Brad Setser

Follow the Money

Cross border flows, with a bit of macroeconomics

Splitting out Emerging Economies Changes the Picture on Global Trade

by Brad Setser Friday, October 14, 2016

The Financial Times’ Big Read feature on hidden trade barriers included a chart showing the growth in trade relative to the growth of the world economy. The graph showed, accurately, that trade is now growing a bit more slowly than the world economy.

The question is why.

A relatively simple adjustment helps answer the question.

Look at a plot of import growth (goods only in this graph, but it doesn’t change if you use goods and services) against growth in the advanced economies, using the IMF’s WEO data set.

ae

And now consider the same plot for the emerging economies.

em

Eyeball economics tells us that import growth has really slowed in the emerging economies, both absolutely and relative to growth. 2015 emerging market import growth sort of look like 1998, and that wasn’t a good year for the emerging world. Advanced economy imports by contrast grew a bit faster than overall growth. Much more sophisticated economics tells a similar story.

Europe is actually pulling its weight here. Eurozone imports have picked up along with the modest revival in eurozone demand over the last couple of years. The problem in the eurozone is that the demand recovery has been weak more than anything else.

Read more »

China September Exports: Not Quite as Bad as They Seem?

by Brad Setser Thursday, October 13, 2016

The 5.6 percent fall—in the yuan data—in China’s September exports was a surprise. Exports had been rising in yuan terms, and in volume terms, since March. I expected the rise to continue, largely because the pickup in volumes is consistent with the expected impact of the 8 percent fall in the broad yuan (using the BIS index) since last July.

And I am very conscious of the risk of interpreting data to fit your prior beliefs, and thus missing a new signal.

That said, I do think there are a couple of reasons why the fall in exports may not be indicative of a shift in trend.

The first is straightforward: there was one fewer working days in China this September than last September (22 versus 21; data are here). Nominal exports, in yuan, per working day, fell by 1 percent.

This argument should not be overstated. There were more working days this August than last August, so nominal exports, in yuan, per working day, were down in August.

The more important reason is a bit more complicated. Chinese export prices jumped last September, in the immediate aftermath of the yuan’s August depreciation. Each dollar in exports generated more yuan. Over time, though, export prices have come down. They are now lower than their pre-August devaluation levels.

china-trade-prices

Read more »

China’s September Reserves, and Q2 Balance of Payments

by Brad Setser Tuesday, October 11, 2016

China’s headline reserves dipped by about $19 billion in September, dropping below $3.2 trillion. Adjust for foreign exchange changes, and the underlying fall is widely estimated to be a bit more—around $25 billion.

Press coverage emphasized that the fall “exceeded expectations.” To me that suggests “expectations” on China’s reserves aren’t formed in all that sophisticated a way.

$20-30 billion in sales is in line with the change in the PBOC’s balance sheet in July and August (the FX settlement data, the other key proxy for intervention, suggests more modest sales in August). Throw in the September spike in the Hong Kong Inter-bank Offered Rate (HIBOR) —which suggested a rise in depreciation pressure on the CNY and CNH —and $25 billion in sales is if anything a bit smaller than I personally expected.* Of course, some of the sales could be coming through the state banks; time will tell.

Even if the pace of sales did not pick up in September, there is is an interesting story in the Chinese data. The $75 billion a quarter and $300 billion a year pace of sales implied by the July-September monthly data aren’t anything like the pace of sales at the peak of pressure on China’s currency. But $75 billion a quarter is a still bit higher than the underlying pace of sales in Q2.

