China’s December trade
from Follow the Money

China’s December trade

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The most impressive part of China's most recent trade data:  18% y/y growth in December exports.  That pushed China's monthly exports up to $75.4 billion, and laid the basis for a $11 billion monthly surplus. 

Why is that so impressive? After all it is well below the 28% growth rate of the entire year, and thus seems to suggest China's export machine is slowing, at least somewhat.

Simple: China's exports last December were very, very high.  The story at the time was that China's exporters accelerated shipments (or at least payments on shipments) to get dollars into the country ahead of an expected revaluation.    So getting nearly 20% growth off the high base of last December is a real achievement.  

One data point: China's December goods exports topped the United States October goods exports.

For 2005 as a whole, China exported $762 and imported $660 billion, running a surplus of a bit over $100 billion.   Judging from the data from the first half, that should translate into a current account surplus of about $140 billion.  Remember, China gets interest on its $800 billion in reserves, as well as remittances (hidden capital inflows?) from the overseas Chinese community.

Everyone, please take note: China runs a big trade surplus with the world, driven by its large surplus with both the US and Europe.  Far too many people -- including some prominent economists -- still think China's global trade is balanced.  It isn't.

$75.4 billion in monthly exports, sustained over an entire year, would push China's exports up to $905 billion - an 18-19% increase.   That certainly seems possible, even taking into account the well-known seasonality in China's trade.  Exports should fall off a bit in q1, given the Chinese new year, then pick up again.  So chalk up 18% export growth for 2006 - maybe a bit more, unless this December's data proves to be an outlier or something changes radically.

I don't expect - again, barring major policy changes - for China's import growth to be strong enough to offset 20%, maybe more, export growth.    To keep the trade surplus from expanding, Chinese imports need to grow about 15% faster than Chinese exports.   Right now, I doubt that will happen.   December's 22% y/y import growth, if sustained through 2006, would basically keep the trade deficit constant in the face 19% export growth.. 

A stable or even rising Chinese trade surplus puts me a bit at odds with the views of some.  Forecasts for China's 2006 trade surplus are all over the map. 

China's own forecasters at the NRDC expect that both export and import growth will moderate, with imports growth slightly stronger than exports.  China's overall surplus would remain more or less unchanged. 

Andy Xie of Morgan Stanley expects a sharp slowdown in Chinese export growth in 2006.   Singe digit export growth even.  Maybe.   Single digit growth - even 15% growth -- is hard on a year over year basis for all of 2006. The base from December is too high.  Suppose December 2006 exports are just 10% more than December 2005 exports.  Next December's exports will be $82.5 billion.   That might push average monthly exports up to $78 billion - up 23% over average monthly exports in 2005 (roughly $63-64 billion).    Given the momentum embedded in China's December exports, a big slowdown in year over year growth implies huge changes, and probably a global hard landing.   

Jonathan Anderson of UBS tells to me a more plausible story (his broader views can be found here).  He expects China's trade to fall -- surplus - at least relative to GDP -- on the back of strong import growth, and some deceleration in export growth.    There is no doubt import growth has accelerated in the second half of 2005.   According to Anderson's calculations, on a seasonally adjusted basis, China's monthly trade surplus has already started to fall.   It is now more like $8 billion rather than $10 billion.    That fall has been driven by a pick up in construction, which Anderson thinks is sustainable.  China is not Shanghai anymore than America is New York. 

That's a better story, one far more consistent with recent data showing continued strong growth in Chinese exports and imports.    I remain cautious though.   Some of the recent nominal import growth has been driven by a pick up in oil import volumes from a very weak first half of the year, combined with higher oil prices.   If oil doesn't rise in 2006, that may slow the pace of nominal import growth.   Some of the pickup in imports also may be linked to the global electronics cycle and that too may not be sustained.  And given how quickly capacity is expanding in China, I wouldn't be surprised if China starts making some of the goods it now imports - both inputs for construction and inputs for its exports.  Think semiconductors.  So I am not yet convinced the recent import pick up will be sustained.

