March 12, 2009
Chinese Exports: "no hope"
From Bloomberg two days ago:
..."There's no hope for export demand to recover any time soon," said Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co. "How fast imports recover depends on how soon the government's stimulus package kicks in and creates real demand in major industries."
Figure 1: Log Chinese exports (blue) and imports (red), and 12 month moving averages (dark blue, dark red). In millions USD, not seasonally averaged. US NBER defined recession dates shaded gray. Source: IMF, International Financial Statistics, updated with newspaper reports, NBER, author's calculations.
Regarding imports, Willem Thorbecke has pointed out to me that the deviations from trend have been most pronounced for imports for processing, and processed exports. Ordinary imports and exports have been less affected -- at least through 2008.
Figure 2: Source: Personal communication from Willem Thorbecke; paper presented at this this conference.
This supports the view that the overall decline in worldwide demand for Chinese exports has thus far driven the declines in Chinese imports, rather than declining domestic Chinese demand. I suspect, however, that over time ordinary imports will decline as well.
Posted by Menzie Chinn at March 12, 2009 03:18 AMdigg this | reddit
How will this drop in imports/exports affect China's appetite for US debt? Will there be a big drop off in foreign purchase of US bonds? I guess the guys at the Fed will be working quadruple overtime now at the presses...
Posted by: Tomato_Thrower at March 12, 2009 05:47 AM
China needs to start consuming much more of what it produces instead or exchanging real goods for pieces of paper that are created by the Fed out of thin air. The risk of holding too many dollars is too high and Chinese investors need to start looking to investments in real sectors like agriculture, energy and mining.
Posted by: Vangel at March 12, 2009 07:53 AM
Tomato, The chinese have curtailed their purchase of US Agencies but not Treasuries, leading to an increase in spread between the two.
This is from back in February:
Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC), told a New York risk-managers conference on Thursday. The Financial Times quoted him as saying: “Except for U.S. Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe-haven. For everyone, including China, it is the only option.”
Posted by: MikeR at March 12, 2009 07:54 AM
I am astonished by the 2nd graph showing how important S Korea and Taiwan are in supplying China for her exports...and that this information generally showed the decline early ~07.
Posted by: calmo at March 12, 2009 08:09 AM
Taiwan's exports declined at a 62% annual rate in the fourth quarter, making it perhaps the hardest hit of all economies in the world right now. Brad Setser's latest numbers show China's exports falling more sharply than its imports recently.
Posted by: Barkley Rosser at March 12, 2009 09:12 AM
Anecdotal evidence (at least to me) suggests that a lot of direct investment into China came from Korea and Taiwan. It isn't just US and European companies that have migrated their manufacturing bases to China, there's also been a hollowing out of industry in Taiwan, Korea and ASEAN. What you're seeing is evidence of the East Asian global supply chain.
Posted by: hishamh at March 12, 2009 09:32 AM
Good post Menzie. Thanks.
China is a final assembly point for the export of many finished goods. Taiwan, Korea and ASEAN were supplying China with goods earlier in the production cycle.
It does make sense that Taiwan would be the hardest hit as a major supplier for China. Notice on the graph that imports and exports converged in 2004 then began to diverge going into the depression. This would seem to indicate that China was building inventory prior to 2004 and then began to reduce inventory afterward.
Barkeley, Brad Setser's comments about China's exports falling more quickly than imports makes sense. The two should converge as China's foreign trade moves more toward domestic consumption.
Posted by: DickF at March 12, 2009 10:57 AM
Depends on whether China keeps its exchange rate constant, or targets its CA surplus. Timmy and Hilarious have recently made noises that U.S. objections to currency manipulation may decline. Is this another way to support U.S. financial sector? If so, it would appear to come at the expense of U.S. aggregate demand and jobs.
Posted by: don at March 12, 2009 11:58 AM
Ok, don, let her rip: why is Hilary hilarious?...before I go nuts.
