Yesterday while I was preparing for my presentation in Hong Kong on the impact of slowing trade on the Chinese economy, one of the participants in the conference passed on to me the January trade numbers, which had just been released. Although they were “surprisingly” bad, and fit perfectly within my very gloomy presentation, they were also not a surprise in the sense that they show what many of us had been expecting anyway. According to an article in today’s Xinhua:
A sharp fall in imports and exports in January, which included a weeklong Spring Festival holiday, has both puzzled and alarmed economists. General Administration of Customs figures released yesterday showed exports plummeted 17.5 percent year-on-year, much sharper than the 2.8 percent fall in December.
Imports fell even more dramatically, to 43.1 percent year-on-year. The combined foreign trade in January fell 29 percent year-on-year. Such a major decline in monthly foreign trade is rare in the 30 years of reform and opening up.
…Last month, however, was an exception because it had one full week of holiday from January 26. The Chinese Lunar New Year is the most important festival for Chinese but usually it falls in February. So this year, January had five fewer working days than those in many of the previous years. If that is considered, the Customs said, exports actually rose 6.8 percent year-on-year in January. And compared with December, they increased 4.6 percent.
As usual, the local press tried to put the best face possible on the decline by comparing numbers on a day-count basis (“exports actually rose 6.8 percent”). This only makes sense however if Chinese exporters and importers were unaware of the week-long Spring Festival holiday and made no attempts to accelerate late January transactions to fit into the January holiday schedule. Pretty unlikely, I would think.
The reality is that both exports and imports continue to contract at a rapid pace, and indicate that both foreign consumption and local consumption are in sharp decline. What worries me even more is a number that the Xinhua report, for some reason, did not bother to publish in their article on the trade data. China’s trade surplus for January was a mind-blowing $39.1 billion, just a smidgen under November’s all-time high of $40.1 billion (or about 25% higher, if we want to play the day-count game), and edging out December’s $39.0 billion for second place. That puts the trade surplus over the past four months $153.4 billion, well over half of all of last year’s record-smashing $297.5 billion trade surplus.
I know I have written about this many times, but I want to say again what that means for the global imbalance. The world’s consumers are experiencing a sharp contraction in demand. That contraction has to be “shared out” among all of the world’s producers. The decline in Chinese exports means that Chinese producers are absorbing part of that contraction, but the bigger decline in its imports means that Chinese consumers are contributing an even greater amount to the contraction in demand. The result, with net Chinese consumption contracting by more than net Chinese production, is that non-Chinese producers must absorb more than 100% of the contraction in demand from non-Chinese consumers. It will be hard to convince them that this is fair.
Although China has tremendous domestic problems and is very worried about the employment impact of the global slowdown, my fear is that those considerations are likely to have little value for other countries also suffering from awful employment prospects. For comparison, in December Taiwan’s exports fell 42%, South Korea’s by 17%, and Japan’s by 35%, compared to. China’s 2.8%, and Bloomberg earlier this week had this article:
China said it was “seriously concerned” at Indian barriers to its exports, highlighting global trade tensions as the worst financial crisis since World War II sends demand plummeting. India’s use of sanctions may have “a serious impact on bilateral trade relations,” Ministry of Commerce spokesman Yao Jian said in a statement on the ministry’s Web site today. India imposed a six-month ban on imports of Chinese toys last month.
…India has initiated 17 trade actions, including 10 anti- dumping probes, against Chinese imports such as penicillin, hot- rolled steel, vehicle axles and linen since October, the Chinese ministry said today. It also cited additional Indian restrictions on imports of products including steel, chemicals and textiles.
…“I believe China won’t implement a ‘Buy China’ policy,” Vice Commerce Minister Jiang Zengwei said at a press conference in Beijing today. “We just need to boost consumption, whether it’s through domestically made goods or foreign-made goods. We will treat them equally without discrimination. Why in the current climate should we resort to protectionism?”
Why indeed? It never makes sense for the leading trade surplus country to resort to protectionism if there is any chance of a global backlash, as the US discovered to its chagrin in 1930. It may, however, make a lot more sense for countries with trade deficits to turn to protection, and there is now overwhelming evidence that this is exactly what they are doing or thinking about doing.
At any rate whether recent Chinese moves to lower interest rates, to increase dramatically the provision of credit to manufacturing companies, to reduce export tax rebates, to reduce corporate taxes, and to stall the earlier discussions over increasing minimum wages, should be considered “resorting to protectionism” is something one can debate extensively, but the fact is that all of these moves are aimed at boosting manufacturing output and employment. Matters are made worse by the fact that most of the stimulus package so far seems to consist of an explosion in bank lending (by the way last week’s rumors were confirmed – bank lending in January was up by RMB 1.62 trillion), and aside from the problems I discussed in my post earlier this week, bank lending is directed almost exclusively towards investment and manufacturing. Whatever effect it might have in increasing consumption could easily be exceeded by the impact it has on increasing output.
Of course the government can point to consumption-boosting measures too, and there is a lot of discussion about providing Chinese consumers with coupons to be used to consume before some expiry date (although whether these create new consumption or simply substitute for old consumption would be a tricky issue), the fact is that the transmission from domestic demand enhancement to import demand is, for whatever reason, very weak. China is still exacerbating the global overcapacity problem.
