China: More Terrible Trade Numbers

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?

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About Michael Pettis 166 Articles

Affiliation: Peking University

Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business.

Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups.

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