Brad Setser

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The (almost) $2.5 trillionaire …

by Brad Setser
May 24, 2009

The world’s sovereign wealth funds almost certainly have less money than is commonly thought. And China almost certainly has even more money than is commonly thought — or at least more money than is commonly reported.

That is the conclusion I have reached after spending a fair amount of time looking at China’s data, and nearly as much time trying to understand the (incomplete) data from the Gulf. The data from China’s 2008 net international investment position — English data through 2007 here — certainly didn’t prompt me to change my mind.

If China’s own reporting is to believed, China’s state likely has about $2.4 trillion in foreign assets — setting the CIC aside. $1.946 trillion in formal reserves. $252 billion in portfolio debt (likely held primarily by the state banks, though some may be stuffed in other accounts). And $186 billion in a mysterious line item that corresponds with the banks dollar reserve requirement and the PBoC’s other foreign assets (see below). Add in the CIC (which likely has another $50-100b in assets scattered across various balance of payments categories) and China’s net international investment position (NIIP ) data suggests that China’s investment in the world — even excluding FDI by Chinese state firms — is now close to $2.5 trillion.


That is a bit higher than I estimated. Data in China’s NIIP — just looking at the cateogies that capture formal reserves and the state banks and thus excluding any additional assets held by the CIC — suggests that China’s state has foreign assets of around $2.384 trillion at the end of 2008. That is more than the $2.261 trillion I found by adding up China’s reported foreign exchange reserves, the PBoC’s other foreign assets and the reported foreign portfolio investments of China’s state banks. The gap in entirely due to the fact that Chinese holdings of portfolio debt in China’s net international investment position ($252b) far exceed the portfolio investments of the state banks that the PBoC reports on its website ($131b).

The change in the reported stock of foreign investment in China’s NIIP also is interesting. Remember that the euro’s rise in 2006 and 2007 pushed the reported value of China’s reserves up, and the euro’s fall in 2008 pushed the total value of China’s reserves down — so the 2006 and 2007 numbers will tend to overstate the true growth in China’s reservse and the 2008 number understates the true growth in China’s reserves.* No matter. In 2006, “private” Chinese investors clearly bought a lot of portfolio debt (the organge bar). In 2007 and 2008, other investment “other” rose rapidly — a function of the rise in the banks reserve requirement (see the blue bar). Other investment is balance of payments speak for bank flows. And even setting the banks reserve requirement aside, China’s net position in the international banking system improved in 2008 (see the pink bar). I suspect that reflects the CIC’s deposits in the international banking system.


When I tried to match up the data I use in my monthly tracking to the data in the annual NIIP (focusing only on the categories that match up — which means that I set aside the CIC), the data lines up reasonably well for all years other than 2006. That was the year when private Chinese investors bought a ton of foreign debt — way more than shows up in the state banks’ foreign currency balance sheet.


That doesn’t worry me too much though, as I have long suspected that the data series I was using understated China’s accumulation of foreign assets in 2006.

The NIIP data also makes a few other things clear.

One, over the last three years, China’s reported reserves have significantly understated the increase in the foreign portfolio of China’s state, at least if China’s state banks are considered part of China’s state. In 2006, purchases of foreign debt securities topped $100b. In 2007, “other, other” — read the dollar deposits of the state banks — rose by about $100b. And in 2008, the ongoing rise in the reserve requirement and the CIC’s various foreign assets likely added another $100b or so to the total.

Two, outward Chinese FDI is still small relative to Chinese reserve growth, and the increase in China’s hidden reserves. The roughly $50b that Chinese firms invested in the rest of the world in 2008 is still smaller relative to the increase $500b that China’s government put into its reserves and other foreign assets — a total that rises after adjusting for transfers to the CIC and valuation changes that make the y/y change in reported holdings an inaccurate measure of the flows. A world where all the increase in China’s foreign assets was channeled through Chinese state firms would look quite different than today’s world.

Three, the rise in China’s foreign assets (counting China’s reserves, its “private” purchases of foreign portfolio debt and the bank reserve requirement) has far outstripped the rise in China’s foreign debts (defined as Chinese debt securities held abroad and bank claims on China). China really didn’t need to run its reserves and hidden reserves up to close to $2.5 trillion for prudential reasons.


China’s foreign assets went from around $500 billion in 2003 to around $2.5 trillion in 2008. That is a stunning increase.

As Geoff Dyer reported in an important article in Friday’s FT — it also has put China’s government in something of a bind. China’s population, it seems, isn’t quite as keen to lose money subsidizing China’s exports (by building up costly unneeded reserves) as China’s government. Yet — as Jamil Anderlini reports in Monday’s FT — China has kept on buying Treasuries.

That harldy seems sustainable, but it is an accurate description of the world we now live in.

Truely wonky details, mostly for my own records.

China’s total foreign assets now total $2.9 trillion, v foriegn liabilities of $1.4 trillion (mostly as a result of foreign direct investment in China). I have set aside those line items that reflect private flows — or the activities of China’s non-financial state firms, as well as those line items that reflect private investment in China. I wanted to isolate the financial activity of China’s state, broadly defined and thus the analysis in the above post focused on those line items of China’s NIIP that are mostly likely to correspond with the monthly data series I use to estimate China’s foreign assets.

The increase in other investment, other in China’s NIIP clearly matches the increase in the PBoC’s other foreign assets.


The match between the state banks holdings of foreign portfolio investment — reported by the PBoC — and portfolio debt in the NIIP isn’t as good.


Other investors, including I would guess other state investors, must have a larger foreign portfolio. Either that of the PBoC’s data doesn’t pick up all of the holdings of the Hong Kong branches of the state banks.

In any case, China’s timing was terrible. It bought a lot of debt in 2006, and the market for riskier debt crashed in 2007 …

The fact that Chinese investment in global equities ($21b at the end of 2008) in China’s NIIP is far smaller than China’s reported holdings of US equities in the US data (close to $100b at the end of June 2008) supports by earlier argument that SAFE bought large quantities of equities in 2007 and 2008. SAFE’s equity holdings would be part of China’s reserves in China’s NIIP; they wouldn’t be reported seperately.