And thank you.
hishamh, thanks for that anecdotal...there used to be a guy that blogged at AB (years ago and maybe as many as half a dozen...what a grind this is) from Taiwan (I'm sorry I can't remember his tag...yet), very entrepreneurial (and a fierce debater with Greg, a doctor...anyhow) who was very cautious about the Taiwanese ventures then. But looks like things changed...it is not raw materials from Taiwan, but it could be from the ASEAN. Why are those 2 countries, SK and Taiwan, bundled together in this graph?
Posted by: calmo at March 12, 2009 09:40 PM
I don't have any hard evidence as far as SK and Taiwan goes, but I suspect its computer and electronic parts and components - investment data certainly suggests this, breaks down to about a third of the total.
There isn't a good source for time series on Taiwan (neither the IMF or UN carries much data); Korean data - I haven't looked for. You might try here for starters (Internet Explorer only), if you're interested in digging in.
I know for sure what's happening in ASEAN though (I'm from Malaysia) - growth in our electronics exports basically died way back in 2006. The only thing keeping exports afloat was commodities, until those went bust in July. Dropping like a stone ever since.
Posted by: hishamh at March 13, 2009 03:56 AM
Is the world savings glut disappearing?
The big cyclical development that is being completely ignored is that with the rebound in US personal savings and collapse in corporate borrowing that despite the rise in the federal deficit US dependence on foreign capital is disappearing.
Maybe it is just a normal cyclical development, but is there any chance that this is the start of a secular shift?
But it is the dog that did not bark as far as public discussion and economic analysis.
Posted by: spencer at March 13, 2009 08:02 AM
If China cannot export, it will buy less or no American debt. Then the Stimulus will have to be financed by printing dollar, devaluating it in fact. The Chinese are most worried: Of course we are concerned about the safety of our assets. To be honest, I'm a little bit worried," Wen said at a news conference Friday. "I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets." What? The Chinese Premier warning the USA to keep its word ie not to devaluate the dollar? This may have the potential of developing into an unprecedented worldwide thingie. Oy wey.
Posted by: j at March 13, 2009 11:37 AM
If China cannot export... American savers will buy American debt. There are a lot more of them nowadays.
Posted by: VennData at March 13, 2009 01:42 PM
China's implied threat to cease buying treasuries is hollow and would blow up in its face. In this atmosphere, the Fed would step up and close the gap by printing more money, the dollar would decline against the yuan and it would be even harder for China to export to the US. One of the reasons for the imbalance is that the dollar is grossly overvalued. We traveled in China last summer and once you get away from the tourist centers, hotel rooms, food, taxis, etc. were ludicrously cheap. Because the dollar has a premium value associated with our country's stability and national security, at times like this it becomes overvalued. Policy should err on the side of devaluing the dollar and creating, if necessay, a bit of inflation to make it easier for debtors to repay their debts.
Posted by: phil mause at March 13, 2009 02:30 PM
The Chinese suppliers of the things that we consume will continue to accept these freshly printed currencies (T-Bills, Bonds, etc.) that they earned in exchange for their products that they manufactured for our consumption only as long as they are alloweds to purchase title to real estate, forests, industries, breweries, hotels, factories, casinos, financial institutions and title to everything else of value that is located in the USA with these freshly printed paper currencies. Some government sources estimate that the title to 25% of our titled property and businesses in the USA are now foreign owned http://www.economyincrisis.org/content/ownership
This is selling of our children's legacy to foreign owners, and the US government calls it "Investing in America". This is sort-of like selling our body parts to keep from working!!!!!
The buying power of any paper currency determines its value or exchange rate. The USA government stopped exchanging gold for our currency in 1972. US government does not go to banks to borrow money. The US government just buys a lots of paper and prints up a bunch of new paper money, T-Bills, Bonds, and other similar paper securities then deposit these financial instruments into banks (actually the Federal Reserve) to cover checks issued to pay for government payrolls, wars, pork barrel projects, negative balance of trade, failed business bailouts, entitlements, government grants, social schemes, new infrastructure, wealth re-distribution, mental health, imported consumer goods, police, education, make-work schemes, and etc. This accelerated printing will cause massive inflation to the point that it will take a whole day's wages to buy one loaf of bread.
