A global stimulus shortage …
China doesn’t exactly want to make it easy to evaluate the size of its stimulus. Bragging about the small size of your fiscal deficit — especially in relation to the US deficit — suggests a rather modest effort. A bigger Chinese deficit afterall would allow the US to run a smaller deficit without shortchanging global demand. The IMF’s analysis – which looks at the change in the balance of the general government – puts China’s stimulus at about 2% of its GDP in 2009 and 2010, roughly the same as the US effort in 2009 and less than the US effort in 2010.
Given China’s current account surplus, its abundant domestic liquidity (the government – per Stephen Green of Standard Chartered) had deposits at the central bank equal to 9% of its GDP, and limited government debt (at least explicit debt), China could and should do more. And maybe it is: telling the state banks to lend to support local infrastructure projects could be considered a form of stimulus (the TALF could be considered such a stimulus too; both try to keep the flow of credit going to sectors that will spend or invest). It just isn’t the kind of stimulus that looks likely to spur China to consume more. And it isn’t clear how quickly those infrastructure projects will be started, and thus provide real support for activity.
At this stage, though, I would be happy if China just did enough to keep its current account surplus from rising. That is the acid test. So long as the surplus is rising, China is subtracting from global demand growth not adding to it. China could meet its 8% growth target without any contribution from net exports if all other parts of China’s economy kept growing at their previous pace – and with private investment growth slowing, that requires a surge in public investment or a big increase in consumption. But I would note that net exports can mechanically contribute to growth if imports fall faster than exports – not just if exports grow faster than imports.
But China isn’t the only part of the world that needs to do more. Europe’s economy contracted as fast as the US economy in q4. But Europe’s combined stimulus looks to be significantly smaller than either the US or Chinese stimulus. Bruce Stokes of the National Journal/ Congress Daily did the leg work:
The International Monetary Fund has called for a global fiscal stimulus of 2 percent of GDP. In 2009, U.S. and Chinese stimulus spending is likely to match or exceed that target. European stimulus will total less than half that amount. And spending in Brazil, South Korea and South Africa will also fall below the IMF goal, according to estimates by the IMF and J.P. Morgan. …
“In proportion of GDP,” Jean Pisani-Ferry, director of the Brussels think tank Bruegel, wrote on the National Journal economics blog last week, “the size of the stimulus packages put in place in Europe [is] at best half the size of the U.S. and, unlike [the American effort] several of them are rear, rather than front-loaded.” While Germany’s spending will amount to 1.4 percent of GDP in 2009, French outlays will total only 0.8 percent, and Italy has not put forward any meaningful fiscal boost at all …
“Any way you slice the numbers,” wrote Ted Truman, a senior fellow at the Peterson Institute for International Economics, on the National Journal blog, “policymakers are falling short of real ambition in the face of the worst global downturn since the Great Depression.”
That won’t cut it. Especially if Europe isn’t willing to do much to help Eastern Europe avoid a sharp adjustment, one that will cut into Eastern Europe demand for western European goods. Germans don’t want to bailout profligate governments (and profligate banks that financed profligate households) in the East. But their profligacy provided the demand that spurred Germany’s exports. Bailing out the East is an indirect subsidy for a host of German jobs ….
The G-20 still has some work to do if it wants to live up to its November commitment to take the steps needed to support global recovery. Policy makers, in my judgment, still haven’t gotten ahead of the forces that are driving a global contraction in demand.
* The IMF estimates of the size of different stimulus packages, as of the end of January, is on p. 18 of this document. The IMF estimated the global stimulus at 1.5% of world GDP. Other estimates have a higher number.
** UPDATE. Tao Wang of UBS estimates that China’s actual fiscal stimulus in 2009 will be a bit less than 2% of China’s GDP.
“Not all of the RMB4 trillion will be spent by the government. Of which, the central government plans to take on its budget RMB 1.18 trillion (of the RMB 4-trillion package), breaking down to RMB 104 billion in Q4 08, RMB 487.5 billion in 2009, and the rest in 2010. All of this is supposed to be additional spending. We think the actual impact of the funds disbursed in Q4 08 would be mostly felt in 2009, and this year’s budgeted increase is likely front-loaded. Combining the two, the fiscal stimulus stemming from the RMB 4 trillion plan felt this year is roughly RMB590 billion, or 1.8% of 2009E GDP. ”
Brad, it has been rumored and reported by a Chinese business newspaper today that the February trade surplus is only $70 billion dollars, with the fall of export and import both reaching more than 20%.
First off, what makes you think China has the rest of the world’s interests at heart? If you’re the guy with the biggest bank account, why not encourage global deflation and then buy things up at bargain prices?
As for stimuli, you can make them as large as you want, they won’t have any effect. There’s nothing behind them. Spending $800B you don’t have on things you don’t need gets you nothing but more debt. Good luck with that strategy.
The US stimuloid package is a sop to the respective states which can longer individually access the bond markets. The US is merely acting as a front man where .gov sells Ts, then sends along the money to the individual states in the guise of ‘fiscal stimulus’. Yeah, right. More like cover the respective unions and other welfare leeches. That’s really gonna pop those GDP numbers in 12 mos. LOL
And as KT Cat points out, why is everyone assuming they have our best interests at heart? Why not go pig on the entire pot? More than finance, the world’s civilization owes its existence oil. Methinks it would be wise to use “little green pieces of paper” (Summers) in exchange for some ‘real’ goods, no?
Brad — as usually, solid and interesting analysis. I have done a little work on precisely this issue, essentially putting some money where many people’s mouth is, by building a (very simple) three region model of global imbalances to estimate effects of the crisis, and the impact fiscal packages could have. The paper is forthcoming in JPO, see http://dx.doi.org/10.1016/j.jpolmod.2009.01.001. I am posting here some conclusions.