The balance of payments data show Q2 reserve sales of about $35 billion (the change in the PBOC’s balance sheet reserves was $31 billion). But other parts of China’s state added to their foreign assets in Q2. In fact, counting shadow intervention (foreign exchange purchases by state banks and other state actors), I actually think the government of China’s total foreign assets may have increased a bit in the second quarter.

china-official-asset-growth

There are a couple of line items in the balance of payments that seem to me to be under the control of the state and state actors. Most obviously, the line item that corresponds with the PBOC’s other foreign assets (“other, other, assets” in balance of payments speak: up $12 billion in q2, after a bigger rise in q1). But most portfolio outflows are likely from state-controlled institutions (portfolio debt historically has been the state banks, portfolio equity historically has been the China Investment Corporation and the state retirement funds in large part). If these flows are netted against reserve sales, there wasn’t much of a change in q2. In my view, shifts in assets within the state should be viewed differently than the sale of state assets to truly private actors.

Read more »

Soybean-Adjusted U.S. Export Growth

by Brad Setser Friday, October 7, 2016

I have argued that China’s current account surplus may paint a misleading picture of China’s trade position, as it isn’t clear that tourism imports have really increased from a bit over $100 billion to a bit over $300 billion in 10 quarters (the number of tourists travelling abroad has likely grown by about 25 percent over the same period, with rapid growth in the the number of tourists visiting Japan and Thailand offsetting the fall in tourists visiting Hong Kong). I can easily imagine how China is running a bigger goods and services trade surplus than now appears in the official data, as some of the reported increase in tourism could be a hidden capital outflow.

And now the U.S. trade data may need to be adjusted too. The headline deficit likely understates the underlying deficit just a bit right now.

The issue in the U.S. is quite different than the issue in China.

The surge in U.S. soybean exports is real. Very real. Soybeans are easy to count and measure. There has been a big jump in exports.

U.S. soybean exports typically peak in q4 and q1, after the U.S. harvest (Brazil and Argentina in turn supply the global market in April and May after their harvest). The seasonal adjustment smooths out a true seasonal spike in U.S. exports.

So when a weak harvest in South America (due in part to a drought in Brazil) leads to large out-of-season U.S. exports in July and August—well, it has a big impact on the seasonally adjusted data. Seasonally adjusted agricultural export volumes (seasonally adjusted) reached an average of $13 billion a month in July and August. $9 billion (in 2010 dollars) has been the recent norm.

Read more »

The Scale of Korea’s Intervention in August

by Brad Setser Wednesday, October 5, 2016

Folks in the market like to talk about what is happening to China’s forward book. Some think that China (or its state banks) sold dollars forward last fall, and, well, to many the (modest) disclosed short position that China reports in the IMF’s SDDS reserves template isn’t all that convincing. In part because the disclosed forward book never changes much.*

But China also quite clearly isn’t the only country in Asia with a forward book. “Shadow intervention” is actually rather common, in both directions.

At the end of August, Korea had bought about $48 billion in dollars forward, up from just under $45 billion in July.** Technically, the forward book may be the forward leg of a swap contract.*** No matter—the rise in the forward book clearly reflects the central bank’s activities in the market.

Adding in the forward book shows the true scale of Korea’s intervention in August. The balance of payments reserve outflow was just over $3 billion. The balance of payments number should track valuation-adjusted headline reserves. The forward book rose by a bit more $3.1 billion.

I like to watch government deposits and government bond purchases too; they are up $1.7 billion (with a big increase in government deposits abroad). Korea’s intervention hasn’t always only appeared on the central banks’ balance sheet (though some of the portfolio debt comes from Korea’s National Pension Service). Sum it up, and Korea’s government could have bought as much as $8 billion in the market in August.

korea-intervention-by-type

Read more »

The ECB on the Slowdown in Global Trade

by Brad Setser Friday, September 30, 2016

I really liked the ECB’s recent report on the slowdown in global trade (summarized here), for five reasons.

1) It doesn’t assume that trade should always grow faster than output. A liberalization of trade (or a fall in transportation costs—or less attractively, new opportunities to take advantage of transfer pricing) should lead to expansion of trade, but only until a new equilibrium level is reached. In the long-run, an elasticity of around 1 (e.g. trade grows with demand for traded goods) makes some sense.

