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Widening Chinese Trade Surplus Increases Pressure to Intervene

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In the 1980s, when unemployment hit 8%, Ronald Reagan’s administration was concerned and took steps to address the problem. One of the causes had been the 60% increase in the dollar versus the yen, which allowed the Japanese to make deep inroads into the US. One of the responses was the so-called Plaza Accord, in which the G-5 engaged in coordinated intervention to drive the dollar down. Narrowly, they succeeded too well, since the dollar overshot on the downside. More broadly, the measure was a partial remedy. US imports from Japan did fall markedly, but US companies did not increase their penetration of Japanese markets as hoped (due to so-called “structural barriers”, meaning all sorts of non-tariff impediments the Japanese used to make life miserable for exporters, plus a very strong prejudice among Japanese consumers against foreign goods).

China is an equally tough minded mercantilist, and has played the US adeptly thus far, managing to blunt the pressure from the US for it to allow its currency, the renminbi, to appreciate (as we noted at the time, its announcement that it would further liberalize its currency policy was a headfake designed to placate the US. Note some economists question whether allowing the currency to rise will do much to alleviate the bilateral US-China trade imbalance, but the flip side is if not, why is China so loath to allow the currency to appreciate?)

The announcement today, that China’s trade surplus reached a whopping $28.7 billion, 170% higher than its year-ago level and well above analysts’ estimates, is sure to increase pressure on China to Do Something about its currency. If China does not act, and the deficit next month is ugly, expect protectionist sabre rattling, and perhaps shots across the bow, like more imposition of targeted tariffs, to result.

From Bloomberg:

With mid-term elections in the U.S. due in November, today’s numbers may provide lawmakers with fuel to increase demands for the Obama Administration to take action against China, which they claim is deliberately keeping its currency undervalued to give exporters an unfair advantage.

A U.S. jobless rate still close to 10 percent may prompt “people in Washington to say China needs to do more to get its trade surplus down and that would involve a stronger currency,” said Brian Jackson, a Hong Kong-based emerging-markets strategist at Royal Bank of Canada.

China’s trade surplus with the U.S. rose 10 percent to $93 billion in the first five months of 2010, according to the American Commerce Department. China’s customs bureau puts the gap at $59.4 billion, 18 percent higher than a year earlier.

Democratic Representative Brad Sherman unveiled a proposal on Aug. 4 calling for China’s permanent normal trade relations status, which lowers U.S. duties on its imports, to be revoked, Agence France-Presse reported.

From the Financial Times:

Earlier in the year, Beijing was able to point to a series of much smaller monthly surpluses – and a trade deficit in March – as evidence that the economy was already rebalancing and was much less dependent on exports. However the figures over the last three months suggest that the surplus in the second half of the year is likely to be much larger.

Yet the slowdown in import growth in China could also be a reflection of a significant cooling in the domestic economy, which would make policymakers in Beijing more reluctant to strengthen the currency sharply.

“The two developments will only add to Washington’s insistence on a stronger renminbi and to Beijing’s resistance,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland in Hong Kong. This could lead to a new push in the US Congress to pass measures penalising Chinese exports, especially as the November mid-term elections approach.

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30 comments

  1. skippy

    China is a historical bad actor…right. Let see how a billion chips sack up against a few hundred million and the central dealer is working with the billion, poker on those odds is bad.

    Skippy…give me a break…we better have a better game plan, than the blame game.

  2. Jim the Skeptic

    Yves said “Note some economists question whether allowing the currency to rise will do much to alleviate the bilateral US-China trade imbalance, but the flip side is if not, why is China so loath to allow the currency to appreciate?”

    If the value of the renminbi goes up then Chinese goods will be more expensive. Then the Americans will import more from the other south east Asian countries instead of the Chinese.

    I don’t think it will help us, for the same reason.

    We desperately need some mechanism to force much more balance in global trading. It can never happen overnight so we need to begin immediately.

    Balanced global trade would benefit all of us.

    1. Phil

      US economy has smaller/lessening impact inside overal chinese economy. (eg. it matters less. as a percentage of chinese economy it is down) It used to be every pundit says if US economy stops importing from china, china will collapse. That didn’t happen, the current US crisis only dent about 1% of china’s economy and they are roaring back while US economy still in the ditch (eg. they dont need US recovery to expand their economy)

      So now, china has all the world in their hand. They can now control dollar price via global trade instead of direct treasury purchase. And the number shows. They stop purchasing dollar bond and start purchasing other country’s bond (on top of hard assets)

      I would say, US next move would be trying to instigate war around china. That’s what the british did trying to contain their rivals.