“In the real world, timing is crucial. The fiscal stimuli will be too late to avoid contractions, and the simple, static model applied here is not able to take that into account. The model does suggest, however, what course of action could help to avoid a severe global recession and at the same time support correction of external imbalances – assuming that authorities in all major economies are able to limit financial contagion and avoid further systemic financial events.
First, China must rebalance demand towards domestic sources. The proposed government expenditure program hints in the right direction, and simulation results indicate that such a program would help to support growth even in the face of exchange appreciation. Some further exchange rate realignment should help to reduce global imbalances, but does not present a solution by itself. Crucially, exchange appreciation should occur broadly and not only against theUSDollar.
Second, Europe’s – as of yet – careful approach to fiscal expansion reflects the political straightjacket of the Maastricht Treaty. Simulations show that a continuation of Bretton Woods II spells doom for German exports, making reflationary policies all the more important. Beyond that, Europe has particularly high stakes in reform of the international financial system.
Third, the US should institute public expenditure increases sufficient to limit GDP losses. The need for infrastructure investment presents an opportunity to weather collapse in the construction sector, and to improve the situation in the labor market. Simulations show that government dissaving is essential to avoid a protracted recession, given the expected and indeed necessary change in household savings behavior.
Lastly, it is not clear where lack of cooperation between major economic blocs could lead, but it is unlikely to be a smooth reduction of external imbalances in the near future. US household balance sheets have seen a turning point, and in order to avoid catastrophe public balance sheets might have to take on substantially more debt for a number of years – but BrettonWoods II cannot continue indefinitely. What will replace Bretton Woods II, when it ends?”
I think it’s pretty much impossible to compare the size of different stimuli.
Let’s take Germany as an example: The officially announced stimulus package may be as you say, but it ignores all sorts of other effects that come about from the way Germany’s economy is organized. For a start, compared to the US, there are many more social security mechanisms that provide automatic assistance for people in danger of being laid off. That’s not part of any “planned” stimulus, but it is happening automatically, and it’s costly. The unemployment insurance fund will not raise premiums (by government decree), which means deficit spending to pay for increased unemployment benefits and Kurzarbeitergeld. That’s many billions of Euros. Same thing for health insurance, which is provided to the unemployed free of charge, at government expense. And there’s more: German corporations cannot easily lay off staff, because most of them have agreements with the unions that explicitly forbid it for several years. So their profits will be hit accordingly. Corporate saving will go down, as will corporate tax receipts, but the government will not cut spending to counterbalance. Also, contrary to US states, German states are not required to balance their budgets. They will keep spending even as tax receipts decrease. No California-style emergency cutbacks anywhere on the horizon.
How do you factor all that in? Just comparing officially announced packages is worse than comparing apples and oranges!
Brad,
Incessantly calling for UberKeynasian policies will ensure US will resemble Peronist Argentina within a decade. Great job!
You write you “would be happy if China just did enough to keep its current account surplus from rising.”
Why are you so convinced that it will keep rising? In all likelihood, China’s current account surplus will not rise any further. It will start going down in the immediate future. The drop in exports lags the drop in imports because components are first brought in and then reexported. And commodity imports will start picking up due to the various infrastructure measures, though that might take a few more months to get started.
Brad-
Europe has no interest in massive stimulus. And why should we?
also huge resentment growing in our sphere on western europe to bailout eastern europe.
in good english, westerners want no part of dealing with easterners.
there also huge resentment and to some degree a difference of thought between Gordon Brown and Merkel.
A new iron curtain is being formed as we speak.
I agree the bulk of the US stimulus package is going to states (or being spent in tax cuts). I think the real “stimulus” portion is perhaps less than $100 billion, or about the size of the EU deal.
And isn’t the EU response limited to the fact that half the governments CAN’T issue any more debt. Italy and Spain come to mind. Not sure about France. Blaming that on the germans seems a bit unfair.
Really? A Global Stimulus Shortage? Or a Shortage of Stimulus to Re-Balance the Global Imbalances? The grossly overvalued US Dollar is the mother of all the nightmares the world is living in…
Brad: “At this stage, though, I would be happy if China just did enough to keep its current account surplus from rising. That is the acid test. So long as the surplus is rising, China is subtracting from global demand growth not adding to it.”
Bon dit.
Thomas;
Your first post was very good. However, on the second, the question is to what extent the Chinese government will undertake official capital flows (through intervention in currency markets). Their surplus is a variable subject to direct government control.
Brad,
The americans have digged themselves into a hug hole during the last 25 years by spending what they didn’t have. Now you want China and Europe to commmit the same suicide as US did, because that would make you feel better?
@ August
Make it very clear. Western Europe (outside) UK will not comply with the current economic order.
We want a new financial order. Period.
And what’s meant by New Financial Order= evaporate the current dollar global reserve system.
What ever happened to “decoupling.” This global mess will not end until American shoppers return to the malls. Waiting for the Germans and Chinese to turn into consumers instead of savers and workers will take generations. Just print the dollars and send directly to US families. Sounds crazy but its reality and works for millions who have no job.
I have to echo Thomas here.
Why are you comparing apples with oranges?
And not taking into account some of the results of our German (Western European) extensive and expensive social safety nets?
After reading posts written by Justin Fox, Felix Salmon, Kevin Drum and Matthew Yglesias and now Brad Setser, I´ll just repost my comment to some of these other posts:
Look at the US package. For example extended unemployment benefits ($60 billion), more money for food stamp programs ($19.9 billion), expanded access to health insurance for the unemployed ($111 billion).
All of these are actually part of the regular social and legal structure in Germany. If unemployment rises government spending for these programs rises too. It´s automatic deficit spending.
Or the $44.5 in aid to local school districts to avoid layoffs and cutbacks. These are state spendings in Germany and not dependent on local property taxes like in the USA. And German states don´t have to produce a balanced budget like many US states. So we´ll see deficit spending in the German states too.
