I apologize for taking so long to write but for the past rwo weeks (and the next five days) I have been traveling for conferences and meetings. I spent last week in Buenos Aires at the 75th Anniversary Conference of the Banco Central de la Republica Argentina, where I gave a presentation on China and the global imbalances. Four days ago I spoke at an event in Amsterdam, while in the past three days in Brussels I spoke at an event organized by the Carnegie Endowment and had meetings with a number of EU officials. Today I am off to London for three days of investor meetings.
In all of my meetings I think people were pretty surprised to hear about my misgivings over Chinese growth and the banking system, and shocked to hear that there is a worried and sometimes acrimonious debate taking place in China among policymakers and their advisers about the urgency of a (perhaps radical) adjustment in the growth model. It seems to me that foreign reports about China mainly fall either into the easily-dismissible China-is-about-to-crash-and-burn camp or, more likely, into the everything-is-going-wonderfully-well camp. Most people I spoke to assumed that China had emerged from the crisis largely unscathed and was about to embark on a new growth surge that would pull the world behind it. There was a hopeful sense that for all the mess in Japan, Europe and the US, there might be a ray of economic light emanating from China.
My claim that China has some deep-rooted problems which will be especially difficult to resolve, especially in a world of sluggish demand growth, was, for many I think, a serious downer, especially in Argentina. I also discussed why I believed that deepening imbalances in the world, set off especially by the financial crisis in the trade-deficit countries of Europe, would make global trade tensions much worse and would make the adjustment for trade surplus countries like China, Germany and Japan all the more difficult. My European friends generally agreed, very glumly, with the logic of the argument, although for all the heroic efforts of the likes of Martin Wolf at the Financial Times a surprisingly large number of people had not made the connection.
But as if to make me look foolish, trade numbers for both China and the US were released Thursday suggesting unexpected improvements in both the American and Chinese trade imbalances. The US trade deficit in July narrowed sharply from June’s $49.8 billion to $42.8 billion. China’s August trade surplus also narrowed. Here is what an article in the Financial Times said:
China’s trade surplus narrowed last month, with imports growing much faster than expected though not enough to defuse political pressure on Beijing over the level of its currency. According to figures released on Friday, the trade surplus was $20.03bn in August, down from $28.7bn a month earlier and short of analysts forecasts. Exports grew 34.4 per cent in August over the year before while imports increased 35.2 per cent.
Will these better-than-expected numbers reduce the threat of serious trade conflict? Almost certainly not, in my opinion. The US monthly trade deficits bottomed out in early 2009 at a still-mighty $26 billion or so, if I remember well, and have risen very steadily since then. July’s $42.8 billion is perfectly in line with that rising trend and only looks small because of a very sharp and unexpected spike in June. More importantly, the improvement in the trade deficit wasn’t caused by a surge in exports, which only grew 1.8%, but rather by a decline in imports, which dropped 2.1%.
In spite of the decline in the overall US trade deficit and in the overall Chinese trade surplus, the trade deficit with China barely budged, dropping from $26.2 billion to $25.9 billion. This means that China’s “share” of the US deficit rose from 52.6% to 60.5%. We should never over-interpret bilateral trade numbers, which contrary to much otherwise informed opinion are largely useless in explaining trade imbalances, but there is no question that the bilateral balance with China is politically very sensitive. The latest numbers are not going to soothe the concerns of US policymakers who worry about the impact on US employment of trade and industrial policies in China and elsewhere.
Interestingly enough although the US trade deficit declined against most of its major trading partners, it actually rose against Europe, from $9.4 billion to $12.3 billion, or from 18.9% of the total to 28.7% This should not be a surprise, as I discuss in my May 19 entry. Everyone, even in Europe, is relying on increased exports to the US to resolve domestic unemployment problems, and the weakness in the euro seems to be having a big impact on European competitiveness. I have written before about Germany’s role in the global imbalances and suggested that Germany-bashing in Europe and the US would become an increasingly popular sport. The latest numbers aren’t going to make life any easier. Basically they mean that not only does the collapse in the deficits of trade-deficit Europe have to be fully absorbed outside of Europe (i.e. the US), but Germany will even benefit from weakness in the euro to expand its surplus even further.
