Green shoots in China’s April trade data?
I sometimes think I see weeds when others see green shoots, and green shoots when others see weeds.
Most analysis of China’s April trade data focused on the negative. Export demand wasn’t particularly strong. That cuts into estimates of China’s growth – and suggests ongoing weakness in the global economy (or an overly optimistic initial spin on China’s March trade data). Jamil Anderlini of the FT:
Chinese exports fell steeply in April for the sixth month in succession, suggesting the worst might not be over for the world’s third largest economy. The total value of Chinese exports fell 22.6 per cent to $91.9bn last month compared with the same month a year earlier – a faster rate of decline than the 17.1 per cent year-on-year drop in March.
But the growth in Chinese exports tells us more about the US and Europe than China. The data on China’s imports tell us a bit more about domestic conditions in China. And the April uptick in imports suggests that Chinese domestic demand has stabilized.
One of my favorite current charts looks at how much China is importing over the last 3 months compared to how much it imported in the same period a year ago. On that measure, the “free fall” in China’s imports is now over.
The CFR’s Paul Swartz has tried to strip out the impact of oil on the data. While the fall in China’s oil import bill is part of the story, it also isn’t the entire story. Excluding oil, China’s imports look to be picking up after a very sharp fall.
And the fact that China’s imports have picked up before its exports means that China’s trade surplus is starting to come down. China’s trade surplus in the three months ending in April is always lower than its surplus later in the year. But the surplus in the last three months can be compared to the surplus from February through April of 2008. It is more or less the same.
That is a change. In December and January, China’s surplus looked to be rising. Now there is a bit of evidence that demand has recovered in China a bit faster than in the rest of the world.
All this though is subject to two large caveats.
- Year over year imports are still way down, and down by more that I suspect can be explained just by the fall in demand for imported components for China’s exports. The import data is more consistent with China’s electricity data than its industrial production data.
– Chinese demand for imported iron and aluminum and other minerals is way, way up (the FT: “China’s imports of unwrought copper rose to 400,000 tonnes in April, up 63 per cent compared with the same month last year. Total aluminium imports tripled from March to reach 440,000 tonnes in April.”). At least in volume terms. Some of the rise reflects a policy decision to build up strategic stocks when global prices are low and demand is slack (More here). Fair enough. But such demand doesn’t reflect end demand. As such it doesn’t provide any real indication that domestic demand in China really has picked up.
Here’s a Bloomberg article today on the chinese stim plan. It is getting some traction. so that would explain some of the commodity import growth.
http://www.bloomberg.com/apps/news?pid=20601089&sid=aRyK7jp3idNc
I get the impression that China fully understands the situation and has the will and the capacity to do what it takes. After all they do have more engineers than economists and in important positions. For example Zhou Xiachung. No slight to Brad intended.
http://en.wikipedia.org/wiki/Zhou_Xiaochuan
Actually the wikipedia entry says he has a degree in economic systems engineering. I thought he was a chemical engineer. He did go to the Beijing institute of Chemical Technology…
Where do we look for leadership these days…
As an aside I think having a first degree in engineering or physical science should be the preferred route to an economics degree.
Here is a fun link for economists.
http://www.facebook.com/group.php?gid=73911783278
comes via debt deflation
http://www.debtdeflation.com/blogs/2009/05/16/economics-students-join-toxic-textbooks/
A handful of anecdotal data points from on the ground: retail mega sales – most of them staring weeks before their traditional pre-New year kickoff – appeared to be designed to clear out any and all inventory and ran longer (and at deeper discounts) than any of my highly shopping-oriented colleagues can remember. The sale signs, around late Feb/early Mar, were all replaced with “Now Hiring” signs. Promotional items in major city department stores were, in late 08/early 09, typically budget specials. Now we’re back to top-of-the-line early adopter goods. Lux resort hotel prices in Sanya, Lijiang and other fly-in destinations were at all-time lows two/three months ago, now it’s rack rate only. Finally, in Beijing and Shanghai at least (I hear different things in other major cities), commercial landlords are starting to be more hard-nosed about tenant incentives: despite apparently huge volumes of unused space, landlords aren’t giving the long-term breaks to private tenants they were four months ago. You can still get a super-low rent for the first year, but only by locking in to a multi-year deal with a pretty steep elevator. It’s not the renter’s market it was in late 08.
