More Terrible Trade Numbers from China

Wednesday 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?

Comments

[Phiota:]

“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?”

As an expat living in china for several years the above statement is not true since most if not all foreign made goods are taxed heavily and much more expensive then when purchase in the US and many other countries. As a example it costs about 2 times as much to purchase a Benz/BMW/Porsche in China then in the United States.

John

Feb 12 11:03 AM

[James Lewis:]

Quite a charged piece Michael...

I get the sense that China is actually trying to dispel the protectionsim behing the scenes. Everyone has been speculating recently about the huge raw material procurement sprees china has been on that pushed the Baltic Index up from its lows. But to me the reason why China has been on a buying spree is to dispel the anger from its ever growing trade surplus (especially knowing such an astonishing number was coming). China has already sent our friend Wen around the world promising large purchases from China. Of course leaving out France, to show the rest of the world if they say anything out of line, the Chinese money won't come their way. A very Chinese approach to doing business.

I also get the sense that a great deal of negotiations are going on behind the scene. Communications like for example with the USA through our friend Gordon Brown. This has led to the Timothy Geithner changing his official line on China manipulating its currency stating that they have not decided if they are or not now. And now we see My Luo in USA saying China will continue to buy treasuries.

What I question is whether China will actually try and meet the world half way, something it has yet to embrace.

With the huge trade surplus again this month and the obvious lending expansion. Evident by the introduction of a number of new consumer loan financial products at banks like ICBC. I now see the possibility of some asset appreciation in certain sectors. I am sure we will see some food inflation as well in the coming year.

From Inflation to Stagflation to Deflation back to Inflation in the space of one year. I think this tells very true of the imbalances present in the system internally in China .

Even more so if China is able to inflate its economy so easily (which we will now see) while the rest of the world falls deeper into deflation whatever it does. This really does illustrate the balance of payments problem.

China is able to pacify the anger now. But will it be able to do so, when the rest of the world sees China pull out of this delfationary phase so easily.

Feb 12 03:24 PM

[Ma-lin:]

Michael,

Although totally unschooled in economics, I am always enlightened by your well researched and and cogently argued commentaries on China's ecomony. However, I was somewhat shocked by the diatribe about emerging Asian artists in your final paragraph. Sure, there is a buble at the moment, which has inflated the prices of works by minor artists. But who is to say that some of the more original ones are not still undervalued compared with their Western counterparts? Zhang Xiaogang, for instance is still (I think) cheaper than a Damien Hirst. And what about Xu Bing (or don't you consider him emerging)? Do I detect a whiff of Euro-Americacentricity in your valuation of the merits of living Asian artists? Or are you a collector who is being priced out of the markets?

Feb 12 04:30 PM

[Firat Ünlü:]

Can't wait for next semester's lecture on contemporary Chinese Art just to see what's to it ;)

Good piece, however is it really unfair that China runs such a high surplus? I know that politically it will be considered unfair and thus a debate on this is only academical but still, what is 'unfair' about China selling more goods than it imports? Nobody's being forced to buy those products. Granted, it would be nice if China 'made some space' for other countries' exports but if it's being more competetive so be it.
How large is the surplus if you take out the surplus with the US? How large is it if you consider the drop in raw material prices? Most of China's surplus comes from trade with the US and the drastically lower import bill will, in large parts, be due to falling commodity prices. So it really isn't that bad is it?
As for treasuries, there have been several comments by the Chinese recently, none of them pulling in one direction, I'd rather have some figures as the Chinese sold some Treasuries most recently and are supposed to have made moves into gold.
Having said all that I want the Deutschmark back, to fall against the Dollar under these circumstances is just...

Feb 12 06:07 PM

[Firat Ünlü:]

Just to add a little thought, how much do the Chinese really care about their Treasury holdings? Given their surplus and ability to absorb any loss within a short timespan is it not worth an idea to assume that they're taking a calculated risk whereby they willingly acknowledge possible future losses (even in the region of thirty percent or more) in foreign reserves for preserving social stability by keeping the US consume machine afloat. Losing a huge amount could, of course, spark unrest...

If they make 300 billion a year what's to say they'll not take a deliberate loss of 200 billion? America's savings rate is going up so China's new engagement may even fall, but that all depends on figures...

Feb 12 06:20 PM

[Al-USA:]

Great article. Thanks for taking the time to write it. I was already leaning towards protectionism, but this "seals the deal". Nothing more needs to be said...

Feb 12 10:03 PM

[sundrenched:]

Protectionism is a step too far, but we need reciprocity. Countries that don't play ball should be excluded.

I also wish European leaders would stick together over China's game of intimidation over Tibet, even send a message that arms sales to Taiwan will be reopened if they don't back off.

The Chinese are too calculating and nationalistic for their own good.

Feb 13 02:45 AM

[Conan the B...:]

Mr. Pettis: All year to year comparisons are going to be skewed to the downside.

Activity prior to the Olympics VS activity during the slowdown should be considered.

Do have a link that can provide Monthly (apples to apples) changes?

Feb 13 07:55 AM

[phdinsuntan...:]

good work again Michael, you are on it. It is clear to me that because of the US/China fixed exchange rate, the Chinese economy is 20% less competitive than the Euro area in 2009. I know you trust in free markets, as we watch the credit bubble flooding china in next months and less dollars coming to China you probably agree with me that a free exchange rate and his consequence, a cheaper RMB may help the US consumers. What do you think? Exporters to China will not be very happy, of course, but that is how a global economy works...