For some reason whenever I point this out there is always someone who accuses me of being “anti-China” (and weirdly enough the accuser is not always Chinese), so let me stress that I am not evaluating, I am only counting, and it doesn’t matter whether or not I point this out. The fact is that quite a lot of people have made or will make the same argument, and if that argument spreads, which it seems to be doing very quickly, China is going to have to deal with it whether or not it likes. The more noise those of us who want to see China succeed make about the growing perception, right or wrong, that China is exacerbating the global problem, the better it is for China.
The thing to remember is that for the rest of the world it doesn’t really matter what explanation Chinese policymakers give for this high and rising trade surplus. They will consider the fact that with China’s export of overcapacity extremely high, and growing even further, anger within their political constituencies cannot help but rise. Of course China needs to fight rapidly rising unemployment, but so does nearly every other country in the world. At all costs China must move quickly to defuse the threat of trade war, but unfortunately I see little evidence that Chinese policymakers are even beginning to understand China’s role in the Great Global Imbalance.
And the problem is certainly not helped by actions like last week’s posting, on the website of the research institute associated with China’s Ministry of Finance, of a report arguing that China’s central bank should “actively guide” the exchange rate and devalue the RMB to about 6.93 against the dollar. The purpose of depreciating, the report said, was to help maintain economic growth and bolster employment.
Wow. It is as if they have absolutely no understanding of how dangerous the global climate is. This is very scary.
On a separate but related note, yesterday’s Financial Times had this story:
China will continue to buy US Treasury bonds even though it knows the dollar will depreciate because such investments remain its “only option” in a perilous world, a senior Chinese banking regulator said on Wednesday. China has used the dollars it accumulates selling manufactured goods to US consumers to accumulate the world’s largest holding of Treasuries.
However, the increasing US budget deficit and its potential impact on the dollar have raised questions about the future Chinese appetite for US debt. Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York on Wednesday that China would continue to buy Treasuries in spite of its misgivings about US finances. “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”
It is good that Mr. Luo is helping to dissipate the widespread but profoundly silly worry about whether or not China will choose to stop funding the US trade deficit. It can’t. As long as China keeps running these trade surpluses it has no choice but to recycle the money, and the only market large enough in which to recycle so much money is the US dollar market. Even if it tried to divert more of it into the euro, this would simply force a larger trade deficit onto Europe, which is not sustainable for any length of time.
What still puzzles me, however, is how China “knows the dollar will depreciate.” Against what? The euro? Why, because the US economy is slowing and fiscal debt is rising? Since Europe is slowing even more, and starts with a higher level of debt, I have trouble understanding why this would indicate that the euro must strengthen against the dollar. By the way the dollar has strengthened remarkably against the euro over the past six months, so perhaps the PBoC would only be forced to give back a part of its windfall? Or is it not a windfall?
Before closing this post I want to complain about one last, only vaguely related thing. On Tuesday when I arrived at the Hong Kong airport, among all the huge advertisements offering services to bankers and businesses, I saw one even larger advertisement for Credit Suisse concerning an exhibit they sponsored of “Emerging Asian Artists.” I know this is going to sound unbearably snobbish, and I really apologize for sounding like this, but while the global financial crisis has many terrible aspects to it, there is no cloud without a sliver lining, and if the emerging artist investment class is one of the many markets that die as a consequence of this crisis (and if history is any guide at all, it will), then the global crisis can’t have been all bad, right?
I have to say very sadly that China is being caught between the devil and the deep blue sea.
My guess is that the drop in imports is mainly caused by two factors:
1. Lower commodity prices
2. Destocking of manfacturers using foreign components/parts (from Taiwan, Japan, etc.)
The first point has nothing to do with Chinese economic & trade policy, and is simply a reflection of plummeting global demand.
The second point would indicate that much worse export figures are still to come, as you first have to import parts before you can process and then re-export…
Not sure if increased Chinese investment in industrial capacity will really lead to higher mid-term exports. It seems to me that at this stage, the limiting factor is not so much China’s capacity to produce, but rather the world’s demand of the kind of products China produces. If so, then increased investments probably lead to cut-throat competition, bancrupties and lots of NPLs, but not to an even higher trade surplus.
Yes, China has manipulated the RMB exchange rate. And yes, China has failed to stimulate domestic demand in recent years. But China has not deliberately kept imports down; it was the Western countries that did not want to sell to China those goods that China had demanded.
China has had a comparative advantage in myriad areas incl. almost the entire low- and mid-end segment across many industries. So the only segment in which China wanted to import goods was the high-end segment, more precisely the high-eng technology segment. China wanted to import mostly state-of-the-art technology and military equipment (weapons, fighter jets, etc.) which Western countries refused to sell to China. Despite the large scale of Chinese exports in the low- and mid-end segment, Western exports in the high-end segment would have (due to the high nominal price per item) offset a considerable portion of their countries’ trade deficits and thus also China’s trade surplus. But they deliberately refused to.
Would it make sense now to think about high-end exports from Western countries to developing countries like China?