However much China tries to stimulate demand it can’t possibly match the demand shortfall; it’ll be pretty surprising if they even matched demand levels in 07/08. Not to mention the effect of stockpiling is often misleading . Honestly, the green shoots still look misleading to me – don’t worry Brad, pretty sure it’s not a sign of colour-blindness
The fact that the stockmarkets are in a recovery honeymoon mood means people are hopeful about recovery though if they just took a look at the real world (aka outside their comfy offices) they would probably realise they aren’t quite in emerald city!
That that many people are hoping to make a quick buck off a quick turnaround despite the grim reality just means they haven’t quite learnt the “bipolar” lesson or that whilst hope is eternal, reality is cruel.
The post made me optimistic, up until the end, where you point out part of the April rise in imports may be commodity storage, which I would interpret as another method of currency manipulation. Perhaps one should look at the trade balance ex-commodities.
Brad, you don’t mention the 4 TRILLION rmb stimulus:
(A million seconds : 11.57 days
A billion seconds :31.7 years
a trillion seconds: 317 centuries, or far longer than history.)
That has to show up somewhere.
China’s stimulus plan is running into local problems. In many cases, local funding is required to match the central money, but it isn’t available (or, forthcoming). This appears to be stalling some projects, but the actual scale is wide open to speculation.
And, Qingdao, 3/4 of the money was already in the pipeline well before the Rmb4 trn figure was announced. Not quite what the Japanese would call “real water.”
China’s Q-1 2009 trade
Exports—
High-tech mechanical & electrical products _ _ -23.2% ($71.2 bn)
Other Mechanical & electrical products _ _ -18.3% ($72.5 bn)
Clothing and attire _ _ -5% ($22 bn)
Textiles, yarn, fabric and products _ _ -15.6% ($12 bn)
Steel products _ _ -40.4% ($6 bn)
Thousands of students in Nanjing clashed with local police following alleged police brutality towards student vendors, the South China Morning Post reported. According to the Hong Kong-based Information Center for Human Rights and Democracy, five student vendors with the Nanjing University of Aeronautics were beaten by officers as they tried to remove them from the campus on Monday evening. Students demonstrators then marched from the campus, blocking main roads at the university’s north entrance. Protestors clashed with riot police and smashed a police car after three students were arrested by police. In total, 30 students were injured. This marks the second student protest in less than 10 days. On May 7, students at Zhejiang University in the eastern city of Hangzhou demonstrated after one of their classmates was killed by a speeding driver. Chinese authorities are wary of campus unrest in the runup to the 20th anniversary of the June 4 1989 student democratic protests in Tiananmen Square.
Brad, I understand that you believe that the uptick in Chinese imports can’t simply be due to the laying of strategic reserves. However, there’s seems to be several blogs and news sources suggesting that it is due mainly to China reallocating it’s sovereign wealth funds in case of a decline in value of the doller. For example, the following Bloomberg article quoting RBC economist, Brian Jackson, and a guest blog post by Jack McHugh on Barry Ritholz’s Big Picture blog.
http://www.ritholtz.com/blog/2009/05/in-china-rock-beats-paper/
http://www.bloomberg.com/apps/news?pid=20602013&sid=a5yhtDZx75kw&refer=commodity_futures
Is there any definitive way to tell the difference between true green shoots and reserve reallocation into hard assets?
In addition, I have to second Judy Yeo’s comment on demand shortfall. It seems strange for an export economy to have an import boom when one of their larger trading partners, Japan, has just posted a 15% fall in GDP, while the others (U.S.A, and E.U. mainly) have cliff diving import levels. Where’s the anticipated demand that will sustain this investment and inventory build up? From what I understand domestic Chinese consumer demand is not likely to suddenly spike to take up the excess production without a whole lot of encouragement, regardless of how pent up that demand is.
Brad,
Fine post. Intriguing discrepancy between industrial output and electricity consumption.. The stockpiling of crude etc makes a lot of sense and may also camouflage a bail out of some SOEs with expensive inventory.
Stockpiles of base metals could have a similar background plus come in handy when carrots will be necessary for the upcoming SOE rationalization. Finally, the emergency budget has to be spent, why not on things that will be useful and are now temporarily cheap. All in all, very little to confirm that the Chinese domestic economy is already responding to the stimulus package.
MMcC
Interesting. The Japanese consumer electronics firms are doing something similar. Shortages of flat screen TVs and upmarket digital cameras at the Western retail level and retailers being told that current models will be phased out and replaced by far more expensive (and better of course) stuff. Perhaps some of China’s export pause is not entirely demand-driven, but the result of Japanese firms’ marketing strategy. And, apparently, the Koreans are happy to play along.
