Chinese economics/political science scholars in or on the periphery of the advisory groups to Government, and the answers to questions about China’s post-Olympic policy changes ranges from New Left to New Right chartered courses, but most frequently “right now we really have no idea either.”

    And I think this is a good thing that people have no idea what to do. If you don’t have any idea what to do, you think and think and think and then you end up figuring something out. The “New Right” and the “New Left” argue with each other and eventually something sensible comes out.

    It’s when you know exactly what to do that you end up with huge messes. Mao knew exactly what to do, and wasn’t about to listen to anyone with a different opinion.

    Glen: Seriously, post-Olympic decisionmaking will be very, very interesting.

    Chinese decision making is always very, very interesting. One thing to point out is that the arguments that people are having now aren’t any more bitter than the one’s that people have had in China for the last thirty years. So watch out for the “Chinese leaders disagree with each other so the Party is going to collapse” meme that happens in the Western media. The institutions are far stronger and the real disagreements are far, far *less* bitter and fundamental then they have been over the last thirty years. Person A wants to spend 20% GDP on investment. Person B wants to spend 50%, so after they argue for a month, then end up spending 35%. (That’s one of the nice things about arguing about money rather than ideology, arguments about money can be resolved by splitting the difference.)

    Huizer: That should involve greater separation of party and state (very difficult to do and very risky not to do)

    Separation of party and state was tried in the 1980’s. It worked very, very badly, and really I don’t see any reason to try it now. One thing that is interesting is to try to get someone that supports it to explain exactly why they think it is a good idea.

    The system as it now exists has the actual orders going down the state hierarchy, but with the party being something of a “human resources” department in charge of figuring out who gets what state position. I don’t see any reason to have any quick, radical changes in the system, since it seems to work.

    I do support strengthening the state and legal system so that if there are ever any bitter fights or power struggles within the party, that the whole thing doesn’t collapse (i.e. what happened in Russia), but I can’t think of any reasons to split the party and state. (And that includes human rights reasons, since I don’t think a split party/state will be more friendly to dissidents, and if it means less control over local officials, it may be even worse for political dissidents.)

    Huizer: administrative (not entirely separate but high priority) reform of the rural sector

    I’m really starting to really hate the word “reform” since it has become a feel-good word that really is starting to lose any meaning. In 1980, the term “reform” actually had some meaning in China since it meant the group of people that didn’t believe in revolutionary Maoism or Stalinist economic policies. Since no one in the Chinese government is a Maoist or a Stalinist today, it means that everyone is a “reformer” and when everyone is a reformer then the term doesn’t have any meaning any more.

    Let’s step back a bit. What *exactly* do you think ought to be changed in rural China? I think that if you ask a dozen people what exactly “rural administrative reform” means, you will get a dozen answers, and arguing over specific policies is the conversation that needs to happen.

  • Posted by unokai

    Excellent post, Brad, as usual! Will you please name the source of your graph? Can I cite your opinions in one russian financial magazine? Thanx in advance!

  • Posted by bsetser

    Unokai — feel free to cite my opinions. the source is the underlying data is the government of China (Ministry of commerce I suppose). i use the export and import data on a customs basis. I did the graph myself based on their numbers.

  • Posted by unokai

    thank you very much, Brad, your blog is an excellent and thought provoking source of information and analysis.

  • Posted by CCTV Training

    In Europe and the UK there will be interesting changes for both private security and national security – data protection is important.