What export slowdown?
China’s July trade data is now out. Strong export growth (27% y/y) produced a much larger than expected trade surplus. Exports from May through July 2008 are running about 23% above exports from May through July 2007. That is pretty good in my book. The troubles of China’s textile sector simply may not be representative of China’s broader economy. Michael Pettis notes:
the woes of a small but powerful segment of the export industry – low-value-added processors in the south of China, who have been hit primarily by rising wages and a welcome shift in the southern economies towards higher-value-added goods and services – have created a false impression about dire conditions for China’s exporters
Earlier I suggested that it would be hard to argue that Chinese exports were really slowing so long as monthly exports were running $20b a month higher than in 2007. July 2008 exports were $29b above July 2007 exports. That suggests an acceleration in export growth, not a slowdown. But I wouldn’t necessarily read too much into the July data — there seems to be a lot of unusual seasonality in China’s data this year. Some August exports may have been pulled toward to help minimize congestion around the Olympics. The sharp fall in German export orders and anecdotal evidence that American manufacturers are seeing a fall in European demand do suggest a broader slump in trade is in the cards, and it is hard to believe that China won’t be touched. If Danske Bank is right, real exports already have slowed significantly, with about 10% of the nominal export growth now coming from higher prices. But 15% real export growth is still quite strong. The US would be thrilled with that kind of growth.
But when I look back, I really don’t see strong evidence that China’s export boom has slowed in any meaningful way. Consider a plot showing the rolling 12m sum of exports and imports. The overarching story of this decade continues to be that China has enjoyed one big sustained export boom.
A plot that shows the difference (in billions of dollars) between China’s exports over the last 12 months over a comparable period a year ago (i.e. I subtracted the sum of China’s exports from August 2006 to July 2007 from the sum of China’s exports from August 2008 to July 2007) suggests export growth has leveled off at a high level — not that it is falling. Imports are up in dollar terms — as one would expect given the rise in commodity prices. But exports have held up well. The surprise isn’t that higher oil has pulled down China’s trade surplus a bit. The surprise is that China’s trade surplus hasn’t fallen by more in a period when US demand for Chinese goods stalled and oil prices soared.
This chart illustrates one other important point. China’s exports historically haven’t always trended straight up. In the 1990s there were pronounced cycles — and even periods when exports fell. So far this decade has been nothing other than one large boom for China’s export sector. There hasn’t been a real down cycle. More of the dollar increase may be coming from higher dollar prices rather than expanding volumes, but export revenue are still growing at a decent clip.
18 months ago, there was a lot of talk about how the US had vanquished the economic cycle, and entered into a new period with far less macroeconomic volatility. That was a bit too sanguine. And my guess is that at some point, China truly will experience an export slump. I doubt China has vanquished the economic cycle. Rising exports imply more not less exposure to the global economy. And, as David Dollar notes, Chinese exports cannot grow more rapidly than world trade for all that much longer.
But if monthly exports are still up nearly $30b (27%) over the preceding year, well, it hard to argue that the slump has started.
thank you, Brad. and what about the reorientation of chinese export? are they searching for new markets for their goods in case of softening demand from US an Europe?
Is it accurate to say that China’s dollar value of exports is about the same size as the US, with an economy currently about 1/4 of the size?
Brad
Dollar is right, at least in what you cite. But the numbers do not bear even a cursory investigation, unless you’re prepared to do detailed forensics. When I was in China, 96-00, one of the key meetings we had was on the stats bureau. We were told that the numbers were less important than the trends. Think that thru.
The numbers are no more credible than Ming Dynasty cropping yields – under and over-reported due to tax rates on arable land and production – not much has changed. The incentive set on counties and provinces’ numbers really needs a close look, as does intra-province trade distortion, which is having perverse effects.
Anyhow, it seems little effort is being applied to sole-charge, micro-ents, TVEs and other elements of the economy, which are fundamentally huge in the optically ginormous (excuse technical term) GNI, so I’m a little concerned about the credibility of the big picture commentary. No one is talking triangular debt either. Ok, I’m now concerned on many fronts.