All it takes now is that the western consumer starts to notice (1) that the vast majority of skilled adults (finance and housing people not yet included) in the OECD have little to fear jobswise once they perceive the stimulus packages and bank nationalization as preventing the business sector from collapsing in a bankruptcy cycle and (2) that housing has not been this affordable for a very long term, and, if they have a job and a variable rate mortgage, that their interest rate and energy costs are leaving a nice little bit of discretionary income. Time to think about raising interest rates?
And when interest rates go up again while fiscal stimulus is still in full swing, what will that do to long term gvt finances? The keynesian agrgument that successful stimulus pays itself back in taxable revenue otherwise forgone has an ugly little brother in that unsuccesful stimulus may lead to stagflation and long term fiscal imbalance..
When you consider the scale of bank lending, surpassing the CNY 5tn target by April, even accepting there will be a rise in bad loans, a rising proportion are used to cover cash flow etc. then its pretty inconceivable that there won’t be a very rapid recovery in domestic demand.
Indeed new FAI projects rose by 94% in the first quarter. As these get properly underway then they’ll have a continuing ongoing effect on growth.
The uneveness of the recovery, with the slowdown in April reflects the uneven rate at which these projects come on stream, but they will come on stream and the trend is only going one way.
Similarly as finances ease they’ll be a recovery of trade and probably exports too.
More interestingly though is how all this fits into the bigger picture.
The authorities have stopped the yuans rise from mid 2008 to help the export sector. That export sector is now much smaller than it was. As domestic demand takes over as the motor from external demand there will be added pressure on them to allow the currency to float upwards. And the voices from the export sector will be weaker.
This will be the harbinger for the transformation of China into a fully fledged financial power as well as an industrial one.
Of course that will vary from country to country, with a large, highly diversified and fairly autarchic economy like the US more positively responsive and (given lack of organized labor) less likely to catch a lot of inflation. But within the EU tensions will mount, while resource countries like Australia and Canada my find policy making very difficult. Not to mention Russia.
bill j,
Yes, apart from the last sentence..
Off-topic—
Japan’s real GDP fell 9.7% in Q-1, the third straight year-on-year drop and the sharpest decline on record. The contraction was 3.3 percentage points worse than the previous, Q1 1994, record. Nominal GDP was ¥755.7 billion yen smaller than in Q-1 1994, still down US$6.5bn after 15 years. Export prices fell 12.4%, after falling 10.1% in Q-4 (both, year-on-year). Import prices were down 23.2% vs. -11.7 in Oct-Dec 2008.
Regarding iron ore imports:
Apparently, one of the reasons for sharply higher import volumes is also that prices are lower than before, and production costs at local PRC mines are much higher than in Autralia. Therefore, a higher percentage is imported from abroad, as local mines are losing competitiveness. Don’t have hard data to back it up, but have heard this reasoning several times over the last few weeks.
My guess was an increase in production as a consequence of an inventory bounce.
How reliable are all the data on electricity use in China
A couple of links
http://en.in-en.com/article/News/Electricity/html/2009041511278.html (note the paragrapgh where one of the top power producers says electricity use rose in the last month)
http://247wallst.com/2009/03/12/chinas-power-consumption-rises/ (here too consumption rises)
http://www.chinapost.com.tw/business/asia/b-china/2009/05/18/208570/China-electricity.htm (here it dropped as well in April as in March)
http://www.chinaeconomicreview.com/industry-focus/latest-news/article/2009-04-15/Electricity_use_fell_4_in_first_quarter.html (here no comment on months)
What to make of it?
Over the next decade, China will have to rely more on internal demand than exports as the global economy rebalances. Think the US Economy will bounce back? Forget about it!
From Mish Shedlock’s blog:
Not long ago, the US was once a nation of savers. Now that the housing bubble has crashed and the stock market along with it, the US is poised to become a nation of savers again.
Peak Credit and her twin sister Peak Earnings have arrived. Here is a snip from the former.
… That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.
It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.
Children whose parents are being destroyed by debt now, will keep those memories for a long time.
Think the US stock market is going to come roaring back if consumer deleveraging plays out as it must? Think again.
Expect another “Lost Decade” when it comes to housing and the stock market. It’s the deflationary payback for the greatest credit binge in world history.