Not to mention that firing state employees isn´t as easy in Germany as in the USA.
Just giving the US stimulus package a quick look-over I´d say that at least around $200-250 billion of that package deals with things that are part of already existing (regular not temporary) German laws.
If we just relabeled German government spending related to these programs (following the US stimulus rules) I´d say we coul boost the number size of the German stimulus package quite a bit.
Blame Germany / Western Europe seems to become a hit around US blogs / media in the las few days. And all of then conveniently don´t mention that a significant part of the US stimulus package just seem to copy the already existing German / Western European social safety net.
Detlef and Thomas — you are right that there is no perfect way of comparing stimulus packages. I used the IMF’s numbers b/c they had to present their numbers to the G-20 and thus were subject to criticism on their methodology.
the way of thinking about the size of the stimulus that makes sense is the change in your central government’s fiscal trajectory (or the trajectory of the general government) v a baseline. a lot hinges on what it is in the baseline. More automatic stabilizers means a bigger change in the fiscal position with less stimulus. Generally speaking, that means the adjustment in fiscal positions in Europe is larger than implied by just the stimulus. on the flip side, US tax revenue is very cyclical (it depends heavily on corp tax revenue and income tax on the exercise of stock options), which produces a big swing in the baseline w/o new policies. Conversely, China doesn’t have large automatic stabilizers so a big stimulus just does through discretionary policy what would happen elsewhere automatically.
and then there is the question of how you account for local government infrastructure investment not financed by transfers from the central government but from raising funds in the market, or in china’s case from state banks.
all these qualifications aside, Germany has a a large current account surplus. A host of countries in europe’s periphery have large deficits. the periphery has to adjust — and would be a lot easier for them to move toward balance/ move into surplus if Germany’s surplus fell. Suggestions on how to achieve that rebalancing are most welcome.
Brad,
I understand the benefits to America of China running a larger government deficit, and I think the Chinese leadership does, too. What they – and I – don’t quite get is the benefit to China.
Sure, rescuing the OECD benefits exporters in China, but as many people have argued net exports are not the main driver of the Chinese economy. Sure, preserving more of the value of the $2 terrabucks the PBoC holds as reserves would be preferable, but in relative terms is it really all that important? Where’s the seat at the table in designing the Next World Order?
Maybe, just maybe, China’s self interest is in picking up the pieces after the Great Crash. And, not before.
DoR since net exports didn’t drive China’s growth, I presume China would be quite happy allowing the rmb to appreciate v the USD and thus v the world?
What does China get?
– growth. China has blown through a lot of cash subsidizing global demand for its exports (via fx intervention) on the grounds that this policy produced growth. the hidden fiscal cost of this subsidy was in the 3-5% of GDP range annually. if china could go to such lengths to support the expansion of its export sector, presumably it could go to greater lengths to support the expansion of internal demand.
– sustained open markets for its goods. us support for global integration is thin. it might get thinner. if net export subtract from global growth — or if US Chinese imports from China start growing when the US economy isn’t, and US exports to China aren’t, watch out … the business lobby has long sustained open us markets b/c big biz benefitted from china’s low costs. but the business lobby has lost a bit of creidbility — and frankly the benefits from trade never trickled down that far (yes, i know of low import prices, but those have to be evaluated v wages, and median real wages haven’t done much). if china wants us markets, it needs to be seen as doing its part to support global demand, not free-riding off a stimulus financed by us taxpayers.
call it financial and economic realpolitik
“Germans don’t want to bailout profligate governments (and profligate banks that financed profligate households) in the East. But their profligacy provided the demand that spurred Germany’s exports. Bailing out the East is an indirect subsidy for a host of German jobs ….” Brad, you may be one of the few bloggers who understood this important point.
The difficulty is that the Germans cannot find the amounts needed to bail out everyone who would like to be bailed out. The Germans need as much help as anyone else as their export-oriented economy will be faced with major challenges, if this crisis lasts longer. The Germans may start by sending all their citizens a big tax rebate for the middle and lower classes (it will help Germans and tourist destinations), repair their physical plant (this will employ Germans as well as Eastern Europeans), and spend even more on universities and physical science and biomedical research (they are, of course, already better than the US in this department). The Germans should also look the other way while some countries overspend while this crisis lasts.
Well, in an ideal world, the Eurozone countries would launch a massive stimulus package to offset collapsing US demand. Problem is, the EU is still financed as a collection of national governments.
At the very least, institutions like the EIB need to scale up massively. The EU needs true countercyclical, area-wide policies, similar to what the Federal government provides for the US. Europenny-pinching will no longer do.
Dennis Redmond: I strongly agree, and well said.
bsetser wrote: ” if china wants us markets, it needs to be seen as doing its part to support global demand, not free-riding off a stimulus financed by us taxpayers.”
If exports are a minor part of China’s economy — and the fraction keeps getting smaller by the year — why would China want to keep giving the U.S. so much free wealth in exchange for dollars that will almost certainly be depreciating strongly in a few years? Viewed in this light, China is subsidizing the U.S. and has been for years, not the other way around. Unless the U.S. actually allows China to spend its stash on some worthwhile U.S. properties, why would China want to continue the subsidy?
Brad:
regarding Germany’s current account surplus:
I would argue there is little doubt that Germany’s surplus will evaporate in the very near future. German exports are geared towards sectors that are suffering tremendously in this crisis, whereas the imports are much more geared towards consumer goods, which are holding up. My guesstimate is that Germany’s 2009 current account surplus will at the very least drop by half compared to 2008, and quite possibly will drop even more.
Don:
I agree that China’s surplus is to a significant extent directly influenced by the government. Still, Chinese exports are highly likely to drop quite a bit in the months to come, and considering the huge gap between exports and imports, imports can’t possibly drop faster in absolute terms.
