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The data brought China’s trade surplus for the first half of the year to $39.65bn, already surpassing the whole year surplus for 2004 of $32bn, and putting it on track to triple this year. "As the surplus is seasonally higher in the second half, our full-year forecast of $101bn is well within reach," said JP Morgan in a research note last night.
China’s June surplus is all the more impressive given that oil was not exactly cheap in June; a rising oil import bill is now generating current account deficits in other Asian economies -- India and Thailand come to mind.
China’s exports are up 33% in the first half of 2005, imports are only up 15%. If that pace continues, China’s total trade surplus could reach $120 billion. That seems a bit too high, since China is unlikely to hold oil import volumes down for the entire second half of the year.
Still, it is now long past time to put the "China runs a trade surplus with the US, but a deficit with the rest of the world, so its overall trade is in something like balance" myth to bed for good. China’s 2003 and 2004 trade and (larger) current account surpluses came in the face of adverse shifts in China’s terms of trade. The World Bank calculates that the adverse shift in China’s terms of trade in 2004 reduced China’s purchasing power by about 1.5% of Chinese GDP. More importantly, these external surpluses came even though China was in the midst of enormous investment boom - the kind of boom that normally generates current account deficits. Morris Goldstein has long argued that China’s cyclically adjusted current account surplus was above 5% of GDP. I would say he has been proven right.
Textile exports up substantially, but their increase lags the overall increase in China’s exports. China’s extraordinary export growth stems above all from booming exports of electronic goods and machinery. And -- as Bloomberg notes - Honda only just started exporting "made in China" cars to Europe. Looking ahead, auto and auto parts exports make take over from electronics as the driver of Chinese export growth.
No doubt China imports many of the components that go into its exports. But that is not the entire story either. As the World Bank noted in April, the electronics industry is "sourcing an increasing share of components from domestic suppliers." The increased Chinese content of China’s exports is one reason why China’s overall trade surplus is increasing so rapidly. Another is that China’s insane pace of investment is producing an equally insane increase in China’s production capacity. The World Bank estimates China’s capacity to produce crude steel increased by about 40% between 2003 and 2005. No wonder China is now exporting steel.
The surge in China’s trade surplus - and the fall off in Chinese import demand - is being felt throughout the world, but perhaps most of all in Asia. In 2003 and 2004, China’s neighbours saw their exports to China boom, helping them sustain trade and current account surpluses even in the face of their rising oil import bill. Not any more. Their oil import bill is still rising, but their exports to China have fallen off. As a result, global reserve accumulation is becoming less of an emerging Asian story, or even a BRICs (Brazil Russia India China) story. It is becoming an China Russia story.
China imports oil, but that has not kept its trade surplus from growing in the face of a now quite significant oil price shock. And Russia’s trade surplus - and reserve accumulation - is ballooning on the back of rising oil prices. Actually, global reserve accumulation is probably a China Russia Saudi Arabia and the Gulf story - we just don’t yet have the data from the petrosheiks. Collectively, the petrosheiks in the Gulf produce far more oil than the Russians, so their balance of payments presumably looks like Russia’s only on steroids.
We don’t know China’s end June reserves. But we do know its reserves rose by $32 billion in April and May. The $15 billion in reserves China transferred to ICBC - a big state bank should be added to this total. Say China’s reserves increased by another $20 billion in June - not implausible with a $9.7 billion trade surplus. That brings China’s q2 reserve increase to $67 billion.
That though underestimates the real increase in China’s reserves. Why? Because China’s holdings of euros are worth about 7% less in dollar terms now than at the end of March. If 20% of China’s reserves were in euros (or currencies that moved in tandem with the Euro), valuation changes subtracted $9 billion from China’s reserves in the second quarter. If 40% of China’s reserves were in euros (or currencies that moved in tandem with the Euro), valuation changes subtracted $18 billion from China’s reserves in the second quarter. Since we really don’t know, let’s take $12-13 billion as an educated guess. That would bring China’s underlying pace of reserve accumulation up to $80 billion in the second quarter.
That is a lot. Annualized, it works out to $320 billion - somewhere between 15% and 20% of China’s GDP.
Russia added $14 billion to its reserves in the second quarter - and that too came in the face of losses (in dollar terms) on the Bank of Russia’s euro holdings. A 60/40 dollar/ euro split in Russia’s reserve portfolio would have generated valuation losses of between $3.5 and $4 billion in Q2. That brings Russia’s underlying pace of reserve accumulation to $17-18 billion a quarter, or $70 billion a year.
That’s right. The two big former Communist states are currently financing the US and Europe to the tune of $400 billion a year. Who would have predicted that 15 years ago?
(note - to get $400 billion, I annualised my valuation adjusted Q2 numbers)