Where will the US taxpayers, or the 50% who are not taxpayers, find the money that they are supposed use to grow their savings, when most of them are less than two paychecks, or one medical emergency, away from going under? Contrary to what I’ve read here, I believe that many of this country’s present college students will go even deeper into debt. When they get out of college, and find that there are no jobs for them, they will do the same thing that people getting out of the military do when they can find no civilian jobs. They will re-up. Not only that, they will borrow even more money, if they can, to pay for going on for that advanced degree.
The idea of savings, for most US citizens, is a myth. They thought they were saving for retirement, but now their retirement funds are depleted. It may take more than a generation before Americans are as solvent as they were in 1963.
Simon: I get the impression that China fully understands the situation and has the will and the capacity to do what it takes. After all they do have more engineers than economists and in important positions
Actually they don’t. The top political leadership have engineering degrees because no one offered economics degrees when they were in school, but if you look at their career paths, they all went very quickly into “management.” They also got training in management from the Central Party School.
The people at the next levels tend to have law degrees, and if you look at the people running economic policy they have very similar backgrounds to the people who run economic policy in the United States. In particular, many of the people that run Chinese economic policy are people with Harvard MBA’s that spent a few years working for Goldman-Sachs. The Chinese government has also been very, very active at recruiting people from Wall Street.
Yeo: However much China tries to stimulate demand it can’t possibly match the demand shortfall.
I don’t see why not.
Qingdao: Thousands of students in Nanjing clashed with local police following alleged police brutality towards student vendors
The problem with bits of news like that is that its really hard to figure out what it means, because there are always these mass demonstrations and riots, and have been for the last 15 years. A thousand person student or peasant demonstration isn’t unusual at all in China.
Qingdao: Chinese authorities are wary of campus unrest in the runup to the 20th anniversary of the June 4 1989 student democratic protests in Tiananmen Square.
I don’t think most Chinese college students today care about Tiananmen at all. The Tiananmen generation are the Chinese equivalent of “aging hippie radicals.” Times have changed since 1989.
Twofish: In particular, many of the people that run Chinese economic policy are people with Harvard MBA’s that spent a few years working for Goldman-Sachs.
DJC: That would be very dangerous to have Goldman Sachs alumni working in the Chinese government. Worst of all are yellow-banana Chinese contaminated with Neo-liberalism economic dogma of the Washington Consensus. The Chinese economy doesn’t need the Harvard Business school innovation of AAA-rated subprime bonds, or leveraged derivative securities that have bankrupted AIG and Lehman. If not for a politically-connected taxpayer bailout, Goldman Sachs would also be insolvent.
In Japan, for national security reasons, foreign educated Japanese are prohibited from high level positions in Japan’s government. The top elite in Japan are usually from Tokyo or Kyoto university. Beijing and Tsinghua Universities are the Chinese equilvalent. I would hope the Chinese government would also follow a similar practice.
blackswan — if you consume less and get paid the same, your savings rate rises. The fall in consumption over the past six months has been larger than the fall in incomes. saving is rising.
bill j — presumably the authorities are hoping for a revival in either exports or private investment to reduce the scale of the stimulus they need to provide from public investment. i am not convinced that the export sector’s clout has gone away — though i am convinced that china’s leaders are more aware of the downsides of relying on exports for growth, namely exposure to external shocks.
as for how certain am i that the bounce in imports is real v just commodity stockpiling as an alternative to dollar stockpiling? well, a bounce would be consistent with the stimulus — and if the bounce is real, it should eventually show up in data on US and EU exports to China (and the Chinese data on imports from the US and EU and perhaps Japan, tho with Japan there is a bit of processing going on so some of the fall in exports to china reflects a fall in us and EU demand)
Andrew — see my response above. for confirmation, look to the US and EU data.
As for the RBC analysis, i have no doubt that China does view stockpiling metals as an alternative to warehousing treasuries, and with bill yields so low, there isn’t much of a carry cost. The key question is the scale of the stockpiling.
directionally, it no doubt tends to reduce china’s trade surplus. but the RBC argument that the q1 surplus would be up v q4 if not for the stockpiling rings false to me — as china’s surplus always falls for seasonal reasons in q1.
If i had enough time to really go into the details of the trade data and use a copper and iron ore price index to back out volumes, i suspect we could learn some interesting things — but that is a bit beyond my skills right now.
DJC: That would be very dangerous to have Goldman Sachs alumni working in the Chinese government.
They do. Many of the people that work in Chinese securities regulatory agencies and Chinese banking are people with Western investment bank experience.
DJC: Worst of all are yellow-banana Chinese contaminated with Neo-liberalism economic dogma of the Washington Consensus.