2) It (implicitly) casts a somewhat skeptical eye on the expansion of trade from 2001 to 2007, and doesn’t assume that the growth in trade over this period was completely sustainable. The 2001-07 expansion of trade was associated with an exceptionally fast pace of growth in Chinese exports, one, I would add, not matched by comparable growth in China’s imports (especially of manufactures); it thus was sustainable only so long as the rest of the world ran large external deficits to balance China’s large surplus.

“In 2001- 07, China’s exports rose faster by about 15 percentage points than import demand in its main markets; by 2008-13, this differential had fallen to 6 percentage points (see Chart A). Waning competitiveness over that period may have played a role: China’s real effective exchange rate (based on relative producer prices) has appreciated by about one-quarter since 2005. At the same time, China’s exports had to slow eventually – they cannot outstrip the expansion of export markets in the long term.”

During this period Chinese export growth filtered throughout Asia. Rising Chinese exports to Europe, the United States, and commodity exporters (who could afford to buy more manufactures because the price of commodities rose) led to an increase in Chinese imports of components (global value chains), though after 2004, as I will argue below, component imports started to lag export growth.

3) It notes that the recent slowdown in trade has been marked by a very large shift in China’s import elasticity. For the past several years Chinese import growth has significantly lagged Chinese GDP growth.

“The recent decline in China’s income elasticity of imports has been striking and has made a marked contribution to the fall in the world trade elasticity. China’s trade elasticity dropped from 1.8 in 1980- 2007 to 0.8 in 2012-15. The fall in imports in 2015 was particularly stark, with imports expanding by just 2%, despite robust economic activity”

Read more »

Won Appreciates, South Korea Intervenes

by Brad Setser Wednesday, September 28, 2016

South Korea’s tendency to intervene to limit the won’s appreciation is well known.

When the won appreciated toward 1100 (won to the dollar) last week, it wasn’t that hard to predict that reports of Korean intervention would soon follow.

Last Thursday Reuters wrote:

“The South Korean currency, emerging Asia’s best performer this year, pared some gains as foreign exchange authorities were suspected of intervening to stem further appreciation, traders said. The authorities were spotted around 1,101, they added. ”

The won did appreciate to 1095 or so Tuesday, when the Mexican peso rallied, and has subsequently hovered around that level. It is now firmly in the range that generated intervention in August.

won-dollar

The South Koreans are the current masters of competitive non-appreciation. I suspect the credibility of Korea’s intervention threat helps limit the scale of their actual intervention.

And with South Korea’s government pension fund now building up foreign assets at a rapid clip, the amount that the central bank needs to actually buy in the market has been structurally reduced. Especially if the National Pension Service plays with its foreign currency hedge ratio to help the Bank of Korea out a bit (See this Bloomberg article; a “lower hedge ratio will boost demand for the dollar in the spot market” per Jeon Seung Ji of Samsung Futures).

Foreign exchange intervention to limit appreciation isn’t as prevalent it once was. More big central banks are selling than are buying. But it also hasn’t entirely gone away.

Read more »

The IMF’s Recommended Fiscal Path For Japan

by Brad Setser Monday, September 26, 2016

With a bit of technical assistance, I was able to do a better job of quantifying the IMF’s recommended fiscal path for Japan.

The IMF wants a 50 to 100 basis point rise in Japan’s consumption tax every year for the foreseeable future, starting in 2017. A 50 basis point rise would result in between 20 and 25 basis points of GDP in structural fiscal consolidation a year (the call for the tax increase is in paragraph 23 of the staff report, and is echoed in the IMF’s working paper).

The IMF doesn’t want Japan to continue relying on fiscal stimulus packages, which typically have funds for public investment and the like (paragraph 23). As a result, there is a 60 basis points of GDP consolidation from the roll-off of past stimulus packages (the change in the structural primary balance is in both table 1 on p.38 table 4 on p.41 of the staff report).

