Don't expect much of a decline in China's trade surplus
By Michael Pettis
Today's WSJ says "China may show a slowdown in export growth starting with July's trade data, but the shift -- from a tax-policy change rather than concerns over recalls -- is expected to be limited."
I think the WSJ is right not to be overly impressed about the size of a possible shift. We've been told since at least 2003 that the latest round of recording-breaking monthly surpluses are likely to be the last, but that has never turned out to be the case, and I think it is unlikely that we will see a sharp drop until there is a change in monetary policy.
China's trade surplus is part of the monetary trap in which it finds itself. Capital inflows, caused in large part by the trade surplus, but beefed up by FDI and portfolio inflows, lead directly to monetary expnasion since, under China's currency regime, the role of the PBoC is largely limited to funding the purchase of the hundreds of billions of dollars that pour into the country. A consequence of this monetary policy is, of course, loan and investment expansion, which itself results in greater industrial production.
Since a country's trade surplus is simply the excess of its production over its consumption, China's monetary expansion condemns it to rising trade surpluses, which themselves cause further monetary expansion. We will need something a little more dramatic than a reduction of export tax subsidies to end this game.
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.
Subscribe to this Site
Comments for "Don't expect much of a decli...
October, 2007
.