Since I’m one of those “yellow-banana Chinese” I’d probably be more offended if I knew anyone that mattered from China that actually believed any of that.
As far as I can tell you are Malaysian-Chinese, and the politics of Malaysia is very different from the politics in China. In Malaysia, the government has trying to create an alliance between Malays, Chinese, and Indians by trumpeting anti-Westernism, pan-Asianism and by going against the world banking system. It’s an interesting political project, but one that is rather disconnected with what people in China or in the United States are trying to do.
In China, the country was destroyed by two decades of xenophobia and there isn’t any desire to close up. There is a lot of Chinese nationalism, but this nationalism involves becoming more powerful within the global economic system rather than rejecting it.
One problem that overseas Chinese run into is the problem of “authenticity”. Who is “really” Chinese, and I suspect that my definitions of Chinese are closer to what people in China think than yours.
DJC: The Chinese economy doesn’t need the Harvard Business school innovation of AAA-rated subprime bonds, or leveraged derivative securities that have bankrupted AIG and Lehman.
I don’t think that subprime bonds and derivatives were invented at the Harvard Business School. However, the Chinese and US business elites are very close to each other, and getting a degree from either the Harvard Business School or Law School is going to fast track your career in business or government in China about as much as it does in the United States.
DJC: If not for a politically-connected taxpayer bailout, Goldman Sachs would also be insolvent.
I don’t think so. In any case, you have to deal with the fact that the people running the Chinese economy have a world view that is much more similar to this “yellow banana” than they do to yours. Over the last few decades, China has sent far, far more students to the United States than to Malaysia to the point where it’s probably better to think of the Chinese and US business elites as two parts of one group than two separate groups.
It appears a revival of residential construction is underway and it seems likely that as the domestic economy revives then so will investment out of retained earnings.
On the issue of China’s financial future FDI outflows had reached getting on for 2008 $90bn, small beer still maybe but a quantum leap from 2005. There’s no doubt that this year they’ll easily surpass that.
I think the best analogy is the rise of the US itself in the late C19. A vast internal market meant that it stayed out of world finance and politics as far as possible, aside from its own back yard see Cuba then or Taiwan today, but ultimately the very scale of its domestic economic power pushed it outwards.
Timescales are always problematic of course, and you’re still talking years, but the events of the last 6 months have radically advanced the process.
Twofish,
If the Chinese government were to apply Western Neo-liberal economic policies, that would widen poverty to the extent that a second Communist revolution would be forthcoming. The US Chamber of Commerce in China has lobbied ferociously against any Chinese worker rights or any government union representation. Threatening to divest operations in China, US multinational corporations were opposed to recent Chinese government regulations on worker overtime compensation, health and safety regulations.
Regarding the ethnic-Chinese community across Southeast Asia, during the Asian economic crisis of 1998, Robert Rubin and his hedge fund cronies were happy to profit in blood while tens of thousands of Chinese were massacred in a holocaust across Indonesia. If you really believe the Washington Consensus has the best interests of the Chinese people at heart, I have the Brooklyn Bridge to sell you. LOL.
Saving RATE rises, but not savings. With credit conditions tight, the money “saved” by not spending go to service and marginally reduce “legacy” debt. Dis-saving has stopped perhaps, saving has not started yet. The difference should be obvious to anyone: the former – money to the credit card, the latter – money in the “pocket”.
The problem with the US Economy is that money creation is now being undertaken by a privately-owned central bank, the Federal Reserve; and it is largely being done to settle speculative bets on the books of private banks, without producing anything of value to the economy. The $180 billion in taxpayer bailout funds funneled through AIG to pay Goldman Sachs for its highly speculative credit default swaps is just one egregious example.
Just thought of a new twist on the Dollar/RMB.
From the looks of the Dollar Index the last few weeks, it appears someone has been tip toeing away from dollar assets. Could be Wall Street (suspect #1), PBoC, SWFs, or some of all. Down 1.4% today!
But what if China doesn’t have enough trade surplus to maintain their peg against against the Dollar if it drops because US domestic flows begin to go looking for higher returns elsewhere again?
Now there is a policy decision. Be the bagholder, or try and fight the battle without enough bullets !
http://quotes.ino.com/chart/?s=NYBOT_DX
DJC: If the Chinese government were to apply Western Neo-liberal economic policies…
There is no one in power in either China or the United States that advocates anything close to neo-liberal economic policies. The current policies of both China and the United States are as far from neo-liberalism as you can get…
Neo-liberalism has been dead for at least a decade. The only reason people bring it up is that there are Malaysian politicians who need an enemy to maintain their power, and they keep fighting the enemies of the early 1990’s, not realizing or caring that the rest of the world has moved on.