It is not the foreign manufacturer's fault that this economic condition exists. We created this condition ourselves. We purposefully destroyed most of our industries and fired all of the employees that were located in the US for various reasons. Why should we work and make the things that we consume as long we can get people in other countries to work to make these things for our consumption? We have paid them with freshly printed-paper currencies and other types of freshly printed-paper securities (Junk Bonds). There is (probably) a limit to the amount of paper dollars that the foreign country manufacturing people and the foreign country raw material supplying people will continue to accept in payment. Our Stupid Legislators of both political parties, Ignorant Government Employees, Self Serving Corporate Managers, Greedy Unions, Wall Street Financial Genius Criminals, Enron and Arthur Anderson type Master Criminals, NAFTA, EPA, WTO, and OSHA, just to name a few, have created this situation.
When the time comes that people in foreign nations no longer accept our freshly dollars to pay for our imported products (and our government activities), we will be in deep trouble with no quick way out. We must act now while we can still buy foreign made materials and foreign made equipment for the re-industrialization of the USA with the remaining purchasing power of the dollar before we have redeemed all of the exported currency for title to the remaining existing US assets. The buying power of the dollar will become nil when there is nothing left for the foreigners to buy with the dollars that they earned by making our consumer goods.
The option is for US citizens to work for cheaper wages than the foreigners. It is going to take at least several decades to re-create the US industrial bases that we destroyed over the past few decades. This will first require that our students study science instead of other subjects in our colleges in order to create the technology base and other knowledge bases that are necessary befor re-industrialization. We must emulate China, India, Pakistan, or die economically. I am worried about the future of my college age children, and all of the other children in the USA.
Posted by: Gerald Spencer at March 13, 2009 04:58 PM
Gold reserves are the basis of the value or buying power of any currency. This was (is) true of all of the currencies in the world. The USA is now selling titles to US properties rather than redeeming US currency for gold. The only thing that will save, preserve or restore the buying power of the dollar is reversing the trade deficit and then re-building our gold reserves. Only a positive balance of trade will restore the value of the dollar, and we must accomplish this by any means possible, or accept third world poverty on a large-scale basis. The only way to do this is to produce export more (dollar value of) things than we import. The only way that we can accomplish exporting is to re-industrialize and make these products with US materials & Labor. The only way that our products will be sold abroad is if these products are technologically superior, or cheaper. We need to increase the percentage of USA citizen college students studying science and engineering from 5% to more than 60%, in order to emulate the Asian countries.
In the last few decades we have purposefully destroyed the industrial base that won WWII and gave us today's bountiful way of life. Paying people to pave roads, build infrastructure, plant trees, dig holes then refill the same holes, rake leaves, write poems, paint pictures, environmental cleanup, etc. will not be useful or contribute anything to correcting the US economic problem. Riots and insurrection are predictable, ala the French Revolution, when the people find their situations economically hopeless.
We desperately need to create many more scientists and engineers who must become better educated, more intelligent and otherwise much superior to foreign scientists and engineers in order to design, create, innovate, and produce new products that foreigners do not have, so that they will then buy the new products from us, and we can export these products in return for their foreign payment (gold) to the USA. We also need to export scientific and engineering services to foreign nations in return for their currency and gold in order to improve our balance of trade. This has to be provided by scientists and engineers who are superior to any foreign educated scientists and engineers, or the foreigners will not buy the services of US scientists and engineers. We need to stop the H1B import of low paid scientific and engineering talent, in order to create a demand and provide more financial incentive for our students to major in the technical and scientific subjects that are needed to re-industrialize the USA. We need to return to scientific and technical excellence in our education systems because we can only export technology if our products and technology services available for export are superior to those available anywhere else in the world, and/or at least superior to the services available in that particular foreign country. According to the National Science Foundation and the National Society of Professional Engineers, only about 5% of the current college students in the USA studying for a degree in science, medicine, mathematics or engineering are US citizens. In the Asia the vast majority of the college students are majoring in science or engineering. We cannot afford to support or educate any more artists, actors, theologians, musicians, philosophers, psychologists, historians, poets, novelists, political scientists, MBAs, etc.