That implies 80 to 85 basis points of GDP in structural fiscal consolidation.

But, in the staff working paper (not formal advice, but it clearly reflects the IMF’s overall recommendations), the preferred policy scenario shows an 80 basis point of GDP increase in temporary transfers and public wages to support the proposed incomes policy (this is in the working paper appendix, in table I.1 on p. 33).

Net it all out; the result is basically a neutral stance, not the consolidation I initially suspected. The 0.5 percent of GDP fall in general government net lending/borrowing in table 2 on p. 25 of the working paper stems from a fall in interest payments and an increase in nominal GDP that is projected from the new incomes policy.*

Actually if you look at table 4 in the staff report, Japan’s is expected to receive more in interest income than in pays out in interest in 2017. Japan’s government is projected receive 1.6 percent of GDP in interest on its assets (including its foreign reserves, which are largely held by the ministry of finance) and pay 1.3 percent of GDP in interest on its debt. The total fiscal deficit is thus smaller than the primary fiscal deficit in 2017. Welcome to the world of negative interest rates.

Read more »

China’s Tourism Puzzle Has Gone Mainstream

by Brad Setser Thursday, September 22, 2016

Or at least it is on Bloomberg.

I wanted to elaborate on three points:

First, the increase in China’s tourism spending, if it is real, is huge. The reported rise in tourism spending by China since 2012 is about equal to the reported fall in Chinese commodity (primary product) imports. A $200 billion move over roughly 2 and a half years (the Chinese data indicates spending by Chinese tourists abroad–imports of travel services in the data–have increased from $120 billion in 2013 to about $315 billion in the last four quarters of data)* is real money.

primary-v-travel-imports

Second, the timing of the rise corresponds to a change in the methodology used to collect China’s balance of payments data. Most of the jump now shows up in the 2014 data.* SAFE’s presentation to the IMF on the implementation of the IMF’s new balance of payments data standard is remarkably honest; they don’t seem to have any idea if their new data set—based on credit card data and the like—really captures tourism spending abroad, or captures something else.** Under a heading titled “related issues to the new method” SAFE notes:

“For example, some remittance reported as travel in ITRS (International Transactions Reporting System) and some overseas purchases via bank card are actually goods transactions, because the money is used for valuables and durable goods, Sometimes, the money is used for investment abroad, which should be included in financial account. However, without further information, it is hard to identify how much should be allocated to goods item or financial account”

My argument is simple: in correcting for potential problems in the old data, China introduced a new set of problems—and those problems appear to be quite large.

The new method likely moved some financial outflows to the current account, and thus it has had the effect of reducing China’s current account surplus. The large rise in travel imports is a big reason why the gap between China’s goods surplus and its current account surplus is now so large—and in my view, there is growing reason to think that the goods surplus may now be the more accurate measure of China’s impact on the global economy. At least since 2013.

Read more »

The August Calm (Updated Chinese Intervention Estimates)

by Brad Setser Tuesday, September 20, 2016

The proxies that provide the best estimates of China’s actual intervention in the foreign currency market in August are out, and they in no way hint at the stress that emerged in Hong Kong’s interbank market in September.

The PBOC’s balance sheet shows foreign currency sales of between $25 and $30 billion (depending on whether you use the number for foreign currency reserves or for foreign assets). A decent sum, but also a sum that is consistent with the pace of sales in July.

cny-9-19-fx-settlement

SAFE’s data on foreign exchange settlement, which in my view is the single best indicator of true intervention even though (or in part because) it aggregates the activities of the PBOC and the state banks, actually indicates a fall-off in pressure in August. The FX settlement suggests sales of around $5 billion in August. Even after adjusting for reported changes in forwards (the dashed line above).

All this said, there is no doubt something changed in September. The cost of borrowing yuan offshore spiked even though the exchange rate has been quite stable against the dollar and generally stable against the CFETS basket.

cny-indexes

Two theories.

Read more »