But you are right that beyond the immediate future, China’s policy decisions will be a major driver of how the surplus develops.
Just to add some examples regarding German exports: That Germany’s car exports are being badly hit is well known. But other examples are even more extreme:
- I believe Germany is the world’s largest exporter of large trucks. February orders for trucks coming in from abroad are down 95 % year-on-year. They have been close to zero for nearly half a year. That has hardly hit export statistics so far, because they are still working to fulfill old orders.
- The Germany machinery industry has just released January orders. Orders from abroad are down 47 %. Again, exports have hardly been hit yet, because of the order backlog. But a few months down the road, machinery exports will start to plummet.
Drops of this magnitude are not taking place on the import side. So unless there is a massive uptick in export orders in the very near future (and I don’t think anybody expects that to happen), very soon there will not be much surplus left.
Don’t get me wrong, sir. I like open markets and growing economies! Really, I do! But, let me ask you this: How much demand would be generated for China’s exports if the Rmb were, say, 20% stronger against its own trade basket?
We know the change in net exports isn’t driving China’s growth. We know 55-60% of its foreign trade is from foreign-invested enterprises. We know something like 10-20% of export values are attributable to the Chinese economy.
The problem isn’t competitiveness. It is a lack of demand. Fooling around with the exchange rate isn’t going to change that.
There may well be very good reasons for China to let the Rmb rise, but producing growth isn’t among them, at least that’s my view.
So again, it is zi Germans that are doing it? Why then does the US want to become much more German-like if not exactly like within the next 3-5 years?
It is the UK that needs saving much more than EE. The EE fix involves involuntary peg of the Swiss franc onto euro until further notice.
I have no idea what the UK fix would involve other than radical change in their “center” of thought, emotion, behaviour and conscious or unconscious adjustment or mediation of their body’s responses to the social and physical environment (much like the US “adjustment”), though I m pretty sure the changeover to euro should be excluded from it firmly.
So we are left with Italy, Greece on the one hand, Ireland and Spain in the middle and the Baltic states, Hungary and Romania on the other end, the latter being much more used to »recessions« as commonly acknowledged. The “older” Europe does need Germany (to an extent) for saving their ability to refinance old debt coming due in “the market” much like California et all. I d not discount tho the existence of hefty (grey) economy sectors outside official numbers plus some excellent food on top in the southern Europe.
When push comes to shove, I d guess Europe will suddenly become able to fix their financials firmly, without much bragging attached, as opposed to (as demonstrated amply these days by “all the `boys” choir) their US counterparty, where bragging is about as much as we ll ever get on any fix.
seems that no one cares about China’s shrinking trade surplus…
DoR — the latest data suggests the Chinese content in China’s exports (in aggregate) is around 50% of their value, not 10-20%. The export boom from 04 on (unlike the 02-04 boom) wasn’t associated with a // rise in imports from the rest of Asia. Reasonable estimates put the value-added in China at around 20% of China’s GDP — a fairly big number. Moreover, it is a number that has increased rapidly. Net exports have contributed mechanically close to 3% to China’s GDP growth in 05, 06 and 07. the number for 08 is more like 1%, but it should still be positive. I have linked in the past to a VoxEU summary of a paper on the value-added in China’s exports and the Li Cui paper (from the imf) on china’s changing trade patterns.
Corleone — the last hard data point comes from January, and it shows a rise not a fall in China’s trade surplus. The q1 numbers from China are always hard to evaluate b/c of the changing impact of the new year, but that rise is consistent with the pattern of q4. i’ll be quite interested in the combined number for Jan-Febr, which can be compared to the combined number from last year. Note though that for seasonal reasons China’s surplus usually declines in jan-feb v q4, and china’s data isn’t seasonally adjusted.
Brad:
I’m interested in the data on the increase in the value-added of China’s exports, but couldn’t find the link. Can you give a pointer as to where I have to look? (How old is the post you are referring to?) Thanks!
bsetser: China has blown through a lot of cash subsidizing global demand for its exports (via fx intervention) on the grounds that this policy produced growth. the hidden fiscal cost of this subsidy was in the 3-5% of GDP range annually.
The Chinese economy was growing at its maximum and simply could not grow any faster. During the boom, we were having 13% GDP growth, and anything that encouraged the Chinese economy to grow even faster would have been a bad thing.
This is the odd thing about a lot of arguments on China, is that a lot of the arguments are set up that if China did this, it would have grown faster. However in the boom years, high growth was not the goal. It was a problem.
And in my view, it was money well spent. China had a broken but reforming financial system and the last thing that you want to do to a broken financial system in the middle of a credit boom is to feed the monster.
If you kept the savings in China, I doubt it would have gone into something useful.
bsetser: – sustained open markets for its goods. us support for global integration is thin. it might get thinner. if net export subtract from global growth — or if US Chinese imports from China start growing when the US economy isn’t, and US exports to China aren’t, watch out …
*if*. Is there any reasonable expectation that this will happen? China exports are crashing. The US/China trade deficit is decreasing, as it the US overall trade deficit.
The trade deficit is simply not an issue right now. It may be in a year, but by that time the economic context will be *so* different that it would be foolish to base policy now on guesses as what the politics of the US would be like a year from now.
bsetser: the business lobby has long sustained open us markets b/c big biz benefitted from china’s low costs. but the business lobby has lost a bit of creidbility — and frankly the benefits from trade never trickled down that far
The trickled down far enough. Median wages haven’t risen, but wages for high skilled workers have mushroomed. There are enough people in the middle and upper classes that have benefited from trade that its not much of an issue.
bsetser: if china wants us markets, it needs to be seen as doing its part to support global demand, not free-riding off a stimulus financed by us taxpayers.
And is there any sign that anyone sees or likely will see China as doing this?