Our computer programming technology and expertise (ala Microsoft etc.) has helped our balance of payments considerably in the past, but the lack of technical education in this country today has reduced and will soon totally destroy this export capability. The foreign countries have become better than the USA at creating new computer software programs, since we have chosen to de-emphasize technical and scientific education in our universities.
Visit the Texas Medical Center (MD Anderson) and witness the percentage of women wearing Burkas to get a clue as to the percentage of foreign medical service income is received at the Texas Medical Center from foreign lands, and this foreign money paid to our US Medical Doctors improves our foreign trade balance. Foreigners believe that US Medical Doctors are superior to their in-country Doctors. I do not believe that these women wearing Burkas are US citizens.
Engineers who are working in Foreign Countries and sending (most) of their dollars home to the USA improves our balance of trade. In the past, foreigners believed that US educated and trained Engineers were superior to their in-country educated Engineers. This advantage has almost disappeared since the USA has stopped emphasizing technical education.
Posted by: Gerald Spencer at March 13, 2009 05:36 PM
To expand on VennData's point -
If US consumers aren't sending their dollars abroad and they aren't spending them here, then they must be saving them. That savings will fund the government's borrowing.
So, this is not really a problem as far as financing the US debt is concerned.
If the US did run into trouble financing the debt the in some sense that is a good sign because it means that US businesses and consumers are spending again.
Posted by: Karl Smith at March 13, 2009 05:37 PM
have you run the #'s behind your presumptions?
if you have, I'd appreciate seeing them.
just to 2x-check, isn't FY '10's budget deficit scheduled to come in ~1.75 Trillion U$D?
I'd have a hard time believing that our, still, feeble 'savings rate' could come near to that number..
even ~500 Billion is 10% of ~5 Trillion, no?
Posted by: Mark E Hoffer at March 15, 2009 12:33 AM
Menzie and fellow students of economics: If I may ask some questions that are slightly off topic.
Apparently Chinese domestic auto sales have increased 25% YOY thanks to tax cuts and subsidies. (Some outlets report 33% YOY increases for February.) Resource bulls are making a big deal of the fact that Chinese auto sales in January 2009 overtook the U.S. for the first time. Engines under 1.6 litres comprised 70% of these sales.
To what extent will increased auto production for domestic consumption offset industrial production for export?
Will increased numbers of personal vehicles on the road be sufficient to offset declines in oil consumption due to a weakening export sector?
Are the Chinese providing a living labratory experiment of how to implement a successful fiscal stimulus program along the lines of the textbook prescriptions of the Keynesian-Neoclassical synthesis? In other words, accumulate strong surpluses during the boom period, and stimulate during the recession.
Note in passing that the Chinese are buying up energy assets around the world with their surpluses as these energy assets become less expensive.
Posted by: GNP at March 15, 2009 03:09 AM
It's interesting to me how we realize how much we depend on other countries for exports and imports when we can't afford to do either one. It would be interesting to find out the difference from other asian countries, such as Japan and Korea, and see if it is hurting them as well. They really are our main supporters for electronics, and it would be really hard to fall back in that sense. If we weren't able to import the latest technology, it may take even longer to get out of this slump. I hope that the stimulus package works, not just for this reason, but for all of us.
Posted by: Tommy at March 15, 2009 07:53 PM
This is interesting
Posted by: Robin at April 2, 2009 07:59 AM