Last month's trade surplus of $24.4 billion was the second highest ever recorded, after June's $26.9 billion. It was 67% higher than last July's surplus. Exports in July were $107.7 billion while imports were $83.4 billion. That brings the trade surplus for 2007 YTD to $136.8 billion.
For the record China recorded a $23.8 billion surplus in October 2006, a $23.7 billion in February 2007, and, to round out the top five, $22.4 billion in May 2007.
In theory July's surplus should have been a lot smaller. Part of the explanation for June's record-busting number was the reduction of export subsidies beginning July 1, which was supposed to have exporters scrambling to move July and August exports to June so as to beat the deadline. This should have left July numbers much lower.
But as I point out in an August 5 entry, I have always been very skeptical of asset-side or fundamental explanations of the trade surplus. I continue to believe that China is caught in a trap in which trade surpluses are both the cause and consequence of monetary expansion. Until something is done directly to change the terms of the trap, I believe China's trade supluses will continue to stay high, and will probably rise in the next few months as Christmas deliveries kick in.
What can get China out of the trap? Probably only three things. One, China can engineer a sudden and unexpected maxi-revaluation of at least 10-15% (as I explain in the June issue of Far Eastern Economic Review). This would not have as big an impact on exports as the financial authorities fear, but it might boost imports and would almost certainly reverse or at least slow down hot money inflows. I should mention, however, that the CEO of one major ($13 billion) New-York-based hedge fund told me two weeks ago that 10-15% was too little, and would merely trigger an immediate speculative inflow as people bet that the PBoC would be forced to revalue again. Perhaps he's right, in which case the revaluation would probably have to be in the 15-20% range, but I suspect that he might not be.
Two, foreigners can choose significantly to reduce their imports, either through protectionist legislation or because of health and safety scares. Although this would be far more harmful to China's employment growth than a maxi-revaluation, it would still have the benefit of reducing out-of-control monetary expansion. Three, the great globalization party can come to an end and, with that, there would begin the slow grinding multi-year process of declining risk appetite and capital outflows to safe havens. This would solve once and for all China's (and everyone else's) problem of too much liquidity, but it wouldn't be a lot of fun.
I respect your expertise in financial analysis. At least, you have better hit ratio than most other financial experts in your predictions, especially about China.
On the other hand, I also think you have missed a critically important piece of China's import/export analysis - "global supply chain".
Take 2006 as an example: among the top 10 China exporters, only one - Huawei Technology (No. 5) - is from China. One - Dell Computer(No. 3) - from the US, the other 8 are all Taiwanese.
There are many forces shaping the (glacier) movement of the global supply chain, not only political/econmy, but also (coincidental) culture and technology factors.
Take electronics (30% of the Chinese export and rising) as an example. When consumers shift their preference for computers from desk top to lap, the supply chain is also forced to shift to China. Why ? Because previously, (almost) every country has some computer manafacturing facilities/capacity (mostly by political will/tarriff protection) where they sourced components from East Asia and did assembly locally, the formula breaks down on lap top - sourcing all components is even more expensive than sourcing a whole, complete lap top, plus the packaging requirements are more stringent and skill/investment heavy.
The effect of globalization (Winer takes all) and the rise (in the last 20 years) the mangemment/manafacturing model - the "Segmented Vertical Union" - (Strangely, not enough serious discussion about this subject) where a large group of manafacturers conglomerate together in close vicinity and every one specializes a single slice of job - flexible production, zero inventory, just-in-time manafacturing aided and facilitated by internet. The super slim margin, massive scale and the forced, expedited commercial Darwanian cycle - first pioneered by Taiwanese and now starting to dissipate to coastal China - the real secret of the Chinese export story.
Try to figure out this puzzle in the textile(apparel) industry (15% of China's export still). There are extensive research results (hence data) available. Compare China and India (another textile industry giant and ermerging economical powerhouse). In 1986, a coastal Chinese textile worker got paid 60% of his (her) mumbai counterpart. In 1996, this numbet was 100%. In 2006, this number was 200%. All thru the time, the Chinese textile industry remains super competetive, even in the face of adverse US/EU quota and tarriff barrier up until today. Why ?