All told, the NIIP data suggests that the data I have been using understates China’s portfolio by around $100 billion or so. It also leaves no doubt that China’s true foreign portfolio is far larger than $1.95 trillion.

Thanks to reader MMcM for alerting me to the release of China’s 2008 NIIP data.

* That implies that the value-adjusted rise in China’s foreign assets in 2006 and 2007 was smaller than the headline total, and the valuation-adjusted rise in 2008 was larger than the headline total.


  • Posted by Cedric Regula

    Ya, but we still got the Big Spender Award. $1.8 Trillion just this year!

    Trillions ain’t worth nothin’ if you don’t spend it. What are they gonna do? Take it with ’em? Commies don’t even go to Heaven!

  • Posted by Rien Huizer

    A hundred billion more or less doe not make a lot of difference. But is it still a lot, especially in proportion to notional GDP. Or per household (about 400 million as of 2004)): roughly USD 6000. Just ask your average non-hukou, recently fired construction worker on his way home to Guizhou how much that is relative to his expected household income and wealth for the coming twelve months…Given that the employment share of GDP is under 50%, those 400 million households share only about USD 4 bn (notional) at best.

    Somewhere along the line this highly visible symbol of state wealth (not taking into account state liabilities) so many years after the effective abolishment of the state monopoly on wealth must start rubbing people the wrong way now that individual prosperity growth seems to be stagnating.

    But there is little that China (consisting of about half a dozen procincial “developmental states” plus many more wannabes) can do at the central level unless state-province relations are radically changed. And, assuming that SOE reform along the lines of bank reform (the banks used to be under provincial authority until the reforms of the late 1990s and the SEOs may well have taken over the “financialfunction of the developmental state” at the provincial level) will be carried out (Beijing is trying to rationalize key industries which will have loss of provincial power as a byproduct) it will take a long time to tame all those little Koreas and their entrenched elites.

    Just a thought for mr Geithner: if Beijing wants to get more grip on the economy, the thing the export-dependent provinces would fear most would be a sharp revaluation of the Chinese EUR, the CNY.. However the threat of revaluation is more useful (for Beijing) than the action itself. But promising a little to the US and showing concern about the inexorable rise of FX reserves (perhaps by revealing a little more, also for mass consumption domestically) would certainly be a good “stick”. But what could be the carrot?

    The logical conslusion of the US-China problem (if US demand for foreign savings stays low, there is a problem) is either trade restrictions or a narrowing of the gap between Chinese and non-Chinese (or rather, NAFTA in this case, the SEA countries would be happy to piggy back on a Chinese rise in popular prosperity) unit labor costs. That could happen by making the US much cheaper or China much dearer. The requisite scenario for the US looks quite unattractive for whoever is is power and may prompt some kind of creative, but politically affordable response in Washington.

    But if one believes that the excessiveness and robustness of China’s net exports are an unintended (but difficult to reverse) consequence of its very sticky political economy model that aims for employment, and industrial modernization and is only halfway in reaching industrial parity with its Northern and Eastern neighbours, it is equally unlikely that China’s contribution to narrowing that gap will be large. Even if wages rise substantially, there are so many productivity gains in the pipeline that unit costs will stay quite low (but some industries would suffer of course) for many years.

    If China was a normal (say OECD) country, without a CCP, provincial state/private kongsis. absurd gap between urban/rural prosperity etc) one would (at the penalty of being ostracized from the group) liberalize the domestic labor market, switch productive capacity to non-tradeables (services especially) and find a reasonable solution to country poverty. Alas, that is asking a bit too much from China’s entrenched neo bourgeoisie.

    So any talk of China doing something with the currency (the preserve of Beijing) may be little more than buying time on both sides. I would expect creativity (like the SDR story) to produce things with appealing features but doomed to fail. Things to do with the SDR that would require cooperation from many other countries and will take up a lot of Wai-ting time.

  • Posted by Rien Huizer

    Of course the 4 bn shared by households should have been 2 trillion..

  • Posted by WStroupe

    China is “trapped” only so long as it relies upon Bretton Woods II (and keeps its dollar peg), and only so long as its reserves are composed of more than 50% dollars.

    On the first issue, it will take China some time to get past Bretton Woods II, largely replacing it with new trade/currency relationships with its other (non-U.S.) global partners. I estimate that within 3 years China’s trade reliance upon the U.S. will have faded significantly, allowing it to completely drop its peg to the dollar. If the U.S. financial and economic sectors descend into a deeper collapse, then I’d give it less time than 3 years, since China and its global partners would then be ‘kicked into the street’ and would be forced to bring alive their new global trade model much faster. Such a new collapse for the U.S. is entirely possible – “green shoots” is a scam.

    On the second issue, China’s working hard and working smart to expend dollars, converting its dollars into other assets. It is a small beginning, however. But this could get kicked into high gear going forward as China scours the globe for more resources-related deals in which it converts dollars into commodities, into stakes in commodities-oriented companies, makes loans around the globe that are not dollar-denominated, buys SDR bonds with its dollars, etc. I would give this process 2-3 years to bring China’s dollar holdings down to 50% or less of its total holdings, if China does kick these efforts into higher gear going forward, as is very likely.

    The ‘gloating’ in the West over how “trapped” China is will be relatively short lived. Once China achieves the two goals I mentioned above, then its leverage over the debt-burdened U.S. is greatly magnified, while U.S. leverage over China will be greatly reduced.

