30 November 2007

China's trade surpluses: disequilibrium and accommodation

China's trade surpluses are humongous, with both the US and the EU. Yet the solution is quite obvious, only difficult to implement. Full essay.


Anonymous said...

Would that lead to another trade war similar to the opium war?

Anonymous said...

China's export growth model generates huge trade surpluses is nothing new. It is copied from Japan and adopted by Asian tigers (S.Korea,Taiwan,Spore,HK) and followed by Msia, Thailand, Indonesia, etc. Over long periods, trade surpluses create disequilibrium in trade balances, currency values & investments. The US consumption binge has propelled much of China's growth. However the US$ decline has hurt China's US$ holdings. Unless RMB appreciates, China will suffer a diminution in their foreign currency holdings. Trade surpluses has always ended in tragic proportions. History had a parallel with Japan in late 80s & early 90s when its huge trade surpluses caused JYen to appreciate and hurt its exports. Also, a surge in Japanese investments in US real estate, golf courses & other ostentatious assets were wasted. This excess/bubble period resulted in a long period of restructuring in Japan between 90s & 00s. The Asian economies suffered their own fate during the Asian crisis of 1997-98 when the Won, Baht, Ringgit, Rupiah were sold down by hedge funds & speculators. Although the Asian crisis is forgotten by now, many had lost their wealth, jobs & assets during that time. Even Spore went through a wretched time - no jobs, property slump, foreclosures, negative equity in property & cars, etc. Due to lack of transparency, we'll never know the extent of the damage but govts lost a great deal of their holdings during that period. The fear is that China is a ticking time bomb. Its fallout will hurt many countries especially Spore.

Anonymous said...

china runs a trade deficit with some neighbours such as taiwan; they are in effect exporting to usa and europe indirectly through china; a recession in china would affect them in the same way the japanese recession affected korea and SEA, though with varying delays; the same goes for areas that receives investment or bank loans from surplus areas


Anonymous said...

There is a saying, if you owe and unable to pay the bank $1000, you are in trouble. If you owe the bank trillions and unable to pay, the bank is in trouble.

The scenario as describe in this Yawningbread article clearly fits the saying. The