Fine art is considered a good and portable store of wealth and hedge against inflation so it will emerge again, eventually.
Who the heck is this “Luo Ping, a director-general at the China Banking Regulatory Commission”?
Never heard him. Do you, Michael? Seems you are quite plugged in with comrades from CBRC.
Hi Prof Pettis,
A quick question. Does China print RMB in exchange for the trade surplus? Do you agree with the statement “China’s 2trn fx reverse = additional RMB printed over the years from trade surpluses”?
[...] – Michael Pettis on China’s latest trade [...]
Why is the decline of an emerging artist investment market good? And why do you naturally assume that the people interested in buying art are primarily doing it to invest? OK OK it is Credit Suisse doing the advertising but someone has to sponsor these things.
I mean I’ve known one or two artists and often the commentary they make is worthwhile. I know that people in general primarily wish to make a living, reproduce and be successful in the convention sense but in times of stress paying attention to culture is a good thing.
People should become genuinely more interested in art in these uncertain times.
BTW I really like your blog.
[...] Michael Pettis, a professor of Chinese Financial Markets at Peking University, discusses China’s “terrible trade numbers”.Brad DeLong asks if this is the end of Milton Friedman.The New Yorker’s Balance Sheet Blog [...]
Hi Michael;
Would you mind doing a hypothetic post on What the world will look like when the trades on final products are mostly banned as the trade deficit countries are struggling to “create” jobs? I expect protectionism will rise to a level we haven’t seen so far. Can you picture what will happen when the protectionism wins the high hand?
thanks.
[...] – Michael Pettis on China’s latest trade [...]
Michael,
I follow your blog regularly and find your perspective to be truly enlightening. I am a corporate treasurer with an public accounting background. I have spent innumerable hours over the past 18 months now trying to get my arms around how this (now crisis) is likely to evolve. One of the areas I continue to have a high interest in is developing a better understanding is the Chinese economy and one of my global macroeconomic questions regards understanding the implications of the global balance of trade/payments imbalances–which is what draws me to your work.
In my former life (as a CPA), one of the keys to understanding situation was, naturally, to follow the cash. In auditing, if one understands where the cash starts, how it flows, and where it ends up, one has gone a long way towards understanding what’s going on. When I look at China, I understand at a high level, where the money is–it’s in China. Specifically, that money is in China and is constituted as Chinese holdings of US government obligations–Treasuries, etc.
Here’s my question: Who owns the Treasuries? I’m presuming the answer to that question is primarily various Chinese government agencies, although I’m not certain. I ask the question, because I, like many am of the conclusion that China needs to stimulate demand, if all of the “excess savings” are in the government sector, unless the government sector were to undertake very material transfer payments to the private sector, I don’t understand how it would be possible to stimulate consumer demand (with millions of Chinese losing their jobs in their own domestic recession). Now it could be that the savings are in the corporate sector, but it would seem the last thing we need is more corporate investment as production capacity is already in a glut. The government sector could also stimulate demand through making infrastructure investments, although, again, it seems like those investments themselves have already been running at a high, if not unsustainable pace for the long term.
Perhaps I am mistaken though, and these US Treasury holdings are in the private sector and hundreds of millions of citizens are simply saving gigantic and increasing proportions of their incomes. But it seems to me that it would be beneficial that more people had a sufficient understanding of these complexities–indeed, it would be good if more people had a better understanding of global imbalances, generally. And for your role in helping expand that knowledge, I greatly thank you.
James Kahler
“What still puzzles me, however, is how China “knows the dollar will depreciate.” Against what?”
Iron, copper, oil, gold, land, houses, corn, wheat, soybeans, pork, beef, chicken, etc., etc., etc. It’s called inflation, and it’s not good for bondholders. Perfectly rational concern for the Chinese, IYAM.
Could you please provide a link to your presentation if possible ?
Hello Michael
“Since Europe is slowing even more, and starts with a higher level of debt,”
That’s very interesting and seems to me to be contrary to what I read in most of the press.
Can you point me to somewhere on the web where I can put numbers on this?
Simon and Andilinks, I am not at all suggesting that artists should starve. On the contrary I am very involved in the underground art and music scene in Beijing and have supported a number of young artists who I really like. My only point was that the feverish art-as-investment activity has distorted things here. Artists who had once been slowly working towards a voice suddenly began mass-producing canvases (not an exaggeration – there actually are assembly-line artists, and they are not being Andy-Warhol ironic), and selling them for tens of thousands of dollars, but the problem was that collectors basically wanted the same sure-to-appreciate-in-value canvas over and over again, which – not surprisingly given the amount of money involved – they got. Collectors and patrons are very important in the history of art – in fact one of my professor at Columbia always insisted the real history of art is the history of the patrons of art – but there is a big difference between the impact of a Gertrude and Leo Stein on the artists they collect and the impact a Gordon Gekko might have.
Thomas, I am still working out the numbers, but in the past the drop in commodity prices accounted for about one-third of smaller declines in imports, and there wasn’t much commodity-price decline in January to have made much of an impact. Just off the top of my head I would argue that commodity-price declines should account for less than one-third (much less) of the decline in imports.