My views are all predicated on a macro story where consumption growth continues to lag import growth, savings keeps on rising and so forth.  So there is another reason I am not ready to say China's surplus has peaked: I don't yet see China adopting the kind of policies needed to change the basis of Chinese growth toward consumption.  The government talks a good game, but it hasn't delivered.   

Two other points:

One. Semiconductors.  They are the raw inputs into a whole range of electronic goods.  So I was intrigued by a chart in UBS's analysis of Malaysia - unfortunately, I haven't been able to find a free copy, but the chart here helps -- showing that y/y growth in semiconductor production peaked in the summer of 2004, at a quite high level, and then fell to about zero in early to mid 2005, before picking up. 

Why does that interest me?  Well, because it fits well with a lot of data showing relatively subdued growth in the exports of many Asian countries (that is Asian countries not called China) for much of this year.   And it fits well with the data showing a big slowdown in US non-oil imports in the first part of the year.   The US imports lots of "embedded" semiconductors from Asia.  It gives texture to the argument that an inventory correction -- and nothing more - explains the slowdown in US non-oil import growth.  

Recent data suggests the correction is over.  That suggests faster non-oil import growth in the US. 

And it also makes China's strong export growth in early 2005 all the more impressive, given that it came amid a global electronics inventory correction.

Morris Goldstein, picking up on an argument made by Jonathan Anderson, argues that Chinese growth doesn't depend heavily on trade, and thus isn't as exposed to the US as it thinks.   He notes that China wasn't hit as hard as the rest of Asia by the 2001 electronics slump.   And it seems to have been spared the late 2004/05 mini-slump.  I generally agree with Goldstein, but not on this one: back in 2001, China only exported $267 billion; now it exports $762 billion.  That growth came for three broad reasons - the shift in electronics assembly from elsewhere in Asia to China, strong demand for all Chinese products in the US and a huge surge in Chinese sales to Europe on the back of the RMB's depreciation against the euro even in the face of relative stagnant European demand.  

The shift in electronics assembly should - going forward - leave China more exposed to swings in global electronics demand.  The past may not be good guide to the future.  Lots has changed.  The ongoing shift in production to China overwhelmed the late 04/ early 05 electronics inventory correction this time around, but that process is probably nearing its natural limits.  Next time around, I bet China will feel the impact of the global cycle.

Two. Autos.  Chinese producers are gearing up to export to US (Europe, too).  Not this year, but in 2007 and 2008.   American auto firms - and their suppliers - are probably considering shifting a big chunk of parts production for the US market to China.   And if China wants to sustain its very rapid export growth, it almost certainly will need to move into autos.  The forces propelling a migration of the global automotive supply chain to low wage manufacturing Asia are pretty obvious.  

But here's my prediction.  It won't be allowed to happen.  Not unless China allows its exchange rate to move significantly, and brings the wage structure of coastal China more in line with global norms.   Depending on your point of view, either politics will get in the way of economic efficiency, the world's tolerance for Chinese exchange rate mercantilism will end or the world will just decide it is no longer willing to sell real goods - big, expensive ones like autos -- to the US for pieces of paper.

China's export boom since 2001 has brought enormous - and positive changes - to many quite poor people inside China.   It also has had profound impacts on the global economy.  It has kept inflation down globally, even amid huge amounts of policy stimulus (I don't fully buy the Fed study that says not so much).  It has contributed to weak real wage growth (at least for non-supervisory workers), the growing gap between productivity growth and real wage growth in the US, the increase in corporate profits relative to GDP, and  -- through complicated channels tied to a boom in China's reserves every bit as impressive as the boom in its exports - to the surge in consumption as a share of US GDP.

While I don't think this boom will end in 2006 - it has too much momentum - I do suspect it on its last legs.   China's exports tripled between 2001 and 2005.  China's goods exports will likely surpass those of the US in 2006.  

But China's exports won't triple again between 2005 and 2009, or even between 2005 and 2010.    Do the math - tripling Chinese exports from their current levels implies that China's exports would top $2 trillion in 2009.

That implies - I suspect - that an equally profound set of changes in the global economy loom on the horizon.

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