DJC: Regarding the ethnic-Chinese community across Southeast Asia, during the Asian economic crisis of 1998, Robert Rubin and his hedge fund cronies were happy to profit in blood while tens of thousands of Chinese were massacred in a holocaust across Indonesia.
If this were true, then it would be a curious fact that I don’t know of any ethnic Chinese other than you who are mad at Robert Rubin and hedge fund managers. It may be the fact that there are lots of Chinese that are friends of Robert Rubin and work as hedge fund managers.
You are entitled to your own beliefs, but what you need to realize is how rare those beliefs are to most Chinese. Most Chinese parents in China want their kids to be like Robert Rubin and be hedge fund managers.
Biofuel: Saving RATE rises, but not savings. With credit conditions tight, the money “saved” by not spending go to service and marginally reduce “legacy” debt.
Which is precisely why you need to massively print cash to flood the system with liquidity, and do major write downs and debt forgiveness (otherwise known as bankruptcy).
“One problem that overseas Chinese run into is the problem of “authenticity”. Who is “really” Chinese, and I suspect that my definitions of Chinese are closer to what people in China think than yours.”
i, for one, would love to read contributions from (english speaking) chinese-chinese. people within china. i read the ‘asia times online’ but am left guessing who exactly the contributors are. where are they coming from ? more like asia-times-read-between-the-lines ?
The comments on this post were, minus the usual political stuff, quite informative. Data rules! Thanks to all.
BTW, I believe the green shoots are pea tendrils.
fyi — the cfr’s blog site was down for a while this morning. if anyone had trouble accessing the blog, that is why …
Twofish: >Which is precisely why you need to massively print cash to flood the system with liquidity, and do major write downs and debt forgiveness (otherwise known as bankruptcy).<
Exactly, insure deposits and let the banks fail through bankruptcy, spend money and institute a policy that promotes innovation, job creation and wage-income growth and let the debtors earn their way out.
Oops, I am getting mixed up – you probably mean let the borrowers fail and let the banks earn their way out… my bet.
Biofuel: Exactly, insure deposits and let the banks fail through bankruptcy, spend money and institute a policy that promotes innovation, job creation and wage-income growth and let the debtors earn their way out.
The problem with this is that this is an incorrect definition of what a bankruptcy is. When a bankruptcy happens debts are forgiven, and creditors take a loss.
Bankruptcy is a process to *prevent* a viable corporation from shutting down, by forgiving and restructuring debt. There are problems with using the bankruptcy process for dealing with banks, but what’s happened recently is a process similar to bankruptcy.
In fact, one of the first things that happens in a bankruptcy is that the bankrupt company gets a massive cash infusion.
Biofuel: Oops, I am getting mixed up – you probably mean let the borrowers fail and let the banks earn their way out… my bet.
I’m getting confused as to what you think I think.
I think I know what Biofuel thinks.
2fish,
I guess many people confuse various types of insolvency: (a) the classical type that leads to liquidation of the bankrupt’s estate, (b) Ch XI (or foreign equivalents) that allows for constructive reorganization an usually continued operation of the firm in a more streamlined form (until the next bump) with good recovery potential for shareholders, creditors and even worker benefits. (c) dysfunctional types such as many states’ personal bankruptcy statutes that encourage recklessness.
The jury is still out on the differences in welfare effects from different insolvency institutions. However, in a recessionary environment, both types struggle to satisfy even secured creditors or keep alive fundamentally sound businesses. There are also the sometimes quite severe externalities from large ch XI arrangements in industries undergoing a shakeout of paradigm shift. The airline industry after deregulation is a good example of the former (the financial system upon deregulation would have been an even better one if there had been no implicit gvt guarantee), whilst the auto industry (detroit’s benefit-rich firms competing with foreigners with much lower worker benefit burdens) is an example of the latter. Those externlities tend to lead to a phase of industry-wide contagion where overcapacity is reduced and more efficient operating approaches, often combined with product unbundling. I believe that in a recession it would be quite feasible to deplete all of an industry’s equity (i.e. there would be no autonomous survivors) if that industry was in the middle of a shakeout phase. Abundant liquidity outside the industry would then come in and pick up the scraps. If there would be too many industries affected, very few scraps would be picked up. Under conditions of democracy this would then lead to large scale state intervention or a voter revolt. In non-democratic systems (assuming that there would be a reasonable market economy next to the state) the effect would be similar. Lesson: in a recession we all wear black. Differences in insolvency institutions and political institutions have their greatest effect when capitalism is sufficiently capitalized..China’s Goldman alumni should be very familiar with this. How tempting it must be to see all those scraps in the US and all that money in PoBC. Were mr Luo’s comments perhaps for internal consumption?