    That’s the real problem for the U.S. – what if China finds a way to succeed in significantly decreasing its dollar exposure? What if it gets out of its present trap? Experts chuckle at how China created this trap for itself, and that is very true, it did. But All the while, the U.S. was creating a much more dangerous, far more persistent potential trap for itself – by its huge debt and reliance upon foreign financing. If China gets out of the trap, the U.S. will simultaneously be placed into one of its own making, therefore. Just imagine a world that really accomplished decoupling, that uses multiple other currencies instead of the dollar, and that therefore significantly leaves behind the traditional global growth driver, the U.S., to wallow in its own debt.

  • Posted by pebird

    I’m interested in thoughts on China’s response to a US credit rating devaluation.

    On the one hand, the nominal value of US holdings decreases, reducing China’s ability to finance acquisitions. But unless the peg is changed, Chinese asset values decrease. If the peg is changed, US imports decrease, reducing Chinese income, also decreasing asset values.

    It’s one of those divorces with the ugly kid – they may stay together because no one wants the kid.

    It’s ironic that China’s response to decrease its exposure to US assets will result in a devaluation. I don’t think they have a few years to get repositioned.

  • Posted by DJC

    The China PBoC may have $2.5 trillion on paper, but the real purchasing power of that wealth is rapidly being eroded by the cheap money policies of the US Federal Reserve. What is the solution that Washington Consensus Economists advocate? Bondholders know that they are so often shafted that it’s a predictable outcome.

    The Federal Reserve policy to raise inflation could, if successful, trigger serious problems in the bond markets. Inflation is a transfer of wealth from creditors to debtors – essentially from China to the US. A rise in US inflation could easily lead to a pull-out of global investors from US bond markets. This would almost certainly trigger a crash in the dollar’s real effective exchange rate, which in turn would add further inflationary pressure.

    Tempting as it may be, it is a beggar-thy-neighbour policy unless replicated elsewhere and would come to be regarded as such by many countries in the world. It would produce a whole new group of losers, both inside and outside the US, with all its undesirable political, social, economic and financial implications. It would also fuel the already rampant discussions about the inevitable death of fiat money.

    Stimulating inflation is another dirty, quick-fix strategy, like so many of the bank rescue packages currently in operation. As Hemingway said, it would feel good for a time. But it would solve no problems and create new ones.

  • Posted by RebelEconomist

    I don’t know about everyone else, but I cannot see the graphs in this post, and have had trouble viewing the blog recently.

  • Posted by bsetser

    i’ll reload the graphs. they seem fine in explorer, but not in firefox — as for difficulties viewing the blog, that is a function of the “technical difficulties” i mentioned earlier. the cfr’s blog platform was compromised last week, and we have been using a patched together system … it has been out for a few periods.

  • Posted by WStroupe

    pebird said, “It’s ironic that China’s response to decrease its exposure to US assets will result in a devaluation. I don’t think they have a few years to get repositioned.”

    I’m not sure China’s response will necessarily put much downward pressure upon the value of the dollar – at least not during the period in which China decreases its dollar exposure. But once it has accomplished that decrease, and the extent of its progress along that path becomes known, then watch out.

    Along the way (on the path) China’s continuing to keep the dollar afloat by buying short-dated Treasuries. And it’s therefore keeping its peg to the dollar in place. But a renewed crisis in the U.S. financial sector, and concomitant crisis in the U.S. economic sector, will make global investors rush back into Treasuries, lifting the dollar once again. It is during such a period of renewed global risk aversion that China can make the most progress along the path of limiting its exposure to the dollar. Here’s why:

    1) Risk-Averse global investors will lift the dollar so China doesn’t have to.

    2) Focus will tend to be taken somewhat off China’s reserve management and placed upon the role of non-governmental investors instead.

    3) China will not need to buy many dollars to keep its own currency low against the dollar since the dollar will be rising again, and also since the U.S. market won’t be buying nearly as much stuff from China.

    4) Such a renewed crisis will prompt China to really kick things into high gear as far as its trade relations with other (non-U.S.) partners is concerned.

    5) The prices of resources and of stakes in resources-based companies around the globe will plummet again, affording China greatly increased opportunities to increase its share of many key distressed companies around the globe and make even bigger resource buys to stockpile goodies. That will help it spend dollars for resources, thus converting dollars into better assets.

    6) China will be looked to, even more than now, as “a stabilizing factor” in the crisis as it supports global trade and makes loans to distressed companies. It could loan its dollars and be repaid in something other than dollars. It will increase trade with many other partners but conduct such trade increasingly in currencies other than the dollar.

    7) China could also spend more of its dollars for even bigger domestic stimulus programs.

    I might well have missed other points that a renewed crisis will afford China to decrease its dollar exposure and its reliance upon the U.S. market for its trade. But in all this, China accelerates its progress down the path of getting out of its present dollar trap, while the U.S. gets shoved into a dollar trap with no way out once China achieves its goals and once the dollar’s fundamentals inevitably deteriorate once again, down the road, and the currency gets really debased, as I think we all know it must due to Washington’s asinine policies.

  • Posted by "Commies"

    “# May 24th, 2009 at 10:19 pm Cedric Regula responds:

    Ya, but we still got the Big Spender Award. $1.8 Trillion just this year!

    Trillions ain’t worth nothin’ if you don’t spend it. What are they gonna do? Take it with ‘em? Commies don’t even go to Heaven!”

    Right, blame the commies, or any alien country who doesn’t speak English, start another war on terror, commie or whatever you call, and finance your American Dream by looting. What a brilliant idea!!!

  • Posted by M Heck


    I think you are wrong.
    There are special circumstances that pushed the dollar this time. Especially European banks had borrowed dollars and bought dollar denominated assets. As these assets went bust, the banks had to convert there Euro/SF/pound/… earnings and reserves into dollars to service their debt.
    This was one major driver. Another driver was the nonsense about the stability of the Euro.

    I don’t think the financial market bets on fast recovery. I see the recent slide in the dollar only partially as a sign of new confidence in economic growth, but as distrust in the willingness of the US to increase taxes directly to deal with the new debt and deficit, but going the path of inflation. Crisis such as this one is rare. The US has to deal with the big deficit/debt much earlier. If inflation is the way, China is under time constraint.