The stimulus package involves lots of concrete and steel pouring and is structured in a way that China gets shut out from most of the contracts. Most of the stimulus is in government construction, and they will be under very heavy pressure to buy American steel and concrete. China isn’t part of the WTO Government procurement protocol so it is certain that Chinese companies will be shut out from most of the stimulus.
bsetser: if china could go to such lengths to support the expansion of its export sector
The massive expansion of the export sector was never planned explicit government policy, it was one of those things that just happened. That’s quite common in politics.
bsetser: presumably it could go to greater lengths to support the expansion of internal demand.
Well it’s doing it now.
Thomas — here is the link:
http://blogs.cfr.org/setser/2008/08/10/value-added-in-chinas-export-sector-and-chinas-exposure-to-a-global-slump/
2fish — China could have simply subsidized wage earnings to increase consumption rather than subsidizing the treasury/ building of us mcmansions. you are right that china was overheating. but one reason why china was overheating was the large contribution of exports to growth. the obvious policy response was a stronger RMB. but that never happened (rmb appreciation v the USD was offset by USD depreciation til Aug 08). Why?
Erste report on CEE debt, real picture with real figures
2fish — China could have simply subsidized wage earnings to increase consumption rather than subsidizing the treasury/ building of us mcmansions.
Not simple at all. If you force the SOE’s to increase wages then you reduce the capital cushion that the corporates and banks have. Outside of the SOE and exports sector, most people in China aren’t people that earn wages in the sense of getting a paycheck.
And even if you could, I think it would have been a very, very bad idea to try to increase consumption.
Right now China isn’t doing great, but it’s doing a lot better than the US is because it has functioning well-capitalized banks and industrial companies. If you increase wages and consumption, you run into exactly the same problem that the US has with vastly under-capitalized banks and industrial companies. Pay now or pay later.
Savings is good. Cash reserves are good. Sometimes it isn’t obvious *why* they are good until later. If profits drop, a Chinese SOE can wait a few months before firing people. As it is, because US companies do not have cash reserves, when something goes bad, they have to fire people immediately because they have no choice in the matter.
In any case, the fact that China put the money in Treasuries in the long run seems to have been very good for China. China really doesn’t care what the US does with the money as long as China gets it back with interest.
As far as whether it was good or not for the United States, the things that led to the financial collapse were so ingrained that I think that things would have blown up without Chinese financing, and conversely had the US followed a different set of policies, it would have not have had this blowup. The decision to use Chinese funding subsidize McMansions was a US one, not a Chinese one.
bsetser: you are right that china was overheating. but one reason why china was overheating was the large contribution of exports to growth.
It was one factor, but it wasn’t the only factor or even the biggest factor, and I don’t get what are you arguing here. Was increase GDP growth in 2004 a good thing or not? One moment you seemed to be arguing that an economy less dependent on exports would have been good for growth, and the next moment you seemed to be arguing that that it would decrease growth.
bsetser: the obvious policy response was a stronger RMB. but that never happened (rmb appreciation v the USD was offset by USD depreciation til Aug 08). Why?
Because the belief was (and I think it is a correct belief) that sudden changes in currency policy cause more problems than they solve.
Once you have something that hires 40 million migrants, it’s something that is hard to shut off. If you shut down the export factories, you end up with exactly the same problem that you have right now. As it was because a lot of the people that were hired by those export factories saved their money, they are better off than had they never got the jobs.
At the individual and corporate levels, savings are good, consumption is bad, and thrift is good.
You don’t want to subsidize wages in the middle of a credit boom. When times are good, you want everyone to cut back spending and save as much as they can, so that you have a pile of cash ready to spend when things go bad.
If you boost consumption in a credit boom, then what happens is that people use up all their savings so that when the boom turns to bust, things totally fall apart.
The combined number of Jan and Feb shows a 64% yoy increase of trade surplus (the yoy increase in Dec 2008 is 72%)
bsetser: the obvious policy response was a stronger RMB. but that never happened (rmb appreciation v the USD was offset by USD depreciation til Aug 08). Why?
Although China tracks a basket of currencies to manage the RMB exchange rate level, dollar is still by far the biggest component. China conducts its international trade transaction in dollars; its biggest import of commodity, the oil, is priced in dollar; its single largest export market by country is the US. And, the country that exerts most pressure on China w/r exchange rate is the US.
For the above reasons, you could say China targets its exchange rate mainly against US dollar. And therefore the appreciation is most apparent against dollar before Aug ‘08.
The biggest concern to China in managing exchange rate is stability or rather employment, not current account surplus, not accumulating foreign currency reserves.
The majority of Chinese exports are low-cost and low-margin. Large fluctuations in exchange rate could easily wipe out the profits for many exporters and would be a deterring factor for investors, both foreign and domestic, to make relatively long term capital investments. The majority of China’s foreign investments are FDI. The exchange rate stability is an important considerations for these investors.
For the reasons above, China can not afford a totally floating exchange rate policy just yet, although an undervalued RMB had started to have negative impact on the economy. It created inflation pressure due to hot capital inflow and large trade surplus; it started to create an asset bubble in stock market and real estate market; most important of all, it hindered the necessarily structural adjustment in the national economy to be less export-dependent and more domestic consumption-driven.
The policy makers understood the implications and started to allow RMB to appreciate in 2005, slowly at the beginning. By late ‘07, it has become increasingly evident that an undervalued RMB has contributed significantly to an overheating economy that was clearly not sustainable. The appreciation of RMB started to accelerate; Labor Contract Law was passed and took effect in ‘08 which intends to protect many of the labor rights and pushed up labor cost to employers especially to exporters; thousands of export rebates were eliminated or substantially reduced. The impact was swift and heavy: thousands of companies in export business were closing in Guangdong by early ‘08. A quick and painful adjustment was underway …
Then came the worst financial crisis in sixty years and following collapse of global demands.