      Unfortunately, the entire Asia was western colonies, so that kind of trick is on every school children textbook.

      Open up their textbook, and see what they remember from 19th century gun boat diplomacy, opium war, forced trade, unequal treaty.

      1. alex

        “US economy has smaller/lessening impact inside overal chinese economy. … They can now control dollar price via global trade instead of direct treasury purchase.”

        That makes no sense. If the US economy matters so little to them, why would they bother to control the dollar price? And if they’ve abandoned controlling the dollar price via direct treasury purchase, when are they going to sell a serious amount of that $2.5T (50% of Chinese GDP) in forex?

        1. Phil

          1. The trend is lessening. (eg. china can hold more pain in maintaining the trade war than US can try to dislodge the peg)

          2. the $2.5T come with increasingly more diverse holding. The chinese has stopped buying T-bond. (look at the report). They basically by other people bond and make those people buy US bond instead. They also recycle dollar like mad. On top of doing “barter” like trade. to reduce imbalance. (I buy your $16B soy, if you sign $20B infrastructure loan, I’ll give you advance for that oil infrastructure, etc)

          3. China has to hold dollar in place, because goods are priced in dollar. It is not about advantage inside US market anymore, but global pricing competitiveness. Obviously, US economy will be dragged like rag doll while china is maintaining price competitiveness.

          To give you the size of their economy, at current rate, they will reach parity against US economy before 2019. That’s before the end of this decade. How long did it take Britain – US economic rivalry to adjust to geopolitical status?

          1. alex

            “They basically by other people bond and make those people buy US bond instead.”

            And how, pray tell, do they “make” other people buy US bonds?

            “They also recycle dollar like mad. On top of doing “barter” like trade. to reduce imbalance.”

            What a shame they don’t do more. Any balanced trade is barter-like.

            “China has to hold dollar in place, because goods are priced in dollar. It is not about advantage inside US market anymore, but global pricing competitiveness.”

            In other words, instead of playing mercantilist games with the US, they’re playing them with the world. Like I’ve long said, if the US ever decides to get serious about Chinese currency manipulation we’ve got plenty of natural allies (including many Asian countries). Of course if China keeps this up, it may not even be necessary for the US to take a leadership position on the issue – other countries may not be as dumb as us.

            “Obviously, US economy will be dragged like rag doll while china is maintaining price competitiveness.”

            You mean if, as is unfortunately a distinct possibility, the US is dumb enough to keep tolerating Chinese mercantilism and currency manipulation? Ah, yeah, that’s kind of the point of this whole thread.

            The only bright spot is that should it come to an all out trade war (or more accurately the US fighting back in the trade war being waged against it) history says that the debtor country is likely to be hurt less than the creditor country.

  3. purple

    Can’t have balanced trade if the dollar is the reserve currency. If the US financial elite insists on that then the rest of the country will inevitably be hollowed out because the US does not represent 50% of world GDP and have the kind of productive dominance it did at the time of Bretton Woods.

    1. alex

      “Can’t have balanced trade if the dollar is the reserve currency.”

      No, but we can come a lot closer. I’ve long been in favor of a bancor like approach, but even with the current kluge we could greatly improve the situation.

    2. Arty

      Party is over. In order to let Dollar reach its equilibrium based on US export/import. Saudi will die in an inflation rage. They peg their petro dollar. As US dollar plunges, their relatively tiny economy (only 30million people) will be flooded with hundred of billion of dollar from mis priced oil in falling dollar.

      So either they risk social unrest, or they de-peg from dollar.

      If they de-peg, which they have to. Then US will suddenly pay $100+/barrel oil.

      And this is just simple energy scenario. What about interest rate? from everybody “dumping” dollar, since it has no international reserve value anymore. Can the economy handle 15-18% interest rate and $100/barrel oil price?

      1. Bates

        Arty… Lots of games going on but they are obscure. Here is an announcement from SA that slipped by bubble head tv…Where did SA get so much gold? Do you suppose they traded sand for it…or perhaps some oil? BTW, China is now the worlds largest producer of gold, surpassing South Africa, and they sell little of it on the open market.

        “Saudi Arabian gold reserves double
        By Javier Blas in London FT

        Published: June 21 2010 03:00 | Last updated: June 21 2010 03:00

        Saudi Arabia, the world’s fourth-largest holder of foreign exchange reserves, is sitting on more than twice as much gold as previously thought, according to new estimates that point to the revival of bullion as part of emerging economies’ official reserves .

        The changes in Riyadh’s reserves were revealed by the World Gold Council, the industry-backed body that regularly tracks official bullion holdings.