  • Posted by "Commies"

    Supposedly one day, China-US trade deficit or Asian-US trade deficit go down to a minimum level, who is going to finance treasure’s new print-out? There’s been some concerns about the size of US debt in the next 10 years from 14 trillion to 20 trillion.

    Does it mean that one day we’ll see 80s hyper-inflation back in the next 10 years. Right now, we have 5 and 10 years fixed mortgage rate of 3.85 and 5 per cent. When the hyper-inflation comes, we’ll be seeing 10% mortgage rate? I mean it scares the hell out of me if I need to refinance my mortgage in the next 10 years.

  • Posted by K T Cat

    Thinking as a CEO and not a central banker, China’s got a problem I would love to have. Tons of cash and a positive cash flow. If you screwed up your investments and somehow they lose value your ability to continue to make a profit will take the sting out of it pretty quickly.

    This “Dollar Treap” stuff seems overblown. Now that Brad’s discovered the Chinese had a few hundred billion in between their sofa cushions, the situation looks even better for them!


  • Posted by bsetser

    DJC — one small point

    over the past year, china’s dollar denominated treasury bonds have increased in value (at long-term rates fell). since inflation fell too, their real purchasing power also rose. China’s losses all came from its own decision to bet on equities (and perhaps to speculate on commodities), not from any rise in US inflation.

    Of course, the future may not look like the past. And investments need to be made on a forward looking basis. But sometimes the rhetoric around here seems to ignore the fact that china actually did quite well on its dollar bond portfolio in 08 (surprisingly well); it was the rest of its portfolio that got killed.

    and of course the real issue is whether or not it makes sense — if china believes the us will inflate away the value of its debt — for china to continue to peg to the dollar and pursue a macro policy mix that leads to ongoing dollar reserve accumulation.

  • Posted by WStroupe

    M Heck,

    I assure you, if the U.S. soon suffers another severe step down in this crisis, as I believe it soon will, then global investor reflex will lift the dollar, though perhaps not as much as it did last year when this crisis really got bad in the lead-up to the Wall Street collapse. A new round of risk aversion will, for a time (perhaps for several months or more) cause the bulk of global investors to seriously question the safety of commodities and the emerging markets and, though worries about the U.S. and the dollar are certainly mounting and deepening, they will see the dollar as comparatively less risky – and that’s the key – it’s the dollar in comparison to all else here. As Brad said, China didn’t do too bad on its Treasuries.

    A new round in this crisis will cause the Fed and global and domestic U.S. investors to pile into Treasuries once again. That will tend to keep long-dated yields low and will give China and others an opportunity to work their ‘decrease dollar exposure’ levers while they can do so without suffering too much loss. China’s leaders aren’t going to be fooled by such a scenario of the dollar rising again – they know they’ve really got to get out of the dollar trap they’re in, and they have a relatively limited time to do so.

  • Posted by bsetser

    commies —

    if china buys fewer us bonds as a result of a true adjustment that brings down its surplus (rather than a market chilling scare where it shifts its existing portfolio around in a way that destabilizes the us bond market), it will either be exporting less (opening up opportunities for others to produce to serve those markets) or importing more (creating demand for the world’s goods). that will support US activity directly and indirectly,as a china that imports more from brazil will allow brazil to buy more us goods.

    if net exports contribute to us growth, the US can reduce the scale of its stimulus over time (or not pass another stimulus as the impact of the current one expires). and automatic stabilizers automatically reduce. the fiscal deficit then would come down …

    otherwise, a big fiscal deficit will push up US rates, inducing a combination of:

    a) more US savings
    b) less US investment (crowding out)
    and c) more capital inflows from the rest of the world … and a corresponding rise in the us deficit — review the impact of reagan’s fiscal policy in the early 80s. this might be accompanied by a rise in s-term us rates as the fed worried the stimulus would generate too much demand in the us and overstimulate the economy …

    the economy ends up adjusting.

    for now, though, the widening of the fiscal deficit has been associated with a fall in the trade deficit, meaning that the us is borrowing less from the rest of the world. Remember, private borrowing has gone way down as us government borrowing has one up, so one is to a degree offsetting the other.

    nouriel used to always tell me to think in general equilibrium terms. before jumping to the conclusion that the us will have to inflate, it is important to remember that private us savings is up and private investment is down … so the overall dynamic is more complicated than it would be if the us government was increasing its borrowing when private borrowers also wanted to borrow to invest, or private households were borrowing to consume.

  • Posted by Indian Investor

    Brad, most of your reasoning is based on the assumption that the BOP identity holds. Actually it doesn’t, in the post 1971 world of legal tender currencies. In the pre 1971 world, if $3500 moves from the US to China, the Chinese would know that it’s equivalent to ~ 100 ounces of gold. So they can hold on to the dollars in anticipation of future exports of goods from the US.
    The soft currency dollar has no inherent value once it leaves the US shores. This is something you have to think about deeply. In the legal tender currency world, suppose China exports 1000 widgets to the US, and the US exports only say 20 wedges to China.Theretically the USD should be worth only 20/1000 of an RMB. In practice,the USD is instead one of the strongest currencies in exchange.
    Accumulation of dollar denominated reserves by foreign CBs is therefore NOT based on the intrinsic value of the dollar for them.Nor is there a direct political advantage in accumulating dollars – China’s forex reserves never made the CCP more popular, or created any direct benefit in Government transfers to Chinese people.
    You have to think very deeply to understand the motivation for, and the process by which foreign CBs accumulate dollar reserves.

  • Posted by Indian Investor

    In several writings you assess the performance of the portfolio of a foreign central bank as if the CB were running a private sector fund. In actuality the forex reserve isn’t a fund, it has no investors, and it probably isn’t measured by portfolio allocation profits at the strategic level. The Chin Communist Party isn’t running a for-profit private fund at all. The size and growth of their reserve fund itself isn’t an end objective by itself for them. The real purpose is much deeper and very different than you might imagine.