By Peter Wang - 8/12/2007 5:27 PM
I don't disagree with what you say but I am not sure why it is a counterexample to my point that China is caught in a monetary trap. The ownership of the export industry (whether owners are Chinese or foreign) has little to do with the monetary impact of the surplus.
By Michael Pettis - 8/12/2007 5:39 PM
Nice site.
One thing that I've noted is that academic economists tend to vastly underestimate the degree to which a sudden revaluation will cause markets to react chaotically or even irrationally. If you suddenly appreciate 10%, the markets will expect that this means that you have to appreciate 15%. If you appreciate 15%, the markets will look for 20%, If you look for 20%, the markets will expect 25%. etc. etc. etc. To convince the markets that you are serious with a one shot revaluation, then you'd probably have to end up far overshooting any rational valuation (i.e. raise the RMB 50%) and that would cause chaos,
Now a 10-15% revaluation over 1 to 2 months would I think be a lot better.
Personally, I think a better solution (and a one which is occurring) involves negotiated protectionist controls on inflow and liberalization of capital outflows. The trouble with those solutions is that there is at least a one to two year lag time.
I think the impact of a currency change isn't quite as mysterious as we sometimes suppose (and I am not sure whether I am pleased or not at being called an academic economist -- I worked on and/or ran emerging market bond trading and capital markets desks on Wall Street for fifteen years), and lived through many a currency crisis.
To me the impact of any adverse shock, including an unexpected currency change, depends primarily on the structure of the balance sheet, and I think the way the Asian Crisis affected Thailand, Korea, Indonesia and Malaysia, versus they way it affected China, Taiwan, India, the Philippines, Vietnam, etc. -- countries that were in notably better economic shape -- demonstrates why.
In the case of a change in the value of the China currency, there are, as far as I can see, no large positions held by local or foreign investors that would be undermined significantly by a revaluation and would lead to the self-reinforcing process that causes balance sheet to collapse. The only entities that would take big mark-to-market losses are the PBoC and maybe the CIC, although we are not sure, but of course that would have almost no impact on their behaviors or on that of anyone else because in real terms (i.e. relative to the the cost of imports and debt paymnts, which is what reserves are for) they would actually be slightly better off.
As for liberalizing capital outflows, of course it is a good idea and one day it may actually have an impact, but right now no one in China is willingly taking money out of the country (except a few corrupt officials) because they would need to earn 9-11% in dollars just to match the minimum return they would get in renminbi, which isn't easy. Money won't leave the country except either in a crisis, when we won't want it to, or when the renminbi stops appreciating, in which case it doesn't help the problem at all.
By Michael Pettis - 8/13/2007 7:32 PM
The term “trade balance” is defined as the sum of a country’s exports less its imports, in aggregate dollar terms. A negative trade balance is known as a “trade deficit” – i.e. where the value of imports exceeds the value of exports. America’s appetite for products based on “the lowest price” is a huge contributor to recent acceleration in America’s trade deficits – many experts see this as a culmination of both the unbalanced nature of global trade and one of the "costs" of globalization and free trade. Reducing the trade deficit requires increasing exports and decreasing imports. That requires inducing foreigners to buy more U.S. made goods, and inducing Americans to “switch” their spending from imports to domestic made goods. Market economies accomplish this through changed relative prices. That calls for exchange rate adjustment that makes foreign goods more expensive for US consumers, and US goods cheaper for foreign consumers. The U.S. deficit with China reflects that US need export more to China. Welcome to AmeriChinaB2B( http://www.acb2b.com/ ) to begin your business trip of China.
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. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
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. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
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Comments (5) for "July trade surplus at $24.4 ...
- 8/13/2007 1:32 PM
January, 2008