China’s Estimated Intervention in January

It should go almost without saying that China’s ability to maintain its current exchange rate regime matters. The yuan has been more less stable against the CFETS basket since last July. If the current peg breaks, China will struggle to avoid a major overshoot of its exchange rate. Christopher Balding recently has argued that the fall in the dollar (on say the Fed’s dollar index) in 2017 is more or less the same as the yuan’s depreciation against the basket—which would make China’s exchange rate regime now more a pure peg against the dollar rather than a true basket peg. Hence the lack of movement against the dollar in past few weeks. Maybe. I though am inclined to think that the yuan’s depreciation against the basket this year just undid the upward drift against the basket that came when the dollar appreciated last year, and China is still aiming to
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Why Did China’s 2016 Current Account Surplus Fall?

Few policies are less liked than China’s 2015/2016 credit-driven stimulus. Even people like me who worried that slamming the brakes on credit, in the absence of more fundamental reforms to lower China’s savings rate, risked creating a shortfall in demand were not exactly enthusiastic supporters. China would be far better off if had used a rise in central government social expenditure to support demand, not yet another wave of off-balance sheet borrowing by local governments and state firms. But the current pick-up in growth suggests that arguments that (yet another) expansion of credit wouldn’t work were a bit overdone. There are no doubt better ways to support growth than more credit. But growth did responded to the stimulus, even if there is a real debate over just how strong the response was.* Tilton, Song, Tang, Li, and Wei of Goldman Sachs (in a report summarized here): “Chinese policy
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How Serious Is the Threat to Global Financial Stability From a Border-Adjustment Tax?

Neil Irwin’s column on the border-adjustment tax spurred an interesting debate. Irwin notes that a 25 percent rise in the dollar (or even a somewhat smaller rise) would have an impact outside the United States, as the dollar is a global currency. Dean Baker and Jared Bernstein note that the dollar moves around a lot without destroying the global economy. The projected moves in the dollar are no larger than the dollar’s 20 percent or so move over the last three years. Baker: “Movements of this size happen all the time. They certainly can cause problems, but the financial system generally deals with it.” Fair enough.* I still worry though. There is a difference between a 20 percent move (off a long-term low) and a 30 or 40 percent move. And there is a difference between normal exchange rate volatility and large, sustained currency shifts. I would note Continue reading "How Serious Is the Threat to Global Financial Stability From a Border-Adjustment Tax?"

The Dangerous Myth That China “Needs” $2.7 Trillion in Reserves

$2.7 trillion is well over 3 times China’s short-term external debt (around $800 billion per the IMF). It is roughly two times China’s external debt ($1.4 trillion, counting over $200 billion in intra-company loans). It is enough to cover well over 12 months of goods and services imports (total imports in 2016 were around $2 trillion).* There are two good reasons why a country might need more reserves than it has maturing external debt. The first is that it has an ongoing current account deficit. A country arguably should hold reserves to survive one year without any external financing – the sum of the current account and short-term external debt. The other is that a country has lots of domestic foreign currency deposits. Neither applies to China. China’s runs a $200 to $300 billion current account surplus, so its one year external financing need is now Continue reading "The Dangerous Myth That China “Needs” $2.7 Trillion in Reserves"

Does Korea Operate A De Facto Target Zone?

Fred Bergsten of the Peterson Institute has long argued for target zones around the major exchange rates. No G-3 economy has ever decided to take Bergsten’s advice. The world’s biggest advanced economies have wanted to maintain monetary policy independence, and—Japan perhaps excepted, at least during certain periods—they haven’t viewed foreign exchange intervention as an independent policy tool. China formally has a band around its daily fix, but its exchange rate is still more of a peg (now a basket peg, without any obvious directional crawl over the last 7 months) than anything else. I though increasingly think that Korea’s exchange rate management could be described as a target zone of sorts. It buys dollars and sells won when it thinks the won is too strong (recently, too strong has been less than 1100 won per dollar). And it sells dollars and buys won when it thinks the won is too
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Offshore Profits and U.S. Exports

One important result of my theory about the sources of “dark matter” in the U.S. balance of payments is a concern that “border adjustment” might not generate the expected revenues. American multinationals would have a strong incentive to shift their offshore income on intellectual property rights that are now located in subsidiaries offshore back to the U.S.. A lot depends on the details of any proposed tax reform, but I think a firm with U.S. expenses and export revenues would generate a tax loss on its exports (export revenues are excluded from calculation of revenues for the purpose of the tax, and domestic expenses can be deducted). If that tax loss is refundable, exporters essentially get a check back from the government for a sum equal to their domestic labor costs (see Chad Bown on the “subsidy” component of a border tax adjustment).* Profits that now
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Dark Matter. Soon To Be Revealed?

