China-s march trade deficit-What does it mean?
Patrick Chovanec on Seekingalpha asks the basic question on the direction Chinese policy makers will take regarding the currency question, but the underlying question remains unanswered…
What tipped this month’s figure from a marginal surplus to a deficit was a surge in imports, up 66% from last year. But it’s going to be important to drill down and take a closer look at exactly what’s making up those imports. If they are finished consumer goods, then it could be a sign of rising consumption in China and a shift towards more balanced trade. But if they consist mainly of raw materials, as many economists suspect, it could indicate that Chinese manufacturers are gearing up for a surge in exports later this year (a phenomenon compounded by rising commodity prices for inputs like iron ore and crude oil, in part due to rising Chinese demand).
The key question is, is this a trend or a cycle? Is it a trend towards higher domestic consumption and more balanced trade, or part of a production cycle that leads right back to where we started? I’m not convinced yet this is a trend.
That’s probably why even Chen Deming, China’s Minister of Commerce (who has been very vocal these past few weeks about the damage a stronger RMB could do to exporters) is being careful not to overplay the news, describing the March trade deficit as “a blip on the radar screen” that may soon be reversed..
The key thing to watch, regarding China’s willingness to strengthen the RMB, is the recovery of China’s exports. They’re up just over 20% from last year, but that’s just barely back to the level they were at before the global financial crisis struck.
I’m very far from being an expert, but I do check the English Language Chinese Press ( http://www.chinadaily.com.cn/ ) from time to time. They have been predicting for several months that China would be running a trade deficit by Summer. I’m not smart enough to know if that is a natural consequence of economics or if the Chinese are somehow manipulating the number. If it is an honest number, I don’t know what exactly it means. I’m not sure that anyone does.
I do know that many people are skeptical of official economic numbers from China, and I think they are somewhat right in their skepticism. Some of the numbers may be manipulated, and others may just be wrong.
But assuming that the trade deficit number isn’t too far from reality, how can one argue that the currency of a country whose imports and exports are more or less in balance is over^h^h^h^h undervalued? Is there some other criterion for over/under valuation?
I think this is the overall Chinese trade balance. What matters to the US is the bi-lateral trade deficit as far as RMB/USD discussions go. The fact that China is in balance overall means they used their surplus dollars to buy chips from Japan, and iron ore, oil, copper, etc… wherever those things come from. This means no surplus dollars left to buy US treasuries.
i.e. the problem is not that the RMB is undervalued. It is that the US Dollar is overvalued. If that is the case, perhaps the questions become:
1. How does China unpeg it’s currency from the dollar while protecting itself from speculative swings?
2. When is the US going to accept the fact that it’s trade problems are not (primarily) caused by foreign agencies and need to be fixed in Washington and New York, not overseas?
“The trade surplus by foreign-funded companies stood at $16.78 billion during the January-March period while Chinese state-owned firms posted a trade deficit of $36.15 billion during the reporting period”
Is this true?
I don’t think you can say the dollar is much off the mark vs the major floating currencies. That makes China the odd man out, not the US. Plus China’s surplus to the Eurozone has passed up it’s surplus to the US in recent years (the Eurozone is more populous than the US , of course)
It’s hard for the Chinese to go to a floating currency, but easy to move the peg up. The way the rules work is Chinese companies must exchange all dollars from exports for RMB with a Chines bank. The PBoC states what the exchange rate is and prints up the RMB and hands it over for the bucks.
Competing against the third world is tough, once they get the hang of robber baron style capitalism. I don’t think we can win that one. But I’m more worried that we may find out we can’t compete with Japan or Germany either, outside of international banking, and that gets much too expensive.
Actually, the concept of national companies competing with other nations’ companies is probably outmoded.
What’s really going on is this Orgasmic Borg Mutual Assimilation between developed world multi-nationals and China. Both sides think they are winning.
Don’t know what to do about that either. It’s that “Giant ******* Sound”, again.
I contributed a small part to this thread. I thought you may enjoy this on the razor thin margins Chinese manufacturers may have at present. Considering the length of the supply chain, this could very well be true. http://www.nakedcapitalism.com/2010/04/more-evidence-of-lack-of-competitiveness-of-many-chinese-exporters.html#comment-103243 “More Evidence of a Lack of Competitiveness .. .” and this: http://www.nakedcapitalism.com/2010/03/on-chinas-currency-peg-and-potential-policy-actions.html and this”http://www.nakedcapitalism.com/2010/03/on-chinas-currency-peg-and-potential-policy-actions.html and this: http://www.nakedcapitalism.com/2010/03/chinas-exporters-hanging-by-a-thread.html
***Actually, the concept of national companies competing with other nations’ companies is probably outmoded. ***
There’s certainly some truth to that and will be more as time goes by. Toyota is a “Japanese” company because its headquarters are in Japan. But it has factories in the US. And anyone anywhere can buy a small share of the company. By 2030 or so, it may be pretty hard to figure out what country many multinationals “belong to”. But I don’t think it’s a major factor today.