  • Posted by WStroupe

    Brad said, “before jumping to the conclusion that the us will have to inflate….”


    Are you considering the possibility that private savings in the U.S. will continue to rise, and that therefore the U.S. government’s huge debt issuance will largely be covered by private U.S. savers? Private investors/savers in the U.S. is indeed a big factor.

    However, the more private U.S. savers/investors save, the more dramatic the negative effect upon the U.S. economy itself, which then causes more job losses, business defaults, etc. That in turn drives yet more U.S. govt rescues and debt issuance, and it seems to me to be a vicious cycle feeding upon itself.

    Is this what we mean by the economy “adjusting”? It’s potentially a brutal adjustment, is it not? And at some point doesn’t the U.S. come to the point where, fears over its creditworthiness mount, interest rates increase and the U.S. is either driven to inflate away its existing debt of default on some flavors of sovereign debt? It’s difficult for me to see how the U.S. “adjusts” out of its predicament without inflating away or defaulting on its debt.

  • Posted by Simon Smelt

    As we know both China and the U.S. benefit in the immediate from the trade imbalance between them.
    But look at the position of the working Jo or Cho in this.

    On the U.S. side, median real wages have barely shifted in several decades. In part, this is because of adverse movement in the terms of trade (think oil). Increasing imports from China have helped reduce this negative swing and kept the rate of inflation down in the U.S. (research suggests the impact is greater for low income households than for high income ones).

    So, for the U.S., the growing trade deficit with China has kept inflation under control and made life more bearable for lower income households. At the same time, the export of jobs to China has kept the lid on low skilled wages. Net the working Jo will be worse off, due to the wedge driven by the elite on both sides. Globalization (which of course extends far beyond the China link) is associated in the U.S. with the rising share of profits going to financial intermediaries and growing wage differentials.

    On the China side, the reserve army of labour is kept cheap and maleable by the lack of a welfare net. This drives down the reserve wage to near zero. This leaves plenty of room for the elite to strike profitable deals with overseas markets. Lots of low pay city jobs for country Cho – better than semi-starvation in the countryside – but lots of rents for his city cousin.

    So, at first glance Jo and Cho are better off due to the bilateral trade, but underneath this the profits go to the elites. Keeping wages low on both sides keeps rents high. Following Mancur Olson, it will be difficult for the elites on both sides to relinquish their grip on this sweet arrangement – regardless of the financial risks building.

  • Posted by WStroupe

    Simon Smelt said, “it will be difficult for the elites on both sides to relinquish their grip on this sweet arrangement – regardless of the financial risks building.”

    True, true. But the mounting disenchantment/anger of DouChe in China and Dookie in the U.S., spurred by this crisis, is a factor neither side’s elites can ignore. The people are going to force their respective elitist upper crust to act more in line with what they (DouChe and Dookie) consider to be right and fair. This crisis has all the potential and factors to bring revolutions – in both China and the U.S.

  • Posted by Ted

    Graphs 1 and 2 are still not visible (I’m using IE7).

  • Posted by bsetser

    i’ll reload them. I reloaded all the others.

  • Posted by Rien Huizer


    Not so sure. Of course Great Egalitarians turn into exploiters soon after being hoisted onto the throne so Jo and Cho would be wasting their time trying to organize themselves and finding a roving bandit ruling them instead of a stationary one, but never underestimate the destructive power of an angry mob. Not everyone is as rational as we are.

  • Posted by jonathan

    It’s freaky to think they “made” $400B a year for 5 years. (I wanted to use a word other than “stunning.”) How much stuff is that? And it’s clearly not all off the US. I wonder how much is from Asia? They seem to be sucking money in from everywhere. How can that be sustained? It reminds me of the money Britain made when they built factories around the spinning Jenny: amounts totally out of scale with normal history.

    (Total anecdote: I was looking for some metal chairs for my deck. I found a set of 4 powder coated, Chinese made steel ones at Target on sale for $200. Lots of work in them, nice value. Then I was at Costco and they had wrought iron Chinese made chairs that had been shipped and trucked across the world and sold individually for the jaw dropping price of $23 each. How is that possible? I do the numbers in my head and someone must be losing money. The shipping companies? are rates effectively negative and is that what’s filled those containers? And who could compete with very well made, Windsor style chairs, packaged intelligently with plastic guards to prevent shipping damage for $23?)

    My oldest, who is fluent in Mandarin, argues all the time that the Chinese population is not happy with the government but they’re scared to say or do anything. We know a few high profile dissidents and I’m never sure if our opinions aren’t influenced by personal exposure.

  • Posted by "Commies"

    Private borrowing definitely has gone down as us government borrowing has gone up. Supposedly, US government spend most of the deficit on corporate bail out, social security and medicare reform, how much growth in us economy we are looking at? Those money doesn’t disappear in the economy but I find it hard to believe that government can deficit itself way out of recession. At the mean time, private borrowing will find the cost of new investment going way up. That will hurt the recovery for sure. I think this is exactly what happened right now. The TARP money is not channelling to real economy rather than saving bank’s own skin. I would love to see china investing their money in us equity rather than treasure notes.

  • Posted by "Commies"


    i agree, china is not building their reserve solely from us. globalization means global, not just us-china. as for the size of trade surplus, i don’t see any problem with that. made-in-china is cheap because those factory worker gets paid for less than $200 per month. the majority of profit are allocated between local manufacturer, exporter, importer, whole-seller, retailer, and of course china and us government.

    as for the political complication in china, it’s been dissidence for centuries whether it is against communist government, pro-west government, or old empires. imagine over 50 ethnic groups of 1.3 billion total population, i will be amazed if there is no dissidence. even in us there are political extremists who turn to violence in stead of political process.

    i am not biased by any means but the size of their trade surplus doesn’t necessarily mean that china will became political destabilized. actually, social unrest and tension has been reduced significant due to increasing employment and improvement on living standard.

    btw, federal reserve and treasury department took actions based on their objectives on inflation, employment rate and etc. i don’t see why chinese central bank and regulatory agencies will have a completely different agenda comparing to us colleges. when managing their reserve portfolio, i would never expect them to behave like a mutual fund manager. profit or loss maybe important for mutual fund manager to get a bonus, but not for government official who manage the reserve portfolio.