DB, I often hear about the refusal of the US to sell to China, but I think this is vastly overstated. The share of prohibited items is much too small to make much of a difference. It is not as if China would normally plan to import $200-300 billion annually of weapons-grade technology. As for China’s comparative advantage, we judge comparative advantage on a price basis, so that the value of the exchange rate in part determines comparative advantage.
Leon, that is approximately true. The PBoC creates money or central bank bills (a close substitute) whenever it buys dollars, so technically the PBoC creates money equal to the trade surplus plus or minus net capital flows.
Frank, it depends on many factors, including what kind of protectionism and its extent. The best I can do is measure the extent of Chinese overcapacity (more than 10% of China’s GDP) and point out the magnitude of the adjustment.
James, thanks for your kind words. The biggest Chinese holder by far of US treasuries is the PBoC, and Brad Setser’s excellent blog probably does the best work on the composition of the PBoC’s portfolio composition. Other entities also hold US dollar investments at least part of which may be in the form of USG bonds.
WDHalgren, like with the depreciation of the dollar versus other currencies, it is not obvious to me that the dollar is inflating against the commodities you mention. Certainly in recent months their prices have declined, not increased, and looking to the near future there seems to be more concern about deflation than inflation. Aside from the fact that they can protect themselves from inflation by buying TIPS or short-term paper, if we did see deflation, I wonder if foreign dollar holders would see any moral obligation to return the currency windfall to the US government.
Menomnon, the numbers are widely available and much dicussed. I have in front of me an article from a February 2 article in Le Monde that cites the Commission Europeenne for debt statistics. Unfortunately I ripped the article out from the paper when I was in France, and so I cannot give you a link.
There is an interesting data burried into the news:
the truck and bus sales droped by 36.5% in china year over year,compared to 2008 jan.
So,the investment is dead.
http://bomlat.blogspot.com/2009/02/china-economy-updatedeep-impact.html
Hi, i found this article on Bloomberg.
I just wonder if anybody here also see these signs of recovery??? Any thoughts?
China’s Economy Shows Signs of Recovery on Stimulus
http://www.bloomberg.com/apps/news?pid=20601087&sid=ai0cU_72bPpU&refer=home
Hi Michael,
I have a problem trying to understand why the stock markets in China have been going up since the end of the Spring Festvial Hoildays despite those horrendous trade numbers and other uncertainties e.g. jobs loss, plummeting homes sales etc. The Shanghai Index has gained 15.56% since February 2, 2009. I would appreciate if you could comment on this.
BTW, your blog is very interesting and of very high standard. You have done a great job!!
What are the numbers on China’s inventories? Won’t inventories, whether increasing or declining, accurately reflect both how deep and how long China’s economic downturn is going to be?
Michael, what exactly do you mean by the “emerging artist investment class”? Thanks. I’m a new subscriber to your site and read about you in the current The Atantic mag.
Prof. Michael Pettis – Thx for a fantastic blog!
1. To the extent that imports are necessary inputs to China’s production process then falling imports may be a leading indicator of even greater declines in production and exports.
2. Falling imports may also be an indicator of much greater unemployment than is being reported–unemployed people don’t buy imports.
3. If unemployment is under-reported or accelerates it becomes doubtful that domestic demand can be stimulated and domestic demand may actually fall.
China’s exports seem destined to fall and domestic demand will be difficult to stimulate. China’s economy appears to be a bubble about to pop.
[...] More terrible trade numbers from China [...]
Prof Pettis,
new money = trade surplus +/- capital inflow;
hence, FX reserve = new money;
As RRR decreases, if record surpluses continues, do you think inflation will kick in a lot faster than pple anticipate for China?
Do you think stock market and property will rise as form of inflation in the near term?
Excellent points professor Pettis, and I would appreciate too a link to your presentation (if that is not too much to ask).
I have a few questions regarding the recent numbers:
1) Do you thing that for the decline of 17% in exports compared to 43% in imports, there is any other explanation that the lag to and 40% there is any other explanation than the one presented by Brad Setser in :
http://blogs.cfr.org/setser/2009/02/11/it-is-hard-to-put-lipstick-on-a-pig-or-even-an-ox/
I’m talking about this chart:
http://blogs.cfr.org/setser/files/2009/02/asian-trade-end-08-1.png
2)About the part of dollar depreciation, wasn’t Mr Luo talking about in fact about dollar inflation ?
3)Are you familiar with Finster Dollar Index?
http://users.zoominternet.net/~fwuthering/FFF/FinsterDollarIndex
Mijou, I read the article and think it should have been called “Projections of China’s economy show signs of recovery”. The article was really about how some projections had turned, without giving any evidence that anything real had turned.