Looking back, China probably should have allowed RMB to appreciate earlier (say in ‘04) and quicker (say appreciation of RMB in ‘05-’07 as quickly as in ‘08). The adjustment process would have taken place much earlier and in a better global economic environment. But such is the difficulty of forecasting and managing a complex economy (plus the export business was too good to let go during ‘03-’07).
bsetser wrote: “Reasonable estimates put the value-added in China at around 20% of China GDP a fairly big number.”
Is that 20% measured in U.S. dollars or in China’s undervalued currency? I see you have bought into the (mostly American) propaganda that exports constitute about 40% of China’s GDP. The true figure is nowhere near that much.
Corleone — do you have the feb data? if so, please paste in a link …
beans — Exports in 2008 = a bit over $1.4 trillion; GDP is around $4 trillion … value added is probably between 15-20% of China’s GDP. Don’t think that is propaganda unless you think the export number is overstated.
greg — i agree with your “looking back” argument. in retrospect (i actually thought so at the time) china would have been better off adjusting earlier. and i also agree that the export biz was too good for china to give it up preemptively, even tho at that point china was restraining domestic demand to keep its economy from overheating while exports boomed
bsetser wrote: “Exports in 2008 = a bit over $1.4 trillion; GDP is around $4 trillion value added is probably between 15-20% of China GDP. Don think that is propaganda unless you think the export number is overstated.”
Yes, the exports are almost certainly way overstated when seen from China’s point of view. Is a Nike shoe that costs $5 to make registered as a $5 export or a $90 export? I think the latter. The $90 figure is what we see in the West, but only $5 of that actually benefits China and should be added to her GDP; Nike pockets the rest. As I recall (sorry, no link) roughly 60 percent of exports fall in this category, which means that the actual impact on China’s economy is far less than the advertised $1.4 trillion.
Suppose the $5 / $90 split is typical for that 60%. So what looks like $840 billion of exports (60% of $1.4 trillion) is actually worth only 840 * 5 / 90 or $46 billion to China. Add the remaining 40% of the $1.4 trillion and you arrive at an export percentage of 15% of GDP. If as you say half is value-add, then the value of exports to China is 7 to 8 percent of GDP.
You might prefer a different split than 5 / 90, but I think I’m roughly right. However, the bogus statement “exports are 40% of China’s GDP” keeps getting propagated, and that smells of propaganda.
[...] I have found a rather good blog, and what happens? The day after it turns out to be the same Keynesian crap as [...]
Brad,
My mistake: the 10-20% figure was the share of the profit accruing to the China-based manufacturer, not the added value.
Prof. Michael Enright estimates domestic value added at 20 – 25%, and in my view has the best record on this subject. (Fair warning: he’s a friend of mine.) Robert Koopman (USITC) puts the domestic added value of Chinese exports at 20.1% in 2002 and 19.2% in 2006. He also uses the Hummels-Ishii-Yi formula to calculate it at 26.0% in 2002 and 25.3% in 2006. (Source: http://www.voxeu.org/index.php?q=node/1524).
Higher than I said, but not enough to make a difference.
.
What I don’t understand is the lack of importance you seem to place on lower-cost China-made goods on increasing US standards of living, especially among the Wal-Mart shoppers. Doesn’t that impact count as “trickle down” ?
China could have subsidized wages? We spent decades telling them to STOP interfering in the market economy! Sorry, you can’t have it both ways: either China follows the capitalist model, or it has wide-spread wage and price controls. We told them to get capitalist, and they did. Now, we have to live with the results.
As for market access, I hope you are not implying that the US is willing to blow up the WTO simply to make a point about China’s lack of domestic demand !
= = = = =
Twofish,
Good analysis, as usual. China’s only two sub-8% growth periods of the past 25 years – 1989-90 and 1998-99 – were scary times. In the first, roaring inflation led to mass protests and ultimately a violent governmental response. In the second, the Asian Financial Crisis combined with the policy decision to break the ITICs. That time, export growth slowed to 0.5% and imports actually contracted by 1.5% amid steep deflation.
China’s exchange rate policy is much more about absorbing surplus labor, and accumulating sufficient forex reserves to have independence from outside interference, than it is about creating growth.
= = = = =
Corleone,
Even if the unofficial Century Business Herald report on February trade data is correct, that 60+ percent increase in the trade surplus is the result of a 20% drop in exports and a 33% drop in imports.
The link just says “both exports and imports fell more than 20%” and resulted in a $7 bn surplus.
= = = = =
Beans,
The $20 (fob) Nike shoe, which has $5 worth of China value, is registered as a $20 export regardless of the price at which it is finally sold at some over-priced Beverly Hills shop.
Sorry, should be “unofficial 21st Century Business Herald.”
DOR wrote: “The $20 (fob) Nike shoe, which has $5 worth of China value, is registered as a $20 export regardless of the price at which it is finally sold at some over-priced Beverly Hills shop.”
I was thinking of Nike’s basketball shoes that sell for $200, for which a $90 FOB would be quite reasonable.
If we use your $5 / $20 split, we end up with exports adding a net of 10% to China’s GDP.
If we then apply your figure of 25% value-add, exports would be worth only 5% of GDP to China.
So exporting is almost optional for the Middle Kingdon.
twofish: even tho at that point china was restraining domestic demand to keep its economy from overheating while exports boomed
And much of the reason for that is that the export industry was effectively outside of the Chinese financial system. Chinese state banks did not loan to export industries so that their credit came from overseas. This meant that when China tried to cool the domestic economy, it had little effect on export industries which were dependent on overseas credit.
The export industries were the darling of neo-liberals like Huang Yasheng. Because they were more “capitalist” and “market oriented” than the state owned enterprises, the belief among market liberals was that China should promote the export sector and restrain the state owned enterprises which were *bad*.