  • Posted by Roland

    @Rien 9:08

    Rien, elites are pretty expendable. Get rid of one, another will soon assert itself.

    That means the only consideration in disposing of an elite is the admitted expense and inconvenience of the process. In any marketplace there is pain associated with corrections, and revolutions are nothing more than sharp corrections in the political marketplace.

    Against the costs can be set the satisfaction of seeing the arrogant and unjust laid low–at least for a while. The creative destruction of social elites also sometimes helps to generate and catalyze new ideas.

    In my opinion, we’re almost getting to the point where it would be worth a 20-25% loss of GDP simply to see the displacement of the current Western financial elite. I’m not sure if we can find any “providers of revolutionary services” who could reliably contract to do the job for our society at a price, say, of 20% of GDP. If I could find such a service provider, I think I would sign the deal. But YMMV.

  • Posted by Glen M


    You really must read Ralph Gomorys’ take on trade……….

    At IBM back in the 1980s, Gomory watched in awe as Japan and other Asian nations captured high-tech industrial sectors in which US companies held commanding advantage. IBM invented the disk drive, then dropped out of the disk-drive business, unable to compete profitably. Gomory marveled at Singapore, a tiny city-state, as it lured American manufacturers with low-wage labor, capital subsidies and tax breaks. The US companies turned Singapore into a global center for semiconductor production.

    “It was an unforgettable transformation,” Gomory remembers. “And it was pretty frightening.

    “The offer that many Asian countries will give to American companies is essentially this: ‘Come over here and enhance our GDP. If you are here our people will be building disk drives, for example, instead of something less productive. In return, we’ll help you with the investment, with taxes, maybe even with wages. We’ll make sure you make a profit.’ This works for both sides: the American company gets profits, the host country gets GDP. However, there is another effect beyond the benefits for those two parties–high-value-added jobs leave the U.S.”

    China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China’s largest foreign investors. China’s industrial transformation is no longer about making shirts and shoes, as some free-trade cheerleaders still seem to believe. It is about capturing the most advanced processes and products.

    The multinationals’ overseas deployment of capital and technology, Gomory explains, is the core of how some very poor developing nations are able to ratchet up their technological prowess, take over advanced industrial sectors and rapidly expand their share in global trade–all with the help of US companies and finance, as they roam the world in search of better returns.

    The Gomory-Baumol book describes this as “a divergence of interests” between multinational firms and their home country. “This overseas investment decision may then prove to be very good for that multinational firm,” they write. “But there remains the question: Is the decision good for its own country?” In many cases, yes. If the firm is locating low-skilled industrial production in a very poor country, Americans get cheaper goods, trade expands for both sides and the result is “mutual gain.” But the trading partners enter a “zone of conflict” if the poor nation develops greater capabilities and assumes the production of more advanced goods. Then, the authors explain, “the newly developing partner becomes harmful to the more industrialized country.” The firm’s self-interested success “can constitute an actual loss of national income for the company’s home country.”

  • Posted by DJC

    China PBoC warns Federal Reserve over ‘printing money’

    China has warned a top member of the US Federal Reserve that it is increasingly disturbed by the Fed’s direct purchase of US Treasury bonds.

    By Ambrose Evans-Pritchard, 26 May 2009

    Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”

    “I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.

    Continue to read:

  • Posted by Twofish

    bsetser: If China’s own reporting is to believed, China’s state likely has about $2.4 trillion in foreign assets.

    One has to be careful in labeling something “state funds.” Much of the holdings are likely in entities whose legal position with respect to the Chinese government are similar to AIG or Freddie/Fannie, but I’ve never heard those characterized as “American state” funds.

  • Posted by Twofish

    jonathan: Then I was at Costco and they had wrought iron Chinese made chairs that had been shipped and trucked across the world and sold individually for the jaw dropping price of $23 each. How is that possible?

    The cost of iron is $55/*ton* and a migrant worker in China would be enthusiastic at making $200/month. The cost of shipping products across the Pacific is basically zero per chair, if you are willing to wait a few weeks.

    What is interesting is not that China is able to sell cheap items in the United States, but that other emerging countries (such as Mexico and Haiti) are not. For all this to work, you need a lot of investment in both physical infrastructure (container ports) and human infrastructure (one *big* advantage that the Chinese population has is that pretty much everyone is literate.)

    jonathan: My oldest, who is fluent in Mandarin, argues all the time that the Chinese population is not happy with the government but they’re scared to say or do anything.

    There is a big difference between being “not happy” and about to have a revolution. Chinese that I know aren’t particularly shy about saying bad things about the government, but I doubt you’ll get much of a revolution because no one has come up with anything better.

  • Posted by Rien Huizer


    I agree that elites are expendable, but they are not all equally so. Elites play the important role of organizing activities and mobilizing capital (we could argue about how to define elites, but lets say some Weberian concept). Good elites generate benefits in excess of their costs and vice versa. Given the right kinds of institutions, the right kind of endowment with low cost or high productivity resources and the right kind of trading environment, countries can outgrow others with less of the above. Predatory and/or incompetent elites, bad institutions and a poor trading environment (think Somalia’s trading relations) will overwhelm even the positive effects of a highly beneficial resource endowment (think Congo). Rocket science, right?