Dr. Loo, the stock market in China is illiquid and has never traded on fundamentals, for reasons which have to do, in my opinion, mainly with the types of tools available to the investor base, and this gives it a pretty poor track record of predicting growth. It is a very speculative market about which the most important question investors ask is “What will the government do tomorrow?” If you can answer correctly you make money. If not, no. In China it is clear that the government will pull out all stops to get the economy going, and that regenerating confidence is considered a key issue. Since the stock market is considered a major barometer of confidence, and perhaps even a ‘creator’ of confidence or the lack of it, many investors feel that the government will effectively provide a backstop if it crashes. Along with the fact that the press is mainly reporting good news, not bad, I suspect that these reasons have driven its growth. By the way there is an interesting article in today’s SCMP>
Duoist, yes, I think so. The inventory story has been a bit muddled with some rising quickly and others falling. I am not clever enough to interpret but I rely on good research analysts to figure it out. One thing I would suggest is that the much steeper fall in imports than in exports will have kept inventories from rising, so one question is whether a continued discrepancy in import and export contraction is sustainable.
Charles, I was just joking about the concept of buying art as an investment akin to Brazilian stocks or Ghanaian bonds. I am not convinced that this is either the best way to buy art or even the best way to make money on buying art once the liquidity cycle that drove the investment art bubble ends. I keep an eye on the art market, by the way, because in every 20th century bubble there has been a major art boom, which crashed ferociously when the credit bubble crashed.
Hepkat, thanks. What happens to employment is one of the key things to watch in China.
Leon, the risk of inflation, not just in China but in the world, is one of the most intriguing questions for me. When money supply growth exceeds the growth of the money needs of the economy, eventually there has to be an adjustment. As I see it either the nominal economy rises quickly to meet the money supply (inflation) or the money supply collapses in a form of Fischer’s debt deflation. I think there is a greater risk now of the latter, but the final outcome is, I think, extremely sensitive to policy responses. I spoke at a Goldman conference Tuesday in which their economist made a very cogent argument as to why inflation is impossible (excess capacity that will be hard to get rid of for a long time), but the truth is I don’t know enough yet to say. For me the jury is still out.
Is data available that would indicate the mix between price and volume in the decline of January imports? Given the decline is measured year-on-year vs January, 2008, when the prices of commodities were signficantly higher and companies in China were adding to their inventories because of concerns about further prices increases and, in some cases, even about availability, the collapse of prices in mid-2008 would likely have made a material difference in import prices in January 2009 vs 2008.
Since the fundamental problem for China’s exports is disappearing demand in Europe and the US, is it not highly probable that the trade surplus will decline rapidly during 2009 as the government’s fiscal stimulus takes hold and the demand for imports for domestic demand in China starts to rise?
PB
I think that if the Chinese tradesurpluss will disapear due to the increasing import we will have a big relief.
But now the main target of the Comunist party leaders is to push back the low-wage slaves to the export industry…
PB- the trade surplus should shrink, but analysts have said it should shrink for over a year now. I distinctly remember a conference call with a well-known wall street economist a little under a year ago who swore that “this is the top” for the trade surplus. Yet the surplus has continued to rise, mainly because of falling Chinese demand. One can imagine a scenario where exports fall but imports continue to fall even more due to collapsing Chinese demand (partially a consequence of previous govt policy).
Thomas- I don’t agree that part of the fall of the trade surplus is because of “falling commodity prices.” This may be what mechanically is going on, but the price of commodities is not some number plucked out of the sky, it is influenced by world supply and demand. In some commodities, like iron ore, China is one of the world’s largest consumers. Ultimately the declining dollar volume of China’s imports is because of falling domestic demand.
Hi Michael,
Thank you for your comments regarding the recent surge of the stock markets in China. I was listening to a ‘Money Talk” programe broadcast by The Hong Kong Radio this morning (Saturday February 14)and according to the commentators the recent surge is caused by the enormous amount of lending from banks in China last month. Part of the money is being used to speculate in the markets thus causing the recent surge. I am alarmed by what is going on. I have my doubt that this action is endorsed by policymakers and banks in Beijing. The irresponsible action of borrowers will put banks to undue exposure to NPL. I can’t imagine the repercussion of what is going on if the markets go south. Stimulus money is not intented to be used for speculations. Never!! This is not the intention of policymakers in Beijing.
Michael,
I would love to know you opinion on Peter Morici’s contentions that;
“In 2010, as stimulus spending in the United States and elsewhere lifts economic activity the trade deficit will increase again, oil prices will surge and China’s exports will rise above 2008 levels”
“every dollar that U.S. imports exceed exports negates at least one dollar of federal stimulus spending. Overall the trade deficit overwhelms the positive effects of the Obama stimulus package on demand for U.S. goods and services, GDP and employment. Along with the banking crisis, the trade deficit is a primary cause of the U.S. recession.”
“To sustain an undervalued currency in 2008, China purchased approximately $600 billion in U.S. and other foreign securities, creating a 40 percent subsidy on its exports of goods and services”
On the last point, after the recent 20% appreciation, could the Yuan still be undervalued by 40%?
US mutual funds cannot invest in short positions. They must invest in long positions. But where in the world can they place their funds? Like a flock of birds fund managers seem to have decided a safe place to land is in China. As long as more and more mutual fund managers keep putting more and more funds into China equities the equity markets defy gravity and don’t fall. Lol! It’s a repeat of mutual funds flocking into commodity equities a year ago. Where in China is the good news? China’s exports are falling and, due to rising unemployment, domestic demand will be difficult to stimulate. How long until the mutual funds fly away and the flock follows?