        According to the WGC, the Saudi Arabian Monetary Agency, the central bank, has gold reserves of 322.9 tonnes, more than double the 143 tonnes it had previously reported.”

        http://www.ft.com/cms/s/0/c4bc3d4a-7ccb-11df-8b74-00144feabdc0.html

  4. charles

    Again, given the ‘fuzziness’ of Chinese statistics,
    worth considering also the other side,i.e the sharp decline in their imports. From today’s FT:

    “Long-term China bear Diana Choyleva at Lombard Research sees the latest figures as further evidence of serious trouble ahead.China’s cyclical story is turning from boom to bust, with negative implications for the rest of the world… Our estimates of China’s real GDP currently show that real domestic demand was flat in Q2 as the economy hit its cyclical constraints. The trade data for July, out today, not only confirm this picture, but suggest that domestic demand may already have started to slump in Q3.”

    http://blogs.ft.com/beyond-brics/2010/08/10/trade-data-china-bears-growl/

    Same thinking going on about the recent rise in German imports: signaling a growth in domestic demand or industrial demand ?

  5. Mark G.

    ” This could lead to a new push in the US Congress to pass measures penalising Chinese exports, especially as the November mid-term elections approach.”

    Markets govern, not the incompetent, corrupt and ineffectual US congress. I would be very surprised to see anything more than rhetoric come from congress. Strip MFN, tariffs, label China a currency manipulator and watch global equity markets nose dive

    1. alex

      “Markets govern …”

      So the Chinese government’s peg, and the PBoC’s $2.5T in forex, have no effect?

      “Strip MFN, tariffs, label China a currency manipulator and watch global equity markets nose dive.”

      Mustn’t disturb the holy “markets” (no matter how manipulated) lest they threaten to hold their breath until they turn blue.

      BTW, did you make the same prediction about the Plaza Accord?

  6. Rahul

    Yves,

    You are missing the whole point. Chinese trade surplus is exploding because the chinese real estate bubble is bursting. China has built as many empty houses, malls, office buildings, stadiums, shopping centers as it could. It has developed an infrastructure to keep building 10′s of millions of new buildings each year. Now as the construction grinds to a halt, there is nowhere for the stuff to go but out.Not only is china’s export surging but it’s imports are also collapsing. This may launch a global deflationary wave that may lead to trade collapse just as happened during the great depression.

  7. tyaresun

    Fixing foreign trade and a pro USA industrial polciy should be preconditions to any further fiscal or monetary stimulus.

    One of these days the politicians will have tried all the wrong things and finally do the right thing.

    Tyaresun

    1. alex

      Echoes of Winston Churchill?

      “America will always do the right thing, but only after exhausting all other options.”

      1. NOTaREALmerican

        That was then. America is now the Soviet Union.

        All large organizations are unmanageable (ungovernable). The loot and power get’s concentrated (in, say, DC or Moscow) the sociopaths are attracted like flys, the organization get’s looted by the sociopaths.

        There are no solutions; it’s the way it has to work.

  8. J Lee

    Correcting the exchange rate with China is a simple exercise if we really wanted to do it. China’s central bank (CBoC) essentially controls the exchange rate by conducting all RMBUSD transactions and making illegal any extra-bank transactions. The US could do exactly the same. Require all RMBUSD transactions to be conducted by the FED. Then the FED would deal exclusively with the CBoC. Regardless of the rate the FED and the CBoC negotiate the FED could force whatever rate it chose onto US banks and hence onto the US economic system. No need to get involved in trade and duty disagreements. Leave the exchange rate disagreement as a financial disagreement between central banks each of which conducts their own internal policies as they choose.

    1. Bing

      oh goodie!!!

      Now I have the chance to arbitrate the Fed-PBOC transaction via third currency. (and we are talking entire high growth asia currency has access to Yuan, unlike westerner) Whaddya gonna do? will then controling Yuan-asian currency as well? What about euro?

      So, basically, you just set up the most profitable forex scheme known to modern history. I would say, go for it.

      United states has only $70B in liquid forex reserve, the rest is gold. (plus increasingly worthless T-bond) The entire Asia is backed by multilateralization agreement, plus nearly $4T worth of liquid reserve. I would say, that game will last about 2 months or less.

      In open market currency game, the Fed won’t last 20 minutes without resorting to printing more dollar. United states is not solvent.

      1. alex

        “increasingly worthless T-bond”

        If they’re so worthless, why does everybody want to buy them? Have you looked at the low interest rates on ‘em?