The debate around the House Republicans’ proposal for a border adjusted (destination-based cash flow) tax will, I think, force an important debate about the impact of corporate tax strategies on global trade flows.* My guess is that tax strategies do have a significant impact on the trade data (one hint: the trade deficit in pharmaceutical the U.S. now runs with Ireland and Switzerland). And in turn I suspect that the revenue projections from the House’s proposals will depend in part on how firms are expected to adapt to a world where export revenues booked in the U.S.—including export revenues from the royalties on intellectual property—are not taxed. A world where the U.S. suddenly becomes tax competitive with Ireland, the Netherlands and others. I suspect that the size of the impact will surprise many people. I first started looking at the impact of firms’ tax
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Imports Normally Would Have Subtracted More From 2016 U.S. Growth

I follow the news, some would say obsessively. I know there are far more important things afoot than backward looking analysis of the United States’ 2016 economic performance. But I do think in some ways the U.S. was lucky not to have slowed more in 2016. Why? Because import growth stalled, and imports did not subtract as much from U.S. growth as normally would be expected (and yes, that obviously wasn’t the dominant narrative of the 2016 election). Plus the U.S. essentially got a small GDP boost as a result of a bad harvest in Brazil that raised U.S. soybeans exports in q3 (a rise that was only partially reversed in q4). The U.S. isn’t (yet) a commodity-driven economy, but it also isn’t (yet) a robot-based intellectual property rights (IPR) royalty-driven economy totally divorced from natural sources of economic volatility. Imports are essentially a function
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The Price of U.S. Imports From China Keeps Falling

The way trade is to be taxed at the border may—or may not—be about to change radically. But rather than speculate on the nature of the new world, I wanted to highlight one feature of the old. I sometimes hear that China is loosing trade competitiveness because of rising domestic costs. And thus Chinese manufacturing firms need to move out of their ancestral homeland, either to low cost manufacturers like Vietnam or even to advanced economies like the U.S., in order to remain competitive. I do not see it in the data. At least not in aggregate — the stories of individual sectors of course could differ. . If the price of imports from China (as reported by the U.S. Department of Labor) is compared to the price of U.S. made finished goods and the price of domestic manufactures, Chinese goods not only look very competitive, but
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Chicken Feet And China: Back to the Future

Yes, this is a blog about chicken feet exports—technically, NAICS code 311615, “poultry processing.” Welcome to the glamorous world of tit-for-tat trade spats. The biggest trade case of 2009 was the tires “421 safeguards” case, which prompted China to respond with duties on U.S. exports of chicken parts. The possibility that the U.S. and China could embark on a cycle of sanction and counter-sanction will, I expect, force a new group of people to explore the nooks and crannies hiding in the data on U.S. exports to China. Some of the sectors are well known. Aircraft, of course. They are one of several sectors that account for about 10 percent of total U.S. exports to China and Hong Kong. Along with autos. Auto exports fell a bit in 2015, but in 2014 auto exports were almost as big as aircraft exports. Mostly SUVs I
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China’s WTO Entry, 15 Years On

Late last year Tim Duy asked for an assessment of the decision to allow China to join the WTO, now that 15 years have passed. Greg Ip met the call well before I did, in a remarkable essay. But I will give my own two cents. Be warned, this isn’t a short post. Frankly it is an article disguised as a post. I added the subheadings to make it a bit easier on the eye. Autor, Dorn, and Hanson Deserve All the Attention They Have Received It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had “most-favored-nation” (MFN)/“normal trade” access to the U.S. market, so it wasn’t clear that all that much would change with China’s WTO accession. But China’s pre-WTO access to the U.S. came
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China’s Reserves Fell by Around $45 Billion in December (Using the PBOC Data)

The pace of decline in China’s foreign reserves matters. Not because China is about to run out. But rather because China will at some point decide that it doesn’t want to continue to prioritize “stability” (against a basket) and will instead prioritize the preservation of its reserves, and let the yuan adjust down. Significant voices inside China are already making that argument. And I fear that if the yuan floats down, it will stay down. China will want to rebuild reserves, and—if exports respond to the weak yuan—(re)discover the joys of export-led growth. Relying on exports is easier than fighting the finance ministry’s opposition to a more expansive (on-budget) fiscal policy, or seriously expanding the provision of social insurance to bring down China’s savings. I thus disagree with those who argue that the “China” shock is over. It depends a bit on the exchange rate. China’s exports of apparel and
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The U.S. Needs More Manufactured Exports

I previously have noted that—if you exclude processing imports—China’s imports of manufactures are low relative to its GDP. I suspect the interlinked “China, Inc” connections between Party and State (described well by Mark Wu) have something to do with this. Manufactured imports, net of processing imports (processing imports are re-exported), peaked as a share of China’s GDP back in 2003. ae-manufacturing-imports The other “trade” outlier among the world’s big economic blocks is the United States. U.S. imports of manufactures aren’t out of line with those of say the eurozone. Or for that matter with Japan, which imports a lot more manufactures now than it used too. The U.S. though does stand out for the low level of its manufactured exports. ae-manufacturing-exports I am using an imperfect proxy for U.S. manufactures here—the sum of capital goods, autos, and consumer goods in the end use data. That leaves out manufactured
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Two Trade Variables To Watch in 2017