Loo: I have a problem trying to understand why the stock markets in China have been going up since the end of the Spring Festvial Hoildays despite those horrendous trade numbers and other uncertainties e.g. jobs loss, plummeting homes sales etc.
The Shanghai stock market is driven by investor confidence and government intervention more than anything else. Also, even if you look at fundamentals, many of the stocks on the Shanghai stock market are SOE’s that are going to benefit from any stimulus package. Finally, volatility on all of the world stock markets have been moving up and down wildly and so 15% rises and falls for “absolutely no reason at all” have been common on all of the markets.
Hepkat: China’s exports seem destined to fall and domestic demand will be difficult to stimulate. China’s economy appears to be a bubble about to pop.
I rather disagree with this. There is enough savings in the system that domestic demand will be quite easy to stimulate. Also the excess capacity in the system seem to be areas that would be easy to find demand for. Lots of idle steel plants? Built railroads? Teachers?
If you have idle factories and cash, you need to step back and ask, what would be the most useful thing for China to spend money on and just do it.
Also, I strongly disagree with the notion that Chinese capital was wildly misallocated in the boom years, and I think that over the next year or so, the ability of China to recover from the crash will illustrate how well China allocated capital over the boom years.
Much of the capital was used to built infrastructure plants that produces raw materials that could relatively rapidly switched over to satisify new demand. Even the areas where there were “stupid things happening” had some positive effects. There was massive overbuilding of luxury apartments, but even in this area, what happened was that a lot of this money went to construction workers that deposited it into banks providing a capital reserve.
Kahler: Now it could be that the savings are in the corporate sector, but it would seem the last thing we need is more corporate investment as production capacity is already in a glut.
Since the corporations are mostly state owned, the government can deal with the problem of overinvestment by having the SOE’s issue dividends and then using those dividends to either pay for public goods, or else just reducing taxes.
There were plans to do just that last year before things fell apart.
One thing that this economic crisis has called into question is the ideology of montetarism. This ideology says that the only role of government is to adjust macroeconomic variables such as interest rates, exchange rates, and contract law, and not attempt the regulate in detail the economy. The belief was that if the government limits itself to high level variables then the private sector would allocate resources in a maximially efficient manner.
I’d argue that monetarism turns out to be both wrong and useless. It’s wrong because the US that followed pretty closely to monetarism has a banking crisis, and it is useless because monetarists are not providing any policy options that are politically viable. “Let everything fall apart and start from scratch” just will not happen, because any government that tries this will just get kicked out. If it turns out that despite people’s best efforts, things really do fall apart (and they may might) we will have learned a lesson, but do nothing is not a viable policy right now.
We’ll know more as time passes, but one thing that seems to be quite obvious right now is that Chinese banks are just in better shape than their American counterparts. Even if you were to argue that this is due to accounting tricks, it matters because even with accounting tricks, American banks still have problems.
This matters a lot because having a banking crisis makes it much harder to deal with the other problems. It becomes more difficult to deal with a fire if the fire trucks are all on fire and you can’t find water anywhere.
In the case of the Chinese economy, lots of things are burning, but the fire trucks are intact and there is a lot of water (i.e. liquid savings) all over the place.
sharpe_mind: the trade surplus should shrink, but analysts have said it should shrink for over a year now.
I wouldn’t trust analysts to be anything other than an indicator of current market beliefs. The trouble with analysts is that I’ve never heard an analyst say “I don’t know” which is the truth, and I’ve never heard analysts give opinions that are too far away from market consensus. If you look at how analysts get paid, fired, and hired, then it becomes obvious that anything that they say should be taken with a grain of salt, and it’s only useful if you look at their logic than at their final result.
It’s also interesting that “analyst” happens to be the lowest rank in an investment bank.
sharpe_mind: This may be what mechanically is going on, but the price of commodities is not some number plucked out of the sky, it is influenced by world supply and demand. In some commodities, like iron ore, China is one of the world’s largest consumers.
Most commodities have highly inelastic supply curves which means that even small drops in demand can cause huge drops in prices, and vice versa. The reason commodities have highly inelastic supply curves is that supply requires lots of capital investment, and no one is willing to invest in more oil refineries or mines if the price keeps crashing every other year.
When the price of oil peaked last year, none of the oil companies were interested in increasing capacity because they have gotten burned before. This meant whatever capacity increases came from people that were “new and stupid” like biofuels, and even they have learned a painful lesson.
sharpe_mind: Ultimately the declining dollar volume of China’s imports is because of falling domestic demand.
It may not be. Something that would be interesting is to look at the numbers and see where the drop comes from.
“domestic demand will be quite easy to stimulate”
one of friend visited China recently, a friend of mine went to China and found an item costing $100, but in USA costing $30. and her friend is making only $300-400 a month in China.
you want China domestic demand or China domestic transaction rate to go up? try lower the price of good and increase the wage or salary which is non-existence in China.
I have a feeling about that China (and the world economy) pass the point of no return.
Chine only one possibility to survive was to start buying shares and corporate bonds / mortage backed securityes .