MD
MD, Andy Xie writes about debt pyramids and triangular debt in a recent Caijing piece, which you can find at http://www.my1510.cn/article.php?84c782d79a02eb75
Specifically he says:
In addition to the financing problem in the property sector, a related problem is debt pyramids being exposed in a receding tide. It is a standard practice in China’s private sector for an entrepreneur to hold numerous companies. The structure is to create liquidity among the companies through mutual guarantees and, sometimes, illegal cash transfers. They are often debt pyramids, i.e., they are cash-negative entities that sustain themselves through ever more debts. In Zhejiang Province underground financing compounds problems. Without transparency lenders in this gray market have no ideas about their borrowers’ financial health. This is a fertile ground for debt pyramids. The high interest rate, usually above 20%, in the gray market suggests that most debts will go bad. In the current environment, it is difficult to see how many businesses can bear such high costs of capital. It is more likely that the borrowers have no intention to pay back and, hence, don’t care about interest rates.
Some argue that the formal financial sector should support such business empires that are collapsing in order to support economic growth and employment. This is a very wrong idea and could severely damage China’s fundamentals. Such debt pyramids, while boosting economic growth and employment in the short term, are value-destroying. The bigger they become, the more harms they cause. Supporting them now only creates a bigger problem for the country later. The government cannot use bank loans to keep afloat such businesses that are merely scams. The sooner they collapse, the better. Moreover, the government should keep an eye on businessmen, especially famous ones, who carry heavy debts. Like ten years ago, they may vanish with cash and leave debts behind. Ultimately, Chinese taxpayers could bear the burden through another NPL bailout. The government has a responsibility to protect taxpayers.
The problem in the export sector cannot be solved with policy support either. China’s manufacturing model is through price competition to gain share in the OEM market. The model thrived because the SoE reform and rural-urban migration led to surplus labor and low and stagnant wages and the collapsing energy demand in Russia and Eastern Europe kept oil price low. In addition, industrial land was cheap and local governments ignored environmental costs. All of these factors have reversed. China’s labor market is roughly in balance, i.e., demand growth leads to higher wages, which makes Chinese labor market normal. While the oil market is a bubble fueled by negative real interest rates, the era of cheap energy is gone. When the bubble bursts, energy price will remain high and will rise with demand growth.
What China’s manufacturing sector is encountering is quite similar to what Japan did in early 1970s during the first oil shock. The low-price model ceased to work due to rising oil price and a US slump. Japan moved aggressively (1) to move up the value chain by increasing technology content, quality, and branding power and (2) to improve growth efficiency to decrease energy demand. This process takes time and needs market force to work efficiently. Artificially maintaining low production costs through price control can only postpone the adjustment. It creates shortage and may lead to economic instability. China’s manufacturing sector has to go through a significant overhaul. It is not a matter of choice.
The restructuring process is certainly painful. Many businesses will close. Many export businesses are family-owned. Such families may not have the capacity to upgrade. Their survival depends on finding another low-cost location. If they can’t, they have to close. Such closures, while decreasing employment in the short term, create room for more efficient businesses to emerge. This is how market works.
The triangular debts among manufacturing businesses may create a financial crisis. Many export companies have been continuing by not paying their suppliers that in term don’t pay their suppliers or obtain bank loans against the receivables. As China’s exports may total $1.5 trillion in 2009 and the working capital that funds receivables may be comparable to this amount, the financial fallout from the sector’s restructuring may be significant. The government needs to monitor the situation carefully.
Both Michael Pettis and Davis Dollar must be right! Compound growth of over 20% leads to silly results once the principal is a meaningful number, which it now is.
And it can certainly not last very long if the strategy does not include a Schumpeterian ingredient. If you keep the obsolete businesses around you continue competing with Bangla Desh, which may be OK if the coast had a large and permanent supply of people at Bengali wages or if there was very efficient transport to regions where these wages still exist in China. There is of course one area where China can grow employment (see Brad’s yesterday’s piece on import substitution). Im my opinion threre is a lot of scope for healthy import substitution now in China and that may assist the trade balance in the next 3-5 years even while exports (necessarily) slow down. As to the latter, what matters most (subjectively for the leadership of course) in a Chinese export slowdown? (1) less growth in CNY received (highly likely and healthy inernationally)?(2) less growth in USD received while CNY continues to appreciate possibly leading to decline in CNY terms (a lot less attractive, but very healthy internationally if resulting from shrinking market share in still expanding world trade)? (3) less growth in employment used to produce exports (as the foregoing but only attractive in as far as it does not lead to growing urban unemployment and less room for further urbaniation of the population)?.