All types of
Quote from SCMP
“Beijing is taking advantage of lower international commodity prices to replace poor-quality domestic supplies with high-quality imports.
So, for example, small domestic mines turning out low-grade iron ore, which needs lots of energy to process and has too many nasty waste products, have been closed in favour of importing high-grade ores from Brazil, which are cheaper and cleaner to turn into steel.
Similarly, small inefficient producers of zinc, aluminium and copper have been shut down in favour of importing refined metals.
Incidentally, this substitution helps explain why China’s electricity production is falling (see the second chart) even though overall economic growth remains relatively robust. With metal industries accounting for 40 per cent of the growth in China’s energy consumption between 2001 and 2007, closing inefficient producers makes a big difference to power demand.”
investdaily,
Maybe, plausible, but then what do we use to look for those green shoots. Globular crystal? Trade and electricity production distorted by metals procssing industry streamlining. Electricity maybe not as bad, imports maybe not s good..
geert,
Imagine China’s electricity production is 1,000 units, and demand is 1,250 units. The extra 250 units is made up from individual generators burning everything from bunker fuel to kerosene, coal, wood and other crap.
When demand rises, there is no indication in the data: 1,000 units were already being consumed. Similarly, when demand falls, there is no indication in the data . . . until the surplus 250 units are no longer needed, in which case – very late – the data begin to decline. Here in Hong Kong, we noticed the downturn as better air quality, starting in mid-2008.
Huizer: I guess many people confuse various types of insolvency: (a) the classical type that leads to liquidation of the bankrupt’s estate.
In many industries, liquidation is probably the worst thing that you can do because the value of the firm has is embedded in social relations and if those relations disappear, a lot of the value is lost. This is the situation in financial and manufacturing firms.
There are a number of problems with using standard bankruptcy law with financial institutions. The big one is that things just happen too quickly. If you have an banking crisis, then within a matter of *hours* you have to let people know what liabilities are good and which ones aren’t, otherwise everything falls apart because all liabilities are bad.
The other problem is that there are no good legal procedures for dealing with a bank that is near insolvent but not insolvent or one in which reasonable people can disagree is insolvent or not. Also, just because you are not broke doesn’t mean that anyone is going to let you money.
There is also the difference between “bankruptcy” and “default.” You can deal with debt by just not paying your bills, and a lot of people that have borrowed subprime are dealing with their bills by just not paying them.
Huizer: Those externlities tend to lead to a phase of industry-wide contagion where overcapacity is reduced and more efficient operating approaches, often combined with product unbundling.
But often the problem isn’t overcapacity. GM wouldn’t have a problem with “overcapacity” if each car cost $100. What happens in a bankruptcy is that once the capital costs are forgiven, then the owners can sell assets at operating costs which are smaller and in some cases much smaller.
This ended up being the situation with the airlines and it’s really often the case with real estate, where the operating costs are negligible.
One thing that happens is that when people talk about “failed industries” they often look for a one size fits all solution, where in fact what you do with a bad corporate situation is very industry and often very company specific.
Hold it, 2fish, my comments did not prefer liquidation to Ch X1 type solutions. My points was that in a recession there is no demand for corporate assets (budget constraints, “liquidity”) so liquidation does not work. And also in a recession, bankruptcy of the ChXi thype in industries undergoing a shakeout (i.e. a process of removing the least efficient players after , for instance, deregulation) contagion is more likely because the scarcety of capital (implying that the marginal cost of capital for even the most efficient firm in the industry is too high to replace the capital lost during the typical shake-out price war to such a extent that that firm can consolidate the industry) stands in the way of efficient consolidation and many firms languish in ChXI purgatory. Of course the car industry has different problems but it happens to be undergoing a shakeout too, with politically unacceptable first-order consequences.
The point was simply that in a recession, it is hard to find capital, either to buy distressed assets (they are in oversupply) or for sick, but curable businesses. In that case private insolvency does not work as intended and there is a role for the government (or, that is what stakeholders hope). In the current recession, high debt levels (private equity) and incomplete transfer of manufacturing to the best (ricardian) locations (china etc) make things just a little harder in most OECD countries. Apologies for not being clearer the first time. I thought it was pretty straightforward.