Depends where you’ve been hanging out in the economy the last 30 years. I started in the manufacturing sector, then made a career change to the Information Age. I’ve been watching it happen the whole time and have been trying to dodge the bullet the whole time.
Manufacturing industries are very far along in the transformation, and it took a rev-val in the yen from 300 to 100 something to convince the Japs to put plants in the US. And everyone’s car parts come from China nowadays.
IBM used to stand for “I’ve been moved”, but now it stands for “I’ve been outsourced to Bangalore.”
Cedric – “Actually, the concept of national companies competing with other nations’ companies is probably outmoded. What’s really going on is this Orgasmic Borg Mutual Assimilation between developed world multi-nationals and China. Both sides think they are winning. Don’t know what to do about that either. It’s that “Giant ******* Sound”, again.”
A great way to put it. Well said. LOL.
Amen. You’re a welcome addition to Dan’s blog.
I’ve noted your comments at Econbrowser, previously at Brad Setser’s blog, and a few others. Once you were quoted in an article…about Econbrowser as I recall.
Good sense of humor. I can appreciate that.
Sorry, but a lot this Yuan wrangling is just about Iran. Washington is using the threat of tariffs to bring China into line with regards to Iran. Silly US economists are krill:blue whale in this game. China will revalue 5 % or something meaningless, tariff threat will go away (US MNC’s will be happy), and China will abstain from a UN resolution on Iran. Then ‘game’ on.
Gee, I didn’t know I was getting famous. But, I’ve come to believe that humor is what keeps us alive.
My first few days on AB have been fun and educational. Thanks for everyone’s inputs.
I’m about to head for a very early airplane flight and be on vacation for the next week and a half, so if I seem unusually quiet and reserved, that would be why.
I think this thread is pretty much dead by now, but I’d like to tack on some additional thoughts:
1. It’s pretty clear that there is no protocol for determining if a currency is under or over valued relative to another or by how much. It’s all guesswork.
2. Foreign Exchange probably is not a marketplace that is efficient with regard to cost of goods. Other factors like perceived stability of currencies and speculative forces probably cause exchange rates to be (considerably?) different than they would be if they were set only by cost of manufacture, shipping, and similar trade related factors.
3. Attempts to deal with trade balances between individual pairs of countries in isolation are probably going to produce dubious results. (But that won’t keep folks from trying).
4. If one were to look at all the trade relationships on the planet, one would probably find that there is no set of values for the currencies that makes them all “fair”.
5. The expectation that revaluing the renimbi upwards will solve US trade problems is probably nuts. A small upward revaluation will probably help. But for every good, once some other nation (which will rarely be the US) becomes the low cost provider, the US will simply swich providers and the Yuan exchange rate will be irrelevant to trade in that product. Beyond a certain point, this is a lose-lose game for the US and China.
***and it took a rev-val in the yen from 300 to 100 something to convince the Japs to put plants in the US.***
I think that the “Voluntary” limits on Japanese car exports to the US negotiated/imposed/extorted by the Reagan administration, may have had something to do with the Japanese building plants in the US. I believe that those limits are still in effect. (I believe, could be wrong, that the yen traded around 400 to the dollar in the early 1960s when the first — often very odd — Japanese imports started showing up on US roads).
I have quibbles with the Seeking Alpha analysis. There is lots more information available than is reflected in the article, which in places even seems to hint that the information isn’t available. For instance, when raising the question of the composition of imports. The piece cites a y/y change for imports, when the year-ago figure was badly depressed in the global trade melt-down, can give a false impression. Now, as it turns out, there was a large rise in imports in March of this year, a 37% gain, the largest 1-month swing since March of 2005, but it does seem that March is a month for big swings. That makes sense, given that imports are curtailed in advance of the holiday, then ramped back up as factories prepare to return to work. Chovanec says Chinese factories may be “gearing up for a surge in exports”. Um, yeah? They are coming off a weeklong holiday, with lots of workers returning late, so delaying full production (which helps account for the smaller rise in exports than imports). The trend in Chinese exports has been rising since this time last year, global demand is picking up and Chinese factories are returning to production from the holidays. There is going to be a rise in exports, barring catastrophe.
Chovanec opines on the trade data and then says that it’s important to look at what goes into those figures, without doing so. Import prices were up 17% y/y, accounting for a substantial part of the rise in imports, though far less than half. There was a surge in auto imports, and in commodities. These aren’t mysteries. Right there in the data.
Chovanec seems to be reading Bloomberg headlines in attributing the Chinese deficit to the surge in imports. It is certainly the same conclusion reached by Bloomberg headline writers, but looks only at the latest month, mostly on a y/y basis. In fact, imports hit a record high, while exports are about 18% below their late 2008 high. Looking past just a single month’s data shows that it is both sides of the trade balance that led to a deficit in March, not just exports.