    Now, you can also look at this in reverse, eg you could consider a priori that a given elite is bad (predatory and/or incompetent), observe poor economic performance (say the US since 1998 in terms of living standard outcomes for the median wage earner and BOP), combined with at least neutral institutions and resource endowment. All of that might convince you that there is a causal relationship between a bad elite and bad economic outcomes. So, in your logic, all you need to do is change the expendable bad elite. Not o easy, but at least, in the US example, the government portion of the elite can be removed by electoral means and insolvency takes care of the private sector portion. The problem of this approach is that we -a priori- labeled this elite as bad. Not everyone would agree to the badness of the US elite, or for that matter most other national elites.

  • Posted by RebelEconomist

    Thanks Brad; I can see the charts fine now.

  • Posted by jonathan

    Twofish, that was my point: shipping costs are effectively negative. Making these chairs doesn’t cost the wage of a worker, certainly not a migrant, but a number of skilled workers in a factory that has overhead. The downward pressures on price are, I assume, being subsidized by the government’s various programs, but the shipping costs have to be below zero for this to make sense. Costco sells them at a profit.

    As to dissidence, I’m not Asian and, as I noted, our experiences are all unique. My daughter, for example, lived in China and notes that criticism is easy and common but within bounds and that certain topics are avoided. (And I don’t think anyone has been talking about revolution as a possibility.) This may not be true for an ABC or others, but for an American blonde girl living with a Chinese family it was.

  • Posted by Twofish

    jonathan: . Making these chairs doesn’t cost the wage of a worker, certainly not a migrant, but a number of skilled workers in a factory that has overhead.

    Overhead like that is a fixed cost which get amortized over the large number of chairs that are being produced.

    Also, if they are mass produced chairs, I don’t think that there is much that can’t be quickly taught to a migrant worker or that requires that much skill. Weld metal piece A to metal piece B. Repeat ten thousand times. I don’t see this as a high skill job.

    jonathan: The downward pressures on price are, I assume, being subsidized by the government’s various programs, but the shipping costs have to be below zero for this to make sense.

    It’s not. The variable costs are labor and raw materials. The fixed costs are amortized over the huge number of chairs. If you look at the numbers, it should work out to be massively profitable.

    If the cost structure is like most retail products, then most of the costs turn out to be in retailing and logistics. You’ll probably find that the chairs are more expensive in China than in the United States because shipping and logistics within the US is so efficient.

    Also the Chinese government by and large doesn’t subsidies export factories directly. One could argue that the RMB valuation is an indirect subsidy, and certainly for the whole system to work, it requires a massive investment in freeways and ports.

    jonathan: My daughter, for example, lived in China and notes that criticism is easy and common but within bounds and that certain topics are avoided.

    Criticism is easy. It’s organizing that will get you in trouble.

  • Posted by Twofish

    Glen M: However, there is another effect beyond the benefits for those two parties–high-value-added jobs leave the U.S.

    They don’t. The basic research that goes into disk drives still happens in the U.S., and cheap drive drives generate a huge number of software design jobs in the US.

    Glen M: China and India, he observes, are now doing this on a large scale. Microsoft and Google opened rival research centers in Beijing. Intel announced a new, $2.5 billion semiconductor plant that will make it one of China’s largest foreign investors.

    None of which are causing job cuts in Redmond and Silicon Valley. One reason that Microsoft and Google are attractive jobs, is that a lot of people that work in research in those positions do so with the hopes of getting into the United States.

    Glen M: The Gomory-Baumol book describes this as “a divergence of interests” between multinational firms and their home country.

    Home country? What home country?

    Second the conflict of interests isn’t between Microsoft and the United States, but various groups within the United States. If overseas trade was causing massive job losses among high skills professionals (like me) then you’d seem more resistance among high skilled professionals.

    One other point is that if you look at the high skilled professionals, a lot of them come from India and China. Without Indian and Chinese graduate students, the American university system would collapse.

  • Posted by Glen M


    As Dean Baker is apt to point out, high skilled professionals operate in a protected environment. Workers in the Technology field in the US are protected via the H-1B requirement.

    I also think that you fail to grasp the temporal nature of the the changes discussed. All those Chinese and Indian graduate students, if they return home, aren’t planning to work in low wage factory positions. I also disagree with your contention that that Intel or Microsoft opening up in China does not displace jobs in the US. That is nonsense. Eventually those high paying jobs in the US become just as easily exportable. Perhaps you should call me on my Hi-Phone and we could discuss the issue.

  • Posted by Twofish

    Glen M: Workers in the Technology field in the US are protected via the H-1B requirement.

    I’m not sure I follow the point you are making. H-1B makes it easier for companies to import skilled labor which reduces the incentives to move jobs overseas.

    Glen M: All those Chinese and Indian graduate students, if they return home, aren’t planning to work in low wage factory positions.

    And if the jobs aren’t available in China and India, they stay in the United States. If the only thing that Microsoft is offering in China are crap jobs, then Chinese graduate students will stay in the United States.

    Glen M: I also disagree with your contention that that Intel or Microsoft opening up in China does not displace jobs in the US. That is nonsense.

    I’m just telling you what I see. If you look at what Microsoft China is doing there, and the projects that they put in China end up creating more opportunities for US workers. They are doing some quite cool stuff in China.

    Glen M: Eventually those high paying jobs in the US become just as easily exportable

    To a large extent aren’t. The thing about the really high value jobs in science and engineering is that they depend very heavily on social relationships.

    You either have to move the entire city of Cambridge, Massachusetts to China and India, which can’t be done, or you grow technology centers in China, which takes a lot of time, and also creates lots of jobs for people in high technology.

    To the extent that jobs are mobile then people can move with the job. One reason that an American engineer in Redmond is less threatened by Microsoft China or Indian outsourcing then you might think is that if Microsoft puts lots of good jobs in China and India, experienced people have the option of moving to China and India. The fact that a lot of these American engineers are named Patel or Li makes this both possible and attractive.