Probably the policy space is limited on the upside by shrinking space from market share expansion (especially taking into account market size effect of high levels of Chinese import substitution) and on the downside by labor economics imperatives.
Now, there is a question for the pundits, where do these two meet, i.e. start to conflict ? And what is the effect of “creative destruction” on location of the meeting point. For instance, assume that declining textile exports (or declining growth) due to rising CNY are made up in the still fast growing trade balance by increasing car exports or – production in general (not so very likely, but, hypothetically) and parts import substitution (highly likely). What does that do to the labor market and would making a lot of cars (and their parts, proximity is the holy grail in car manufacturing) in Shanghai have any positive labor market externalities extending to the Pearl Delta.
It looks to me that you have to export an awful lot of cars and build them in Zuhai (Scrap de golfcourses, build Factories instead!) in order to create replacement work there and that would not include tens of thousand of managerial positions..
It is likely then that the conflict point will occur earlier if China tries to fill a hypothetical (short term) world trade quota whilst racing towards that at current speed but from more sophisticated industrialization (higher value products per man hour). It cannot combine industrial upgrading (deepening yes, for a while) with a very high and growing world export market share and also grow employment, unless it finds a way to stimulate domestic demand, which would entail changes in product range, logistics and large investments in service and maintenance in the inland regions.
It appears that the optimization problem described above requires a fair amount of planning and execution capacity. I doubt that such capacity exists ( for an economy as large, diverse and complex as China) and I also doubt that either incrementalism or dramatically more market action (especially financial, bridging the gap between the unofficial and official credit markets, having a proper market for equity (not this sham stuff) having a decent bankruptcy process etc) can do this smoothly enough to avoid serious political problems. The institutional framework for a Schumpeterian happy ending (did not the good old Genius predict that socialism would win in the end?) looks awfully weak to me despite enormous improvements during the past 15 years). A stronger framework turned out too weak for Japan, remember and they are still stuck with all those little anachronisms. If I were the Politburo, I would look at the unappetizing topic of industrial policy and expand the public sector But that does not really work either and alieniates the Vanguard of the Proletariat. Well, perhaps the US can avoid a recession, that might help.
Asia Times Economic Survey of China’s Economy
http://www.atimes.com/atimes/China_Business/JH13Cb01.html
China’s export growth should deteriorate further in the second half of this year and 2009 to below 10% as European Union-Japan demand weakens, following weak US demand, Chen Xingdong, chief economist of BNP Paribas in Beijing, and Isaac Meng, senior economist at the same bank, wrote in a research note this month.
“With the export sector accounting for 11% of total jobs and 12% of fixed-asset investment, there could be an additional impact on overall domestic demand growth,” they wrote.
Dong Xianan, macroeconomic analyst with Southwest Securities, forecasts that GDP this year might decline to 10.1% from 11.9% recorded in 2007. Guangdong province, which accounts for 30% of China’s exports and 12% of its GDP, reported that industrial profit for the first five months in 2008 rose only 4%, while 25% of industrial companies incurred losses.
Mainland exporters are meanwhile being squeezed by shrinking overseas demand. Profits at 149 state-owned companies declined 10.3% to 425.6 billion yuan (US$62 billion) in the first six months, the State-owned Assets Supervision and Administration Commission said earlier.
Beijing raised export tax rebates on textiles and garments to 13% from 11% on August 1, seen as an effort to help exporters hurt by higher costs and weak demand overseas. The People’s Bank of China, the central bank, last week increased by 5% the annual loan quota for national commercial banks to help fund the growth of small enterprises. The quota for regional banks was raised by 10%.