The other thing is that I really don’t see why it is a good idea for anyone for China to change its currency policy and monetary policy and trade policy to increase employment in the United States. If Chinese trade is adversely affecting employment in the United States, the logical thing to do is to use US government policy including tariffs and procurement to protect politically sensitive high employment sectors.
If people are complaining that stimulus package money is being used to buy Chinese steel, then the logical thing to do is to pass a regulation that says that stimulus package money can only be used to buy American and not Chinese steel (which Congress did).
I don’t have much problem with industry specific tariffs and trade restrictions, because by putting restrictions that protect employment sensitive industries, one moves trade toward non-employment sensitive industries. Once American steel workers are not complaining about Chinese steel, they stop caring about imports of tennis shoes.
I think that this period of low growth is less scary for Chinese leaders. Scary, but less scary. One thing that has driven Chinese policy over the last decade is to set things up so that when there is a downturn, like now, the government has this huge pile of cash to pay people not to overthrow the government.
Brad, the link is here:
http://www.21cbh.com/HTML/2009-3-6/HTML_T243JWRV2UQO.html
2009
Jan: expt 90b(-17.5%) impt 51b(-43%) surplus 39b(101%)
Feb: expt 70b(-20%) impt 63b(-20%) surplus 7(-18%)
Combined: surplus 46b(64%)
2008
Jan: expt 110b impt 90b surplus 20b
Feb: expt 87.4b impt 78.8b surplus 8.6b
Combined: surplus 28b
Corleone,
the article you link to also makes some interesting qualitative observations:
Apparently, Chinese researchers argue that January’s import figure was unusually low also because previous infrastructure stimuli had already expired and new ones have not yet come on stream.
In addition, iron ore imports were unusually low and are only now starting to increase again. (Destocking due to high stockpiles)
A Tsinghua researcher is quoted who speculates that the recent drop in Taiwanese exports is a bad sign, because China is usually affected by export drops later than Taiwan.
The article also mentions various “schools of thoughts” among Chinese researchers, which seem to disagree sharply as to if the surplus will go up or down in 2009, or possibly even turn to a deficit.
Beans,
somewhere along the line, your line of reasoning is inconsistent:
Are you saying that China’s headline export figures are wrong, or are you saying they are right, but value-added is much lower than others argue?
I don’t quite understand why you have an issue with China’s export statistics, because it can be verified simply by looking at other countries import statistics (haven’t done so myself, but I assume somebody would have caught it by now if there was something really fishy going on with those numbers).
Your estimation of a 5 % of GDP value-added of Chinese exports is almost certainly wrong (I don’t understand how you calculate it in your post, but let’s just take your number and work with it): China’s current account surplus is already more than 5 %. You cannot have an account surplus higher than the total value-added you create, can you? If you also import goods that are not used as components for reinvestment, your export value-added must be significantly bigger than your current account surplus.
I think the only thing that can be debated is if China’s value-added is more towards 10 %, or more towards 20 % of GDP. I used to lean more towards the 10 % in the past, but after reading the analysis linked to by Brad, I suppose a reasonable case can also be made for the higher number.
I agree with Thomas; it is hard to see how value added in China can be smaller than the current account surplus (actually, the current account surplus plus commodities imported for domestic use). so 10% of GDP strikes me as a lower bound. And the Li Cui imf paper strongly suggests that a rise in value added in chine due to rising components production is a big reason for the rise in China’s surplus. It all fits. Consequently i prefer the VoxEU paper I linked to as a baseline estimate for Chinese value added.
The stories on China’s Feb talked of a declines of at least 20% … or so. if the Feb fall in imports is only 20%, I would be thrilled (Jan was much worse, and the y/y comparison on oil should be bringing nominal imports down). but i want to see the data.
DoR. The fall in import prices for the goods that China exports has to be offset by the rise in prices for the goods China imports. Rodrik is absolutely right on this; in theory trade changes relative prices not overall prices. And for a while China was putting upward pressure on a host of commodity prices. Moreover, theory suggests that the integration of a high wage and low wage economy through trade can put downward pressure on wages in the low wage economy. Quanitifying these effects has proved hard — the paper that is most often cited finds a positive impact from lower imports on the bottom 10% of the income distribution but it didn’t look at the impact of higher commodity prices and the bottom 10% of the distribution is outside the labor force generally speaking so didn’t face pressure on their wage income. Overall median real wage growth has been very very weak in the US past few years. I don’t think trade with China/ other low wage producers is the dominant factor — or that the impact could not have been corrected by public policy — but it seems likely to have been something of a factor. Certainly the distribution of output and jobs in the US was changed by the fact that the US sold paper rather than goods to China in exchange for China’s goods.
finally, there are a lot of ways of raising real wages without a lot of distortions. the earned income tax credit is one. cutting taxes on low wage workers is another. and so on. both could have been financed by the distributed earnings of SOEs. broadly speaking, china opted for a development strategy that substituted capital for labour and thus hasn’t been great at generating either job or wage growth (judged in relation to the speed of overall growth); labor income has fallen sharply as a share of GDP.
[...] Brad Setser earlier this week offered some details on stimulus efforts by region. He had this to say about Europe. But China isn’t the only part of the world that needs to do more. Europe’s economy contracted as fast as the US economy in q4. But Europe’s combined stimulus looks to be significantly smaller than either the US or Chinese stimulus. Bruce Stokes of the National Journal/ Congress Daily did the leg work: [...]
Brad,
Very, very good post.
Thomas wrote: “Your estimation of a 5 % of GDP value-added of Chinese exports is almost certainly wrong (I don’t understand how you calculate it in your post, but let’s just take your number and work with it)”
See my earlier posting on this page (March 6 7:00 pm). Then the one on March 7 12:25am will make a lot more sense; that is probably where you got my 5% figure.