Or,as an equal,to start buyin US and european goods,and to run a trade defitic (burn down the FX reserves)
But due to political reasons it made a decision to kill the customers of the chinese factories,and with it to kill the chinese economy.
OF course it was the same in japan and in many other Asian country…
“As usual, the local press tried to put the best face possible on the decline by comparing numbers on a day-count basis (“exports actually rose 6.8 percent”).”
This is hardly a fair characterization of Chinese press, particularly when it comes to economic and financial reporting and discussions. There have broad spectrum of opinions expressed in Chinese press in the area of economy for at least the two decades now.
“I know I have written about this many times, but I want to say again what that means for the global imbalance. The world’s consumers are experiencing a sharp contraction in demand. That contraction has to be “shared out” among all of the world’s producers.”
First of all, this “global imbalance” theory may be the favorite theory by some western analysts, to the point of them attributing the financial crisis to the so-called global imbalance or “saving glut.” It is far from a global consensus. China certainly does not subscribe to such a theory nor do the majority of the countries.
Secondly, this “fair-share” of pains or the so-called adjustment among countries is neither convincing nor easy to implement. How do you allocate the economic pains? Based on what? Your proposal that the “rest of the world” give China one year’s time to correct the “imbalance” is just – I don’t know what to say.
Every country is suffering from the global economic slump right now, but it doesn’t mean all countries should experience the same drop in export percentage-wise. The structure of import and export sectors are different for each country; the competitiveness of the export products is different. In the US, almost all retailers have seen significant sales decreases, but WalMart still manages a small increase.
“Although China has tremendous domestic problems and is very worried about the employment impact of the global slowdown, my fear is that those considerations are likely to have little value for other countries also suffering from awful employment prospects. For comparison, in December Taiwan’s exports fell 42%, South Korea’s by 17%, and Japan’s by 35%, compared to. China’s 2.8%”
My fear is that China won’t be able to solve the world’s unemployment problem. It could barely deal with its own problems. As Chinese leaders repeatedly said, the biggest contribution that China can make to the world economy is to maintain fast and steady growth of its own economy. And I don’t see anything wrong with that.
And the economies you mentioned above will be greatly benefited from China’s economic growth. The prices of commodities and BSI have recovered somewhat largely in anticipation of China’s success in stimulating its economy.
“Why indeed? It never makes sense for the leading trade surplus country to resort to protectionism if there is any chance of a global backlash, as the US discovered to its chagrin in 1930. It may, however, make a lot more sense for countries with trade deficits to turn to protection, and there is now overwhelming evidence that this is exactly what they are doing or thinking about doing.”
Why does it make a lot of sense? Resorting to protectionism is a lose-lose proposition. Everyone with some basic economics background should know it. If the sole justification for protectionism is that “you will suffer more proportionally,” then I don’t see any sense at all.
The best strategy out of this global recession is to take care of your own problem in each country and for major economies to take large fiscal actions, as suggested by Tim Geithner at the G7 finance ministers meeting.
And so far what China has done is exemplary (http://www.washingtonpost.com/wp-dyn/content/article/2009/02/14/AR2009021401382.html?sub=AR):
“The Chinese stimulus is the gold standard in terms of the countries which matter,” said Nicholas R. Lardy, senior fellow at the Peterson Institute for International Economics. “She ought to give them credit for that. . . . The Chinese are increasingly confident. I think the government feels they have a good program in effect and it will help economic growth.”
Last November, when China’s 4 trn yuan stimulus package was first announced, you used the slight dips in Shanghai Stock Exchange index in the following days as indication of the market’s lack of confidence in the measures. I’m wondering what’s your take on the over 20% increase in the same index since late last year, the world’s best performing market this year, just for the sake of consistency in arguments.
“The thing to remember is that for the rest of the world it doesn’t really matter what explanation Chinese policymakers give for this high and rising trade surplus.”
The thing to remember is that we should not characterize this as China vs. the rest of the world (which reminds people of the often-cited phrase “the international community” by Tony Blair when the invasion of Iraq was justified only several years ago). The way you put it, it’s as if China is the source of all kinds of economic evils in the world.
Most analysts viewed China’s huge drop in export and import as the loss of demand globally and domestically, and the substantial decreases in commodity and old prices. It’s an interesting perspective to spin the numbers as China’s increased export of excess capacity.
“And the problem is certainly not helped by actions like last week’s posting, on the website of the research institute associated with China’s Ministry of Finance, of a report arguing that China’s central bank should “actively guide” the exchange rate and devalue the RMB to about 6.93 against the dollar. The purpose of depreciating, the report said, was to help maintain economic growth and bolster employment.
Wow. It is as if they have absolutely no understanding of how dangerous the global climate is. This is very scary.”
Just showed you the diversity of opinions in China when it comes to economic matters.
And the Chinese government has been very responsible when it comes to exchange rate. In the last six months, all the currencies in the world have depreciated against US dollar except Japanese yen and Chinese yuan.
Why should anyone prevents the discussion of the exchange rate policy? I completely fail to see why it’s scary to even discuss the matter.