Off-topic
Beijing Olympics is the most watched Olympics in American history
August 10th, 2008
by Robert Seidmam
http://tvbythenumbers.com/2008/08/10/nbcs-olympic-coverage-on-pace-for-most-watched-olympics-in-history-with-114-million-total-viewers/4645
NBC’s BEIJING OLYMPICS ON PACE TO BE MOST WATCHED OLYMPICS IN HISTORY WITH 114 MILLION VIEWERS
BEIJING -Aug. 10, 2008 -NBC Universal’s Beijing Olympics coverage is on pace to be the MOST WATCHED OLYMPICS IN HISTORY. Through two days NBCU has attracted a record 114 million total viewers – four million more than Atlanta in 1996 – the most watched Olympics in history and nearly 20 million more than Athens (95 million), according to data provided Nielsen Media Research.
Saturday’s coverage on the Networks of NBC Universal reached 92 million total viewers, 14 million ahead of the comparable Saturday from Athens in 2004 (78 million).
Brad,
While the troubles of China’s textile sector simply may not be representative of China’s entire economy, the labor intensive textile sector provides millions of jobs and forms the bedrock of political stability nationwide. Please inform Hank Paulson that it is simply not possible to retrain low skilled textile workers to become lawyers or even worse, investment bankers. As a declared socialist economy, the Chinese government has a legal and moral obligation to ensure “full employment” for low skilled workers. The Chinese government doesn’t have any moral obligations to hostile foreign governments that provide advanced weapons to Taiwan and covertly finance Tibetian separatists to the tune of $100 million per year. Any further revaluation of the Chinese yuan might even destablize the Hong Kong dollar peg to Wall Street Hedge Fund attacks endangering the socio-economic environment of the entire Pearl River Delta.
DC — there are other ways China could meet its moral obligations to low skilled workers. you never really have responded to the argument that a policy mix based on loose fiscal and loose credit and a stronger exchange rate would generate more jobs than the current policy mix (tight fiscal and tight credit — which are bad for jobs, and an undervalued exchange rate).
p.s. Hong Kong shouldn’t still be pegged to the $. An RMB peg might work better …
anon– China’s economy is now between 1/4 and a 1/3 the size of the US economy. goods exports exceed US goods exports (tho us goods exprots likely have a higher US value added). goods and services exprots fall short of US godos and services exports.
Matt — I am not sure what you are driving at. Sure, the data is imperfect — but the trade data is better than most (it matches with US and Eiropean data once you adjust for hong kong). and what is the trend that is worrisome? Constant export growth in nominal dolalr terms? A slide in real export growth but from an exceptionally high level? A world where credit (b/c of the big lending curbs) is available on very cheap terms (negative real rates) to some, and on prohibitive terms to others b/c of a desire to avoid overheating w/o adjusting the exchange rate?
Rien — why does China have to meet its labor market imperatives by subsidizing exports? there is a ton of evidence that indicates this policy is inefficient at supporting the labor market. the export boom hasn’t produced a jobs boom; labor income has fallen v GDP. The easiest explanation for this is that CHiense policy isn’t directed at job growth, but rather has been captured by the interest groups (including western MNCs that get their cut of underpriced Chinese inputs) that benefit from the current policy —
I have yet to see any one reconcile the widespread view that Chinese leaders care most about jobs with the data showing limited job growth (Relative to GDP growth)/ falling labor income v GDP over the past few years.
Brad,
Given the enormous financial losses from the recent Sichuan earthquake, Prime Minister Wen Jiabao wisely ordered all non-defense government agencies to slash expeditures 10% across the board for the next several years. Although absolutely necessary, rebuilding destroyed infrastucture really doesn’t contribute to “real” GDP growth or improve productivity over what previously existed. It would be beyond reckless for the Chinese government to play with the value of the yuan monetary unit, inflating and devaluating the currency. The long term consequences of such a reckless policy would be the worsening economic stagflation that the US economy currently experiences.
dc — the financial losses on china’s holdings of us and european debt are far larger than the financial losses from sichuan. and cutting fiscal spending (spending on chinese citizens) while increasing the subsidy to us consumption by limiting appreciation and buying USD debt is in my mind an even more reckless policy.
china has been playing with yuan — it has depreciated it enormously in euro terms, and pursued a monetary policy that has led to huge inflation. all to maintain a link to the dollar …
Xie: Without transparency lenders in this gray market have no ideas about their borrowers’ financial health.