But there’s more. Friday’s Wall Street Journal had an article on Japanese anger at Chinese purchases of yen which, according to Japanese government data released Wednesday, showed that China’s yen purchases this year equal $27 billion, more than six times China’s combined yen buying in the previous five years.
Tokyo turned up the heat on Beijing for contributing to a strong yen, which is threatening Japan’s economic recovery and adding to tensions between the two countries. As the yen hovered near a 15-year high against the U.S. dollar Thursday, Japanese Finance Minister Yoshihiko Noda called for talks with China over its recent yen-buying spree, which has helped drive the Japanese currency higher, making Japanese goods less competitive with China’s.
“I don’t know the true intention” of China regarding its growing appetite for yen-denominated bonds, Mr. Noda said Thursday before the Japanese parliament’s upper house. “We are paying close attention,” Mr. Noda said. Mr. Noda reiterated a pledge to intervene in currency markets to stem the yen’s rise. Japan hasn’t entered currency markets since 2004, the last time it sold yen for dollars in order to weaken the yen. If Japan does intervene, it would add another complication to the China-Japan relationship.
Everyone is playing the same game — trying to force the brunt of the adjustment abroad — and here we have China and Japan squabbling over Chinese attempts to recycle its trade surplus into Japan rather than into the US or Europe. Japan is having none of it, although my older readers will remember wryly that twenty years ago Japanese officials dismissed as bizarre and dishonest American arguments that currency intervention of this sort justified angry responses. Times change, of course, and I guess you have to keep up with the latest trends.
Since I am traveling I haven’t been able to look closely at the Chinese trade numbers, but I did notice another article in the Financial Times. It pointed out that:
China, the world’s largest consumer of commodities, including copper and iron ore, registered strong growth in crude oil and copper imports in August, allaying fears of a slowdown in the country’s demand for materials. The preliminary numbers, published on Friday by China’s customs bureau, are a closely watched barometer of demand.
Imports of crude oil increased 13.3 per cent in August from the year prior to 20.9m tonnes – more than expected after figures showing weak oil import demand in July. Imports of copper jumped 16.7 per cent from a year earlier, continuing strong growth from the previous month thanks to demand from China’s expanding power grid.
The increased importing of commodities may be for real domestic use, but if it is for commodity stockpiling (including, I might add, stockpiling in the form of “use” in empty apartments and offices purchased for speculative purposes), it really represents investment, or anticipated consumption, more than current consumption, and so should be removed from the trade numbers to give clearer picture of the real trade balance.
What does this all mean? I would argue that the trade imbalances are getting worse, but the rising US trade deficit is not being driven by another US consumption binge. No matter what US consumers might choose to do, the US trade deficit will continue rising as an automatic consequence of events and policies abroad, and as they do, the US fiscal deficit will probably need to rise even faster to minimize the employment impact. This will keep on going until the US retaliates. For me this is not a matter of if, but when.
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Hey Michael, I’ve followed your work closely over the past few years. Really great stuff.
A question I am trying to sort through: What impacts do China’s capital outflow restrictions have on the trade deficit? Do China’s FOREX purchases serve as a sort of pressure value to offset largely one-way capital flows? If so, how much of the imbalance would be relieved by more liberalization and more market-driven RMB investments in foreign assets? My vague hypothesis is that instead of wanting to protect exports, the larger concern may be capital flight (or decreased domestic investment). Any thoughts (past or present) that you have about this dynamic would be most appreciated.
Dear Michael,
I think that your interpretations about China’s “good trade numbers” are interesting and, in my opinion, quite reasonable and an integral part of China’s “trade surplus” strategy in order to ease the tension with the U.S., although I think it is or should be apparent to everyone why they are doing, what they are doing.
Unfortunately, your article ended, when I started to become most engaged in it. I am curious about your opinion, what options the U.S. have to retaliate? What instruments or measures, in your opinion, will they use to counterfeit China’s moves?
Your articles are very much appreciated!
Michael,
The US China Trade relationship is and will continue to be a major issue when discussing the US economy. Thanks for shining a new light on issues that we should be considering. The Crash and burn of the Chinese economy is a possibility and could have disastrous effect for us all. Thanks for your article.