Another green shoots enigma: Chinese steel production is stagnant and iron ore imports are shooting up. Iron ore is a litte less attractive to stockpile than copper and zinc. Maybe we should disregard all those numbers for a while.
“I get the impression that China fully understands the situation and has the will and the capacity to do what it takes.”
I get the impression many, many people continue to romanticize the Chinese as omniscient masters of planning and problem-solving. If they are, and their current guidance to economy recovery is indicative of that, then I’m fairly sure the U.S. itself must be making all the right moves as well.
“Where will the US taxpayers, or the 50% who are not taxpayers, find the money that they are supposed use to grow their savings, when most of them are less than two paychecks, or one medical emergency, away from going under?”
Most are not. As with the “average credit card debt” meme, it pays to look more closely at the numbers behind the averages.
“In Japan, for national security reasons, foreign educated Japanese are prohibited from high level positions in Japan’s government. The top elite in Japan are usually from Tokyo or Kyoto university. Beijing and Tsinghua Universities are the Chinese equilvalent. I would hope the Chinese government would also follow a similar practice.”
…… mind-boggling.
Rien — China wants leverage in its iron price negotiations with the Australians; storing a bunch of ore is one way to get leverage!
PMOK I very much agree that China’s reputation for looking forward and thinking strategically about the long-term seems a bit exaggerated. China’s currency policy for example seems to have been driven by a serious of short-term considerations (the time never seemed right to let the rmb move enough to really change the trade dynamics) that had the effect of leading china to accumulate a ton of dollars. its management of those dollars has been all over the place — in 06 it let the state banks take credit risk (That didn’t work), in 07-08 it bought equities (that didn’t work), from 05 on it shifted into agency MBS (rather than treasuries) and that left china a bit more exposed to a potential agency default that it wanted. so by default it is back in treasuries … and its search for an alternative to the dollar is hampered but an equal unwillingness to stop pegging to the dollar.
all in all, policy — best i can tell — has been driven by a set of short-term considerations, with the result that china created a problem for itself and ptoentially the world now that it concluded it is over-exposed to the dollar.
> China’s currency policy for example seems to have been driven by a serious of short-term considerations
nice freudian slip there!
PMOK: I get the impression many, many people continue to romanticize the Chinese as omniscient masters of planning and problem-solving.
So do I. Chinese economic policy has been (like the economic policies of most countries), ad-hoc largely responding to current events and driven by political rivalries and compromises.
One reason that Chinese problem solving is romanticized is that the previous conventional wisdom was that the Chinese government was totally incompetent and on the verge of collapse, whereas there was a belief that the US could do no wrong.
Also, one reason that Chinese policy has been reasonably decent is that China has made a huge number of economic mistakes in the past and has learned from them. The banks are in reasonably good shape right now *precisely* because they were such disaster areas in the early 1990’s.
DJC: In Japan, for national security reasons, foreign educated Japanese are prohibited from high level positions in Japan’s government.
Which might explain why Japan traditionally has done such stupid and strategically self-destructive things, like attack Pearl Harbor. The one person that thought that attacking Pearl Harbor was a bad idea was Isoroku Yamamoto who had studied at Harvard.
In the case of China, because you have so many people in high positions with direct contact with the US, so that people in the Chinese government basically understand the United States.
DJC: The top elite in Japan are usually from Tokyo or Kyoto university. Beijing and Tsinghua Universities are the Chinese equilvalent.
A large fraction of people from Beijing and Qinghua University end up in American graduate schools. It’s an interesting relationship since American graduate schools are extremely dependent on Chinese graduate students for labor. A huge fraction of American universities would shut down cold if it weren’t for Chinese students.
DJC: I would hope the Chinese government would also follow a similar practice.
They don’t. Foreign university experience and foreign business experience is preferred for most positions in the Communist Party. After all, Sun Yat-Sen studied in Japan. Chou En-Lai and Deng Xiao-Ping studied in France.
This was a question that someone asked at the CSRC recruitment gathering. PRC citizenship is required for policy positions (although there are no restrictions on having a spouse or child with non-PRC citizenship). Also CSRC is doing what it can to make it easy for returnees to return. There are all sorts of logistical issues (jobs for spouses, education for kids, etc. etc.)
Twofish,
Perhaps the Japanese experience with Yamamoto reinforced this practice. Yamamoto may have contributed more to Japan;s defeat than any other military leader..
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