Thomas wrote, and bsetser agreed: “You cannot have an account surplus higher than the total value-added you create, can you?”
Sure you can. If the value of exports from China is overstated, and that is my contention, then so is the current account.
Thomas wrote: “I don’t quite understand why you have an issue with China’s export statistics, because it can be verified simply by looking at other countries import statistics”
Nike has every incentive to pretend that a $5 shoe made in China actually costs $90 to import: the corporate tax rate in China’s Special Economic Zones is far lower than it is in the U.S. For every such shoe, China’s current account grows by $90, but $85 of that flows right out again — which is not measured in the current account — and ends up in some tax haven such as Bermuda or the Cayman Islands. So only $5 of that $90 actually affects China’s prosperity, and that is why my estimate for the impact that exports have on the GDP is far lower than others.
China’s export numbers are honest enough, as far as they go. They just can’t go far enough; nobody can possibly track all the devious ways that multinationals have for hiding income.
The major point I want to make is that exports are not all that important to China. As I have said here before, China is not Japan. Japan is not even self-sufficient in food, so it needs to export like crazy just to be able to eat. In contrast, China has a lot of natural resources and a vast and growing industrial base; it has little need to import, and therefore little need to export.
Beans,
you make an interesting point. While I accept that what you describe does exist, I doubt that the magnitude is anything close to what you assign to it, and in addition, it seems to me that such practices would automatically be captured in China’s current account surplus.
My reasoning goes as follows:
If a large proportion of China’s export earnings is simply shifting of profits to a low-tax-location (in this case, China’s SEZs), then presumably the companies benefitting from this shift would subsequently transfer the money out (e.g. to Bermuda/Cayman as mentioned in your post). In terms of balance-of-payment accounting, that would be classified as “profit on direct investments made by foreigners”, and would reduce China’s current account surplus.
Or are you suggesting that these companies find a way of channeling money out of China that isn’t accounted for anywhere?
The previous argument.
It is a given that all the parties are trying to game the system.
The facts remain that China’s exports went mostly to the U.S. in the important period of 2000 to 2005. China’s economy has been growing at a fantastic rate compared to other countries. Investment in plant and equipment is crucial for an extremely rapid growth rate. China controls who invests in China and on what terms. Despite the controls, multinational firms are intensely interested in setting up factories in China.
The combination of controlled foreign investment and redirection of profits earned from exports to domestic investment provide the funds to pay for machines and factories. Ability to ship goods made in China to the U.S. was crucial to these developments. The investment and GDP growth depended heavily on exports.
Exports are important to China, not to feed their people, but to provide the dollars used to fuel the growth of their economy.
Pardon my bluntness, but to try to discount the importance of exports to the growth of the Chinese economy is stupid.
The Cninese business model, in the period 1995 to 2005, was to get raw materials from all over the world, including Canada and the U.S. and to get semi-finished goods from other Asian countries and to sell the finished product in the U.S.
In the early years, they imported so much raw materials and semi-finished products that they did not have a trade surplus. But they did have a trade suplus with the U.S.
Exports to the U.S. provided the final sales that fueled the entire process.
A large part of their imports were machines made in Japan and Germany to set up their factories.
Everybody benefited except the one country that had a large trade deficit – the good, ole sucker, the U.S.A.
Thomas wrote: “While I accept that what you describe does exist, I doubt that the magnitude is anything close to what you assign to it”
Well, as I have said, you may prefer a different split than 5 / 90.
Thomas wrote: “it seems to me that such practices would automatically be captured in China current account surplus.”
Not necessarily. Let’s continue the Nike example, where a $5 shoe made in China is imported into the U.S. for an arbitrary transfer price of $90. China gets the $90, and this the amount by which the export total and the current account grows. Fine so far?
Now suppose Nike takes its $85 profit in China (ignoring tax), which is the difference between its real costs and its fake transfer price, and “invests” it outside the country. Is the investment a transaction in China’s current account or capital account? I would say the latter.
Incidentally, the taxation dodge I have outlined might not last much longer: transfer pricing audits are to start next month in China. Whether they will actually happen is a good question; as you might imagine, the uproar from the tax dodgers (practically every multinational) has been deafening. But if the authorities stay the course, and China’s exports suddenly drop in value, you will know why!
ReformerRay wrote: “Pardon my bluntness, but to try to discount the importance of exports to the growth of the Chinese economy is stupid.”
Pardon my bluntness, but I have not said that exports have never been important to China. They were vital initially, when the country needed to get its economy started. But recently, not so much.
Beans,
in terms of the mechanics, I suppose you’re right, it could be done that way.
Though I do wonder if MNCs really do it the way you describe (i.e. run up huge accounting profits in mainland China, and then use their mainland China subsidiaries as a source for formal outwards investments).
I do understand that transfer pricing is and has been a tricky issue. But it’s new to me that MNCs formally use their mainland China profits for outwards investments.
Though I suppose they could use the domestic profits to finance domestic expansion of their factories. So instead of showing low value-added and low profits in China, and having to bring fresh money in to finance expansion, they create artificial profits in China and use them for local reinvestment.
So if what you say is correct, a change in transfer pricing would mean: Lower export figures, and at the same time higher foreign direct investments in China (unless domestic expansion is slowed down due to the crisis, in which case export numbers simply go down with no corresponding increase in foreign direct investments).
I have no idea what the magnitude of this could be, though. I find it a bit hard to imagine that it could account for more than 1-2 % of China’s current account surplus (in % of China’s GDP).
But in any case, it’s an interesting point to ponder.
Btw, more data just came out: Container handling at China’s ports dropped 17 % yoy in February. That’s volume, not value.
The Feb trade data is out:
http://www.customs.gov.cn/publish/portal0/tab1/info161535.htm