Feb 13 09:48 AM

[Dalmasian:]

If I may offer my personal opinion, has it ever occured to America that there needs to be profound change in paradigm away from over-dependence on consumption (of mostly imported consumer goods) to manufacturing and producing them at home (in-country) to serve the needs and wants of the American consumers. Why donesn't America start pruducing the consumer electronics, PC computers, shoes, garments, toys, and what have you in-country instead of importing them from overseas suppliers. That way you hit two birds with one stone, you increase employment opportunities for Americans many times over while minimizing the outflow of US dollars to other countries. If Americans cannot produce these products domestically at competitive prices, then find out why and do something about it instead of crying and whining about other countries being "too protective" You cannot expect others to increase their production costs just to match yours so that you can be competitive. You lower your production costs instead and compete head-on with others in a level-playing field. If others impose high tariff and protectionist walls around their markets, then do the smae bilaterally to force these countries to back down in order to continue to have access to the American market. These are my 2 cents for the day.

Feb 13 10:12 AM

[seneca:]

This writer is a perfect example of someone who has gotten way, way ahead of himself. He is hardly 'anti-China' -- he is 'anti-intellectual'.


To paraphrase Tennyson, modern global economic dynamics is 'red, in tooth and claw'. Nations and economic units do whatever is necessary to survive and prosper. The fact that the Anglo-American economic sector is falling -- and alternative systems prospering --- well, these are facts not subject to puerile moralizing.

Feb 13 10:38 AM

[traxcavator:]

I suspect that China is and has been "cooking the books". The real question is by how much, and whether the how much? has changed recently.
It would seem likely one could put together a more accurate picture using data from trade partners and other external sources. We know exports are down from US and EU numbers. We also know that imports are way down from China's import sources.
Given that energy costs have dropped dramatically, the question is whether that is enough to allow positive internal growth (as is claimed), or whether the domestic economy is actually shrinking. The proportions of various inputs and their changes over the recent past probably tell a story. Throw in a dash of exchange rate variations, and it's beyond my abilities to come up with any real answer.
Is China really in a domestic recession, or are the official figures showing slower internal growth accurate? There has to be an answer if one turns over enough rocks.

Feb 13 10:42 AM

[Jack Walker:]

Michael,

What more could China do to stimulate domestic demand? Why don’t you offer a list of suggestions for discussion?

Jack

Feb 13 04:13 PM

[omooc:]

I share Ma-lin's sentiment fully. I also share senaca's. As I read the author's profile, I failed to see his educational background. Wall Street experience does not qualify one, at least in my view, to be a faculty member at a leading Chinese university. In fact, his anti-China attitude is reason enough to ask for his resignation. traxcavator talks about "cooking the books," which is a favorite argument among westerners not knowing how to make sense of data out of China. This evening (2/13/09), in Fast Money, a CNBC program, one panelist raised a similar question. She did not know how to make use of a favorable market trend in copper (another panelist suggested that China was the likely buyer of copper and other building materials). Euro-centric commentators are at their wits' end -- they do not want to see China to recover ahead of USA, but underlying data do not come to their defense.

Feb 13 09:07 PM

[J.D:]

Part of the problem is that China already has a strong "buy China" policy. Unless your foreign product is a non-agricultural commodity, it's not really welcome in the Chinese market place.

Nice catch on the Ministry of Finance research institute posting. Funny that a currency manipulator would be so careless.

Feb 14 06:01 AM

[Conan the B...:]

Seneca/omooc: What Chinese buying of Copper?

The copper held in Inventory both in London and New York has gone up another 20,000 tons since the one day decline of 325 tons.

If the Chinese are buying, they are doing so slowly enough not to influence Inventory unduly.

Meanwhile, I enjoy contrary opinions by all but neither of you has been inclined to present your own Credentials. Nor do you present any commentary on the Article with facts substanciating your Nonexistent views.

Author Bashing is easy, prove the Author is wrong.

IMHO

Feb 15 04:16 AM

[User 80619:]

Pettis question regarding against which currency would the dollar depreciate made me think. I guess a possible answer could be: against itself and gold, in view of the inflationary effect of the stimulus package.

Feb 16 09:33 AM

[Kunst:]

Pedantic fool!


On Feb 13 09:39 PM seneca wrote:

> This Pettis is without a doubt a complete imposter and certainly
> would not have any standing to teach at my universities (Princeton
> and Harvard). The Chinese should be very, very careful about inviting
> unqualified Western 'experts' to advise or 'teach' them. I hope
> those in a position to comment on Pettis's writings are in a position
> to warn the Chinese.
>
>
> On Feb 13 09:07 PM omooc wrote:

Feb 16 05:04 PM

[traxcavator:]

Respected Omooc and Seneca,
Those of us in the West can only see China through a tarnished mirror. Although we seek wisdom, we are often deceived by shadows. Since hard numbers are difficult to find, and interpreting those numbers can be even more difficult, we must do our best with what is available to us.
If you can tell us how much of the 49% reduction in China imports is energy/oil, and how much is other goods, it would increase our poor understanding. Obviously if all of China's imports are energy, and those imports have shrunk by 50% (in dollars) in the past year, China is importing more energy now than a year ago. However, if the imports are goods whose values haven't changed significantly in the past year, then China has less to work with, and the conclusion is that domestic economic activity is likely shrinking. The corrolary to the latter is that China is in the same recession as the rest of the world.
Please enlighten us with facts. Attacks on the reviled Pettis cannot increase our wisdom.
Traxcavator (either a bulldozer or a seeker of truth)

Feb 17 08:52 AM