      2. J Lee

        But you seem to miss the point that the FED would not be trying to play in the open market for RMBUSD but rather closing the market in the US. Two central banks can play the fixing game; not just one. The FED would be preventing the CBoC from playing us for its own advantage. And perhaps if the CBoC realized that it can’t achieve its goals with complete disregard for its trading partners it might then also realize that an open currency market is a better solution. Then let the RMBUSD settle or rise to where it might. In the long run you can’t have free trade and unfree currency markets. It’s long past the time where we should recognize that this contradiction is the key reason for the destruction of our economy.

  9. Bates

    China certainly has a huge problem internally with 66 million (yes, 66,000,000) empty houses and untold commercial vacancies…entire cities have been built and are pratically empty. That said, China has ~ 120,000,000 people moving from rural areas to large cities each year.

    China is experiencing the same thing that happened in the US when farm labor dropped from 97% of the US population to 3% of the US population…except, China’s rural exodus is time compressed because farm machinery already exists and does not have to be reinvented.

    Contrary to popular belief China does not want to continue to accumulate US Treasury issues that it views as suspect. Instead China wants a ‘basket of currencies’ to serve as the world reserve currency, not the dollar.

    Here is what the deputy governor of the central bank of China recently said about what China would like to see with regard to a world reserve currency. BTW, I have no way of knowing if their central bankers lie as readily as Western central bankers…my guess is yes, they do. There is a pdf link but this link is not pdf…

    Chinese Central Bank Outlines Plan To Ditch The Dollar As The Yuan’s Peg
    “Hu Xiaolian, deputy governor at the Chinese central bank, has released a paper which suggests it’s soon time for China to peg the yuan to a basket of foreign currencies, rather than the U.S. dollar alone.

    This especially makes sense for China given that, going forward, the U.S. might not [be] the voracious consumer it once was. Thus tying itself at the hip to the dollar might not be as useful as it was before.

    Hu Xiaolian:

    “Compared with pegging to a single currency, the exchange rate regime with reference to a basket of currencies will help adjust exports and imports, current account, and balance of payment in a more effective manner. It has two-way movements of exchange rate. The RMB exchange rate has been basically stable at an adaptive and balanced level though it may fluctuate in both ways against any particular single currency.”

    Read more: http://www.businessinsider.com/china-yuan-currency-basket-change-2010-7#ixzz0wDXAKh1K

  10. alex

    Yves Smith: “Narrowly, they succeeded too well, since the dollar overshot on the downside.”

    I’ve often heard this, but don’t understand it. We never went into trade surplus, so how did the dollar undershoot?

    “More broadly, the measure was a partial remedy. US imports from Japan did fall markedly, but US companies did not increase their penetration of Japanese markets as hoped …”

    So what? The US multilateral deficit matters more to us than any bilateral deficit. IIRC the Plaza Accord took us from 4% trade deficit to 0.5%. Good enough. It would be a blessing now.

    “If China does not act, and the deficit next month is ugly, expect protectionist sabre rattling …”

    Is it protectionist to take action against a country that’s horribly protectionist?

    1. aet

      Violence against the violent is yet still vilence.

      So..yes, it is still protectionism.
      That word is not a prejorative, by the way.

      1. alex

        “Violence against the violent is yet still violence.”

        Rather than get caught up in a discussion of the ethics of such a situation, I’ll just note that adjusting exchange rates isn’t violence. Bonus points if it’s done in a controlled manner that lets both countries adjust.

        “So..yes, it is still protectionism. That word is not a pejorative, by the way.”

        The way ‘protectionist’ is used in contemporary political/economic discourse, it’s maybe half a step above ‘terrorist’.

  11. Greg

    It’s not the exchange rate, it’s the fact that they hoard US dollars. That’s money they could be spending in the US, on goods produced in the US, bolstering the US economy. Instead that money is used to enforce the trade imbalance.
    By doing this, they force an increase in US Aggregate Supply, while US Aggregate Demand actually decreases, (because they hoard the dollars, and foreign goods compete abainst domestic goods.) This drives down price levels, and reduces the revenue available to US producers.
    It’s hardly any wonder US producers refuse to invest in domestic production.

    China has been fighting a trade war with the US for the last 10 years.

    And the US is losing. The Unemployed are casualties. Idled industry, industry debt, deflation and even much of the govenment deficit, is all damage inflicted upon our economy by our trading ‘partner.’

    See: http://anamecon.blogspot.com/2010/04/effects-of-unbalanced-trade.html

  12. EmilianoZ

    I seem to remember that Chinese workers had a substantial wage raise some time ago after ferocious strikes. Doesn’t that have the same effects as an appreciation of the RMB?

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