On the other hand, grey market lenders are often dealing with their own money so that they often have a very, very good idea about their borrowers financial health. If we are talking about the Wenzhou credit networks, most of the field work I’ve seen seems to think that they tend to be very careful about who to lend to.
Xie: This is a fertile ground for debt pyramids. The high interest rate, usually above 20%, in the gray market suggests that most debts will go bad.
Not necessarily, if is being used as revolving credit. Of course if you aren’t careful revolving credit can quickly become non-revolving credit. Again a lot depends on how good the people are at risk control, and one shouldn’t automatically assume that people in gray markets are worse at risk management than people in formal markets.
In any situation, if the loans do go bad, a bailout is probably the worst thing that you can do. Preserving employment and salvaging factories is important, but that is better handled through direct welfare payments to workers and an asset-preserving bankruptcy process, than a bank bailout.
[...] « Previous [...]
Brad,
Recall Ben Bernanke’s statement, “The Federal Reserve possesses the modern technology of the printing press. The Federal Reserve can stimulate the US Economy by dropping money from helicopters”.
By dropping the US discount rate to the current 2% that is well below the “real” rate of inflation, the Federal Reserve is pursuing a wildly, inflationary monetary policy. If the CPI statistics were measured objectively, US inflation tops 8%. Broad M-3 money supply under Bernanke is exploding at an annualized hyperinflationary 15% growth rate as per Shadowstats.com .
http://www.shadowstats.com/
Until the US adopts a “sound money” monetary policy, the Washington Consensus has no credibility left to criticize the China PBoC. Either adopt a “sound money” policy, or Bernanke should immediately resign.
DC — I am belabouring a point and continuing a silly debate, but by all your criteria (policy rates under inflation, rapid money growth), the pboc governor also needs to resign. And given your criticism of the US fed, i am surprised you think it should set monetary policy for China as well as the US.
I won’t rise for the bait again — some of rien’s points were quite interesting and there is certainly an interesting debate to be had about risk in china’s version of a shadow financial system that might be exposed should China experience a bit of slowdown.
As economists and market participants we all must deal with uncertainty and probabilistic outcomes/scenarios. One that I believe is very evident if one looks into the numbers and data is this breakneck export, investment, and money growth in China that is fueling misallocation of capital, resources, and labor. Just as the US had a yield bubble, China is having a capacity/manufacturing bubble, both of which are secondary and unintended consequences of the vendor financing arrangement in place whereby US is consumer of last resort, China lender of last resort, US outsources labor and manufacturing to China, and China outsources monetary policy to the Fed. Both of which engender easy money and all the consequences thereof. The bubble has popped in the US because the free market could no longer clear; in China it has not because party officials are driven by growth to absorb the excess labor and to ameliorate living standards. Reminds me of credit hedge fund managers leveraging and reaching for yield in 05-Aug07 to get their fees for the year before the inevitable blowup…
But as the now-in-vogue economist Hyman Minsky observed, stability breeds instability, and Hu Jintao’s harmonious society could end in debt deflation, zombie companies, mass unemployment, and potentially social upheaval the longer these excesses and misallocations persist. There is no way to tell when this well happen, and I give BS great credit in trying to analyze and decipher data that is clearly fudged and manipulated. But how can you analyze a complex and smoke and mirrors economy of a country that will substitute a 9 year old girl to sing at the Opening Ceremony of the Olympics because her appearance didn’t accord with her voice? I think China has so much potential, like the US 100 years ago; its people entrepreneurial, diligent, and economy once the largest in the world. But there is too much smoke and mirrors, and this has to expunged from the system. That’s what recessions do, that’s what credit crunches do, and that’s what needs to happen. The longer it doesn’t, as Xie has said for years, the worse it will be. Guys like DC remind me of the realtors 3 years ago who said house prices never go down….