    One thing about the shops that Microsoft is setting up in China is that for the mid to high level positions, they pay wages that are comparable to wages in the United States. The reason I know about what Microsoft is doing in China is that they have these road shows looking for skilled software engineers in the US to work in China. Also, if you go to the high tech centers, you’ll find that pretty much everyone is involved with setting up some business in China.

    One reason that I think that over time, the bias in China is going to move to reducing the value of the RMB to increasing it, is that if you appreciate the RMB, you make it easier for companies in China to offer wages which are comparable to US companies to attract high skill labor.

  • Posted by Glen M


    I think that will have to agree to disagree. A Lot of engineers and metallurgists that I know are looking for work and have complained that once production moved abroad their work soon followed.

  • Posted by "Commies"


    Do you know how much it cost to produce those chair in china? Cost of labour, cost of material, cost of overhead, depreciation of capital investment, cost of shipping, tax in china, import tariff in US, profit margin of china manufacturer, profit margin of china exporter, profit margin of US importer, profit margin of US whole-seller and retailer? Without those figures, I don’t know how you come to the conclusion that shipping costs are effectively negative. Do you have any factual information to support your assumption that the Chinese manufacturer was subsidized by various government programs?

    Here is some information from google: according to Cypress Industries, the shipping cost of 20’ dry container (19’ length, 7’8” width and 7’10” height, cubic capacity of 1,170 ft3, cargo weight capacity of 62,350 lbs) was estimated around $3,000 for goods from china to US. The actual cost may vary depending on the season and oil price. But those figures give you a rough idea of the shipping cost of those Costco chair. Personally, I don’t know how many chair maximum you can put into 20’ container. I am just estimating the shipping cost of those chairs by weight. Assuming each chair is about 50 lbs, we’ll have 1,247 chairs before exceeding the weight capacity of 62,350. In that way, we’ll have $2.41 shipping cost per chair to bring them from china to US. So there is a shipping cost crossing pacific.

    As to criticism and boundary, here is my personal experience: I was a Chinese citizen 6 years ago before moving to Canada. I have criticized Chinese government in private and in public long before Canadian government granted me immigration visa. Guess what, nothing happened, I don’t think I was ever been followed, monitored, harassed, torched, or depressed by Chinese government in any way. Why? Because I was nobody and I was not expressing my opinion in a violent way. So who gave a rat’s ass. It is not a secret that there are wide spread social injustice in china. Simply talk about it won’t put any additional risk on national security.

    As twofish said, there is a big difference between being “not happy” and about to have a revolution. Wishful thinking doesn’t help when it comes to investment and politics.

  • Posted by Twofish

    Glen M: I think that will have to agree to disagree.

    This really as a matter of political reality.

    Someone is benefiting from moving plants overseas, and if it is a small group of people, then there the possibility for a “political entrepreneur” to get power by supporting the interests of the “common American worker” against the “evil multi-national corporations.” The problem is that I think that fairly large numbers of people in the United States either benefit from, or see themselves benefiting from multi-nationals opening plants overseas. So many that you aren’t going to find any political market for going “populist.”

    It’s probably because we know different groups of people. The people I know are either in software, semiconductors, and finance, and I know extremely large numbers of Chinese-Americans and Indian-Americans employed in those fields.

    Talking about how bad H-1B visa holders are for the US economy and how awful it is that jobs are going overseas is political suicide in some places, because the voters are former H-1B visa holders and the Indian or Chinese worker that gets a job from a multi-national is likely to be someone’s cousin.

  • Posted by Simon Smelt

    In my previous comment, I wasn’t advocating the need or likelihood of elites being overthrown. The observation was that the current trade between China and the U.S. suits elites on both sides. Ex Olson, they will seek to adapt to the changing situation in ways that suit their ongoing rent extraction, rather than address the underlying issues.

    Thanks for the Gomoroy reference. International corporates will seek profit opportunities globally. Their county of origin has no special claim on their loyalty (or even their taxes!) but if the shares are predominantly owned there, then the country of origin (through those shareholders) will benefit from the flow of profits to back home. Essentially, you have global predators who return much of their gains back home. That effect dissipates as share ownership spreads globally; e.g. China trying to buy a big stake in Australia’s RTZ, whose main source of profit is – China.

    So, where to now?

    Christian Romer, chair of the U.S. President’s Council of Economic Advisors, in her recent talk at the CFR emphasised export and investment led growth for the U.S. This recognises a shift from a consumption led boom, but how is the USA to export more – especially given how hard hit international trade has been? It’s hard to imagine Cadillacs displacing Mercedes on the roads of Paris and HK!

    Exports are a small % of the US economy – one reason it has been less vulnerable than Germany or Japan. To get an export led boom and boost to industrial investment would require a major depreciation of the US $, making U.S. labour, land and capital cheaper relative to the rest of the world. Or, in other terms, pricier oil and a lower standard of living for the U.S. worker.

  • Posted by Glen M

    Interesting insight Simon. I don’t think that it is imperative that the US has a surplus. Balanced trade would be enough. Going forward, its demographics place it in a much better position than China, Japan and Germany. While exports are small % of the US economy, with the change in the US-Euro exchange rate, when the dust settles, the US will be well positioned. I am sure Boeing is optimistic.

    What appeals to me about Gomory’s ideas, is that the benefit is not transferable. Indirectly, the country of origin, or the consuming nation, will automatically have a claim. These are policies that are well within the rights of nations to exercise.

  • Posted by Theodore

    If China is so doing well with their GDP and countries spending, why is that so many immigrants come from China to the United States. More in fact come illegally to the US when they should just obtain a eb5 green card .

  • Posted by Samuel

    I will have to agree with Samuel here. The eb5 green card presents an opportunity for these people to gain residency through an investment in America that creates jobs for American workers. Surely this is the more noble option if compared to merely entering illegally and making a go at it.

  • Posted by Lewis

    Samuel, you are absolutely correct. The eb5 investor visa is a fantastic opportunity for both the foreign national and the country. While not many Chinese citizens are taking advantage of this program, that could change at any time.