I suspect that few variables will tell us more about the course of the global economy, and perhaps global policy, than the evolution of Chinese and U.S. exports. Sometimes the most important indicators are simple and straightforward. China’s exports matter for a simple reason: they could provide the basis for a true change in the narrative around China’s currency. I tend to think controls can play a role in stabilizing expectations. The trade account doesn’t signal an underlying overvaluation of the yuan. China’s goods surplus is quite substantial. And China’s exports, as the chart below shows, have outperformed U.S. exports both during the period of dollar weakness (05 to 13) and in the recent period of dollar strength (chart uses a volume index, Chinese data starts in 05). us-v-china-real-goods-exports With an ongoing trade surplus, the right exchange rate is ultimately a function of the scale of outflows—and those are in
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China’s Q3 Balance of Payments Data Helps Explain Why Q3 Reserves Fell So Much

I want to step back a bit from the rather extraordinary moves in the offshore yuan market over the past few days. It seems quite clear that China’s authorities felt the need to signal that the yuan isn’t currently a one way bet against the dollar. And stepping back in this case means taking a deep dive into the details of the balance of payments data — details that come out with a quarter lag, and thus provide information that is stale from the point of view of a forward-looking market. A lot, and I mean a lot, changed in the fourth quarter. I generally like it when China’s data series line up. Line up with each other. And, when possible, when China’s data also lines up with data reported by China’s trading partners. So I have been bothered for some time by the large discrepancy between the fall in
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Three Takes on China to Start a New Year

Christopher Balding (Balding’s World) highlights the risks from the interaction between PBOC tightening—whether because China’s own economy has picked up or a need to mimic the Fed’s tightening cycle —and rising levels of debt (mostly corporate debt, counting the debts of state enterprise as corporate) in a carefully argued Bloomberg view column. Adair Turner’s column “A Socialist Market Economy with Chinese Characteristics” emphasizes how surprised many were by China’s 2016 rebound: “Almost all non-Chinese economists anticipated a significant slowdown, which would intensify deflationary pressures worldwide. In fact, the opposite has happened. Central and local government borrowing in China has soared: bank and shadow-bank credit has grown rapidly: and the People’s Bank of China (PBOC) has increasingly issued direct loans to state-owned banks in a maneuver closely resembling monetary finance of government spending.” Turner highlights the risks of large losses from the bad lending that has come with Continue reading "Three Takes on China to Start a New Year"

Appreciate the Disaggregated Dollar

The broad dollar is now up well over 20 percent since the end of 2012. The vast bulk of the move occurred in the last two and a half years. The dollar has essentially reversed its 2006 to 2013 period of sustained dollar weakness (tied to the weakness of the U.S. economy, the size of the U.S. trade deficit, and the Fed’s willingness to act to ease U.S. monetary conditions at a time when the ECB was stubbornly resistant to monetary easing). And in some sense we have already seen some of the results play out.
  • U.S. export growth has slowed (though U.S. import growth has remained fairly subdued, particularly in 2016—moderating the impact of net trade on output)
  • China decided that it couldn’t continue to manage its currency primarily against the dollar, but only after (essentially) following the dollar up in 2014. The transition
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China’s November Reserve Drain

The dollar’s rise doesn’t just have an impact on the United States. It has an impact on all those around the world who borrow in dollars. And it can have an enormous impact on those countries that peg to the dollar (Saudi Arabia is the most significant) or that manage their currency with reference to the dollar. China used to manage against the dollar, and now seems to be managing against a basket. But managing a basket peg when the dollar is going up means a controlled depreciation against the dollar—and historically that hasn’t been the easiest thing for any emerging economy to pull off. And China’s ability to sustain its current system of currency management—which has looked similar to a pretty pure basket peg for the last 5 months or so—matters for the world economy. If the basket peg breaks and the yuan floats down, many other currencies will
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Why Doesn’t Apple Export More Services (Wonky)

A big caveat. Apple is being used to represent a lot of companies with very valuable intellectual property (IP) that have built up similarly outsized piles of cash outside the United States; it is the most high-profile case, but it is hardly unique. The iPhone, famously, is designed in California and is assembled in China out of parts manufactured (mostly) in Asia. I do not think the recent coverage about what it would take for Apple to manufacture the iPhone in the United States has added much to Keith Bradsher and Charles Duhigg’s spectacular reporting back in 2012. And, to my mind at least, the big revelation in the Bradsher/Duhigg article was that even the high-end components of an iPhone, and even those high-end components that come from American companies, typically aren’t made in America. Corning now manufactures its gorilla glass mostly in Asia, the chip designers farm out
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Hong Kong Is Now a Negative Indicator of Chinese Tourism Imports

I haven’t written about China’s tourism imports for a while. Suffice to say they remain a puzzle. To recap quickly, China’s reported imports of tourism soared in 2014 and 2015—with imports of tourism (spending by Chinese residents travelling abroad) rising as fast as China’s imports of commodities fell (see this blog post). China’s tourism imports are $324 billion over the last 4 quarters of data, up from $234 billion in 2014—and way up from $128 billion in 2013. The tourism deficit is now big—about $210 billion over the last 4 quarters. It is one of the main offsets to China’s large ($525 billion on a balance of payments basis) goods surplus. Much of the rise in China’s tourism imports seems to reflects the fallout of the introduction of a new methodology for calculating tourism imports, one that relies on electronic payments data rather than the numbers on actual
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