Brad, yr # 9
I think I agree that the government is captured and not only by MNCs. However, the employment explanation for bizarre economic policymaking, in connection with the nature of the regime (even this “communist” mob must be paternalistic, both of which I support intuitively (sorry) , makes me believe that jobs matter, in the sense that complaints from mates and managers are taken seriously and that riots have to be prevented at all cost, especially if you have trouble typing.
As to the employment share: that is a phenomenon very familiar to people familiar with Singapore. MNCs (including Taiwanese and HK firms) will not repatriate a lot if the money is making money and/or may have to be used for further investment. Low taxes and a firm outlook for the currency are then enough to drop as much revenue into the country as possible and keep it there. It is probably not the whole story but I would expect an Asian MNC friendly super exporter to have a declining employment share for quite a while. In a sense, a firm CNY boosts GDP that way. Not something that the domestic media would advertise though! Like in Spore, you direct the attention at GDP growth, not at the rather weak link between GDP and private consumption (in my book the best proxy for working class happiness) . It is pretty hard to present a rather sophisticated theory about China’s political economic dilemmas in this silly little window without being unclear or worse..
Mr. Setser,
You are providing interesting and necessary information along with valuable perspective. I wish you still at RGE.
Thank you
Peter Schaeffer
P.S. I did pass math.
“Broad M-3 money supply under Bernanke is exploding at an annualized hyperinflationary 15% growth”
It is a succulent irony that professional economists, (those who confuse the supply of money with the supply of loan-funds), thus conclude that increases in the old monetary figure “L”, (or M2, or M3), are inflationary.
The conclusion is tantamount to saying, “don’t save money” as savings (which we don’t have enough of), adds to “L” and therefore has an inflationary bias, when in fact, savings, (a large portion of “L”), is evidence of money that has already been saved/spent/invested. Non-bank savings-investment accounts have erroneously been lumped into the Keynesian inspired concept of money (as are MMF funds).
The “money stock” is unknown & unknowable.
Note: “L” measured M3 plus all other liquid assets such as Treasury bills, savings bonds, commercial paper, bankers’ acceptances and Eurodollar holdings of US residents (non-bank).
“the Federal Reserve is pursuing a wildly, inflationary monetary policy”
Commercial bank credit (loans-deposits) is still on a sharp downward path.
Also, you can make the argument that the Fed is actually being restrictive in monetary policy; its balance sheet has stayed relatively constant since last year since it has sterilized all injections and effectively swapped its Treasury holdings for MBS and Agency debt, not a bad trade for a non-levered and mark-to-market entity. The carry and slide alone on these securities relative to Treasuries is astounding.
Similarly, you can make the argument that the ECB is actually easy. Though it has not cut, its balance sheet is exploding since they are repo’ing all the junk from UBS and Spanish real estate. For a bank that talks about moral hazard, the dual pillar of money growth, etc, it sure is compromising that by inflating its balance sheet.
These aren’t views I wholly believe in, but one could certainly make that case. When people say the Fed is printing money or inflating away the USD, they are wrong, not perusing the Fed’s balance sheet data, and just using cliches from the typical anti-Fed/American consensus.
These people confuse and ignore cost of money with availability of money. When the Fed was tightening from 04-06, in a way they weren’t tightening because availability of money didn’t changed, if anything increased with the proliferation of Tangelo Mozilo’s Option ARMs, GMAC’s car loans, and the shadown banking system’s love affair with CDOs. Now, the cost of money has fallen, but the availability of credit is collapsing (bank credit, C+I, etc). Financial conditions are tightening dangerously and the Fed by lowering the rate is trying desperately to rectify that. The argument that a credit contraction is long overdue is fair, but when entrepreneurs can’t get loans to start a business, homeowners to buy the surfeit of inventory, etc then the economy will suffer. The salient point here is that the monetary base is barely growing, private credit availability collapsing, and Fed balance sheet not inflating. We’ll see where this ends, but as of now it doesn’t look pretty
[...] July, China posted rather impressive export growth — all things considered. US imports from China in July aren’t known, but US imports [...]