from Follow the Money

Stein’s law, China edition ... What can not go on forever

May 20, 2008

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Back in 2005, the rise in the ratio between home price and rents, the unusual rise in real home prices and the rise in household debt relative to income seemed, at least according to some, to be an example of things that couldn’t go on forever.

Looking at those graphs reminds me of two other things that sure seems like they cannot go on forever but as of now show few signs of slowing: the increase in China’s (worldwide) exports, and the growth of its reserves.*


*reserves here is defined to include funds now managed by the CIC and funds that have been shifted to the state banks. In both cases, the government retains the currency risk.

Is there any sign either export growth or reserve growth is slowing? Not really. Export growth is slowing in percentage terms. But that largely is the result of a larger base. In dollar terms, Chinese export growth has just leveled off.


To be sure, the fact that Chinese export is no longer accelerating in dollar terms is something of a change. But Chinese exports are still expanding by about $250b a year. For reference, total Chinese exports in 2000 were only about $250b a year. $250b is a big number.

The y/y increase in Chinese exports also continues to top the y/y increase in Chinese imports -- though there is no doubt that the pace of import growth has picked up.


Why are imports rising? Easy, high oil prices. Oil is about $50 a barrel higher this year than at this time last year and Chinese imports are still growing. The ongoing rise in oil prices could add something like $70 to $80b to China’s oil import bill over the course of the year, which might be enough to bring the surplus down. At least for a bit.

The rise in import growth has kept China’s trade surplus from continuing to rise, but it hasn’t been strong enough to bring the surplus down. At least not yet. The cumulative monthly surplus over the last 12ms is as large as it has ever been.


The pace of the foreign asset accumulation by China’s government picked up in 2007 - and may have picked up some more in early 2008. It all depends on just how much was shifted to the CIC and squirreled away with the state banks in the first quarter (my graph assumes $70 billion was shifted to the CIC in q1; I haven’t tried to adjust for the growth in the banks’ foreign assets -- or, per Stephen Green, the increase in their domestic foreign currency lending to companies looking to expand abroad).


* The data in this graph has not been adjusted for valuation changes. I was lazy. The valuation adjusted data can be found in an earlier post.

What explains the dramatic shift in the pace of export and reserve growth that seems to have begun in the first part of this decade? Opinions differ, but I would emphasize the change in the path of China’s real exchange rate. China’s real exchange rate tended to appreciate in the 1990 and, perhaps as a result, China never had a large sustained trade surplus. From 2002, though, the RMB depreciated in real terms -- and it didn’t resume appreciation in a sustained way until 2007.


The tech recovery and end of the US recession can explain the pickup in 2002 and 2003, but not the persistence of China’s export boom. WTO accession helped, but it seems hard to attribute the entire post-2002 export boom to the WTO when it mostly just locked in existing (and generally low) tariffs on Chinese goods. Plus, wouldn’t WTO accession and the resulting increase in demand for Chinese exports normally be associated with a stronger currency? The same argument applies to state-enterprise reform. Domestic reforms that make an economy more productive should put upward, not downward pressure on the currency.

These kinds of graphs are one reason why I often find discussions about trade that feel like they could have been written in the 1990s frustrating. A late December oped in the New York Times, for example, didn’t even mention the impact of China’s policy of using its central bank balance sheet to subsidize its exports (for more, see Dr. Rodrik). Chinese foreign asset growth – counting central bank reserves, the CIC, and funds managed by the state banks – in 2007 was over two times the global increase in reserves in 2000 or 2001.

The times have changed. So have the policy issues. China -- and others too, but China is the most dramatic case -- impacts the world economy in a much more profound way now than in the past.

Chinese exports cannot continue to grow by $250 billion year forever -- and at some point Chinese reserve growth will peak as well. We don’t, however, yet know how the adjustment will take place A significant slowdown in Chinese export growth to the US is now underway, but there is little evidence of a comparable slowdown in the growth of China’s exports to the rest of the world. That isn’t adjustment; that is a reallocation from the US toward other markets. And all signs -- including the increasingly obvious concerns about how money inflows -- suggest that Chinese reserve growth continues at a very strong pace.

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