It Has Been a Long Time

I stopped blogging almost seven years ago.

My interests have not really changed too much since then. There was a time when I was far more focused on Europe than China. But right now, the uncertainty around China is more compelling to me than the questions that emerge from the euro area’s still-incomplete union.

Some of the crucial issues have not changed. The old imbalances are starting to reappear, at least on the manufacturing side. China’s trade surplus is big once again—even if the recent rise in the goods surplus (from less than $300 billion a couple years back to around $600 billion in 2015) has not been matched by a parallel rise in China’s current account surplus. The U.S. non-petrol deficit is also big, and rising quite fast.

But some big things have also changed.

The United States imports a lot less oil, and pays a lot less for the oil it does import. That has held down the overall U.S. trade deficit.

Oil exporters have been facing a gigantic shock over the last year and a half, one that is putting their (sometimes) considerable fiscal buffers to the test. Even if oil has rebounded a bit, at $50 a barrel the commodity exporting world is hurting.

Looking back to 2006, 2007, and 2008, one of the most surprising things is that Asia’s large surplus coincided with rising oil prices and a large surplus in the major oil exporters. High oil prices, all other things equal, should correlate with a small not a large surplus in Asia.

The global challenge now comes from the combination of large savings surpluses in both Asia and Europe rather than the combination of an Asian surplus and an oil surplus.

And, well, China’s surplus is rising not because its exports are growing fast, but rather because its imports are falling more than its exports. And not just its petrol import bill. Actual imports. For 2015, and looking only at goods, China’s import volumes were down 2 percent year over year. Export volumes were flat year over year. China’s manufacturing surplus is stable, but at a high level (just under $1 trillion a year). China’s commodity import bill is falling fast, and that has pushed the goods surplus back up to record levels. A huge (and to my mind hugely suspicious) surge in tourism spending though has offset some of the rise in China’s goods surplus in the current account.

The global challenges that come from a large surplus that reflects weakness rather than strength are in some ways more complex. The fix for China’s outsized trade surplus back in 2007 was conceptually simple: China had to stop intervening and let its currency appreciate. China’s economy was over-heating, so a stronger currency would have helped maintain domestic balance. Back in 2007 and 2008, China clearly had the capacity to take its foot off the various brakes it was applying to domestic activity if it got less support from exports.

Now if China stopped intervening its currency would likely fall and its already-large trade surplus would—assuming that the second order effects of the resulting depreciation on the rest of the world were not too big—rise even more. And the policy tool that most obviously would bring China both toward internal and external balance—expansionary fiscal policy done by the central government and on its balance sheet—still faces internal opposition. Borrowing by the central government to provide policy support for household consumption isn’t the same thing as borrowing by local governments to finance a splurge in investment or borrowing by a state firm to build new steel capacity. But sometimes those differences seems to get lost. It is easy to say that the solution to too much debt is not more debt. But sometimes the solution to too much debt in one part of the economy is more borrowing in another part of the economy.

And, well, the techniques that helped me “see” the global flow of funds across borders back when a large share of global flows were being intermediated through the balance sheets of a small number of emerging market central banks, which were reliably adding $1 trillion plus to their reserves a year, no longer work that well.

Back when the PBoC was buying a lot of U.S. treasuries and agencies, it was in a deep sense too big to hide. “Belgium” almost certainly didn’t buy $200 billion in U.S. treasuries between the end of 2012 and the end of 2014, and it equally didn’t sell $200 billion in U.S. treasuries last year.

Chinese citizens are on net still buying a lot of foreign assets, even if China’s government sold reserves in 2015 at a pace that was almost as fast as it once bought the reserves.* That is what a $300 billion a year current account surplus means. And I suspect some of the surge in spending by Chinese tourists is going into financial assets, and thus the real current account surplus is a bit higher. But private capital outflows from China—and for that matter private flows from other important economies, like Russia—never have really showed up cleanly in the TIC data. So to an important degree I now feel like I am flying blind. Flows through banks are a bit harder to track than flows through the bond market.

I am excited to be back at the CFR, and to restart this blog. I hope that there is still an audience for opinionated, but hopefully (largely) data-driven analysis of the global economy and the global flow of funds.

*In dollar terms the pace of sales was a bit faster in 2015; as a share of GDP, the purchases back in 2007 and 2008 were far larger.