“It is good that Mr. Luo is helping to dissipate the widespread but profoundly silly worry about whether or not China will choose to stop funding the US trade deficit. It can’t. ”
Again, Mr. Luo was speaking his opinion, perfectly ok. Just showed you there are all kinds of opinions in China in the area. If anyone can read Chinese, he or she will have no difficulties in finding all kinds of debates and discussions in economic polices in China.
“For some reason whenever I point this out there is always someone who accuses me of being “anti-China” (and weirdly enough the accuser is not always Chinese), so let me stress that I am not evaluating, I am only counting, and it doesn’t matter whether or not I point this out.”
Let me be perfectly honest with you. I started reading your blog since the financial crisis started last year. I have since developed a very strong impression that you’re very biased. It’s not so much your subscribe to a misleading and superficial theory (global imbalance), it’s more about your flawed arguments and selective facts. For example, you didn’t give China’s stimulus package a fair and complete characterization (it’s not mainly about export rebates and credit to manufacturers by the way); your judgment of China’s recent huge credit expansion is based on a few rumors or anecdotes from your students; your threat of trade war against China (that US’s GDP in the 30′s in six times of China’s today relative to the world GDP and therefore China would suffer enormously) is way too simplistic and hardly convincing to say the least. And just because “global imbalance” is your favorite theory and Chinese government has put China’s interest first does not make them “provincial.”
There is nothing wrong to be “anti-China.” It’s just that as an academic I would expect more fair and objective analysis that are based on facts.
Greg, did you actually read anything Professor Pettis said before responding? It would have helped. For example you say: Your proposal that the “rest of the world” give China one year’s time to correct the “imbalance” is just – I don’t know what to say.
What? my reading (and re-reading) is that he said almost the exact opposite. China cannot possibly adjust in one year and so the rest of the world must work with China over several years to achieve a balance.
This is probably what he meant when he said that anyone who disagrees with the official position is automatically labeled anti-China. Pathetic.
Greg: As Chinese leaders repeatedly said, the biggest contribution that China can make to the world economy is to maintain fast and steady growth of its own economy.
Well if that’s what they said, it must be true of course. Chinese leaders would never dream of saying anything that isn’t true.
But what if policies to encourage Chinese growth cause slower growth in other countries, for example by increasing the trade surplus? Should the rest of the world appreciate the Chinese leadership as uncritically as the Chinese people must?
Greg – I appreciate your comments and insights as it is important to have balance in these discussions. I agree that Michael’s comments tend to be more critical then balanced then one might expect, but they are interesting and insightful and therefore, helpful, in developing a more informed understanding to the issues
XuX – the Chinese leaders have not said they intend to pursue policies that would slow growth in other countries and have reccognised for some time the need to build a more balanced economy but clearly that is not something that can be done overnight. Additionally, if you really believe that people in China accept leaders comments uncritically, then you are missing a wonderful opportunity to learn from the wide range of opinions expressed and the vigourous debates that occur about the economy, business and reform. The rate of change over the past 10 years has been quite remarkable in many areas while clearly recognizing that there are also many reforms still needed.
FYI, although I very, very strongly disagree with Michael Pettis and Brad Setser on their views of global imbalance, I’m very careful not to try to label their views as “anti-China” or mine as “pro-China” since the purpose of this discussion is to figure out what the optimal economic policy for China is.
Personally, I think that policies based on the notion of global balance and overcapacity would be quite disastrous for China, but by labelling the policy “anti-China” is a bad thing thing it would 1) turn the discussion into one of motives and 2) assume the conclusion. It may well be that the policies that I advocate are bad ones, in which case I’d be the one that is “anti-China.”
One of the good things about Chinese economics is that when it comes it the important issues there is not very much of an “official position.”
Michael & Twofish: The heat of the China stock markets is getting hotter each day and I am rather scary about it. It is reported by Cable TV in Hong Kong today (February 16) investors are surrendering their life insurance policies to cash into the markets. This is horrendous and policymakers have to do something to stop this stupidity. Buying a life insurance policy is different from buy the stock of a particular company. I don’t want to go into details here.
I am still maintaining what I have said previously i.e. “Beware The Ides of March”.
It would be interesting to know the overall mix of price and volume in the significant decline of January imports. For example, the prices of iron ore and crude oil declined 45% and 58% respectively, while volume was relatively, only down 11% and 8%. While still a major drop in volume, the decline should not be a surprise given the lack of demand globally but also probably means that domestic demand is down as well but not as much as indicated by the overall drop in imports. It still seems reasonable to expect the trade deficit to narrow significantly as the government stimulus takes effect well before any possible recovery in exports. Nouriel Roubini recently referred to the economic stimulus in China as the “gold standard” — let’s hope he is right.
Greg – I appreciate your comments and insights as it is important to have balance in these discussions. I also agree that Michael’s comments tend to be more critical and less balanced then one might expect, but they are interesting and insightful and therefore, helpful, in developing a more informed understanding of the issues
The Baltic Dry Index has started to pull back since February 11. This is not a good sign.
Any foreigner who criticizes Chinese policies and/or Chinese leaders are “Anti-China”. It’s a favorite package deal developed by the CCP.
I don’t think anyone knows what china should do or not do!