Forgive us, we are going to be a bit terse tonight. Turns out we got a wee case of food poisoning (likely culprit: shellfish). On the mend, but also behind schedule on various fronts.
Bloomberg reports that China’s trade deficit has hit an all time high of $262.7 billion. So much for the idea that the loosening of the dollar peg (the yuan appreciated 6.6%) has had much impact. The dollar fell versus non-managed currencies last year, and even with the modest appreciation relative to the dollar, the yuan fell in euro and sterling terms. The article also suggests that China faces a nasty choice: tolerate further inflation, which has hit a level which is leading to domestic protests, or risk underutlization of its factories, and by implication, unemployment.
Update: A mere hour and a half after I put up the news story cited below, Bloomberg is suddenly putting a different spin on the same underlying story. Headline: “China December Trade Surplus Narrows as Exports Cool (Update2).” This story stresses that China’s trade surplus was narrowing in the last two months of 2007. The long excerpt below is from the first version; I’ve then put the opening paragraphs from the updated spin.
Did someone from the Chinese government get on Bloomberg’s case about the initial reporting on the story?
China’s trade surplus surged to a record for 2007 adding pressure on the government to let the yuan rise faster to prevent the economy from overheating and cool inflation.
The trade gap surged 48 percent to $262.2 billion, the state-run Xinhua News Agency reported today, citing customs data. The surplus for December narrowed to $22.7 billion from $26.2 billion in November, Xinhua said. The monthly figure was lower than the $24.4 billion median estimate of 21 economists surveyed by Bloomberg News.
China’s booming exports have flooded the economy with cash, fueled inflation to the steepest in 11 years and fanned asset- price gains. The U.S. and Europe say the yuan, even after recent advances, is still at a level where it gives local companies an unfair advantage in overseas markets.
“The yuan has yet to move to the level where it can have much effect on the trade surplus,” said Zhu Baoliang, chief economist at the State Information Center in Beijing. China’s currency advanced 7 percent against the U.S. dollar in 2007, twice as fast as in 2006. Against the euro, it fell 4.3 percent.
Government policy makers last month named inflation and the risk that the economy will overheat as its two main concerns for 2008 and said the People’s Bank of China would pursue a “tight monetary policy.”
The policy is partly designed to slow the rate at which cash has been funneled into building thousands of factories, many of which may become idle should export demand dwindle.
“If exports slow in China, you’ll see a lot of overcapacity, you’ll see margins collapse, you’ll see deflation and you’ll see a lot of non-performing loans,” said Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong.
A 1 percentage point slowdown in the U.S. would trim China’s export growth by 4 percentage points and reduce gross domestic product by 0.5 percentage point, according to Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.
Morgan Stanley forecast last month that growth in China’s shipments abroad may slow to 16 percent in 2008. Imports may increase 18 percent, the investment bank predicted.
“A U.S. slowdown will hit China’s other exports markets too — and that we think will likely have a knock on impact upon China’s own investment growth,” said Stephen Green, an economist at Standard Chartered Plc in Hong Kong.
Standard Chartered cut its forecast for China’s economic growth to 9.5 percent in 2008 from 10.5 percent.
“A butterfly flapping its wings on Wall St, combined with that domestic monetary tightening, and not forgetting yuan appreciation, has the potential to cause a significant slowdown in overall growth in China,” Green said.
The updated and considerably more China-friendly re-release:
China’s trade surplus narrowed for a second month as export growth slowed, signaling that the fastest economic expansion in 13 years may have peaked.
The surplus for December shrank to $22.7 billion from $26.2 billion in November, the Chinese customs bureau said in a statement on its Web site today, lower than the $24.4 billion median estimate of economists surveyed by Bloomberg News.
Export growth cooled to 21.7 percent last month from 22.8 percent, indicating that recent yuan gains, the slowing global expansion and cuts to export-tax rebates on polluting industries are beginning to bite. For 2007, the trade gap surged 48 percent to a record $262.2 billion, giving U.S. and European officials ammunition to keep calling for faster appreciation of the yuan.
“Slower export growth may help China achieve a soft landing,” said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. “China’s economic expansion may have peaked last year.”
Get well soon! I enjoy your commentary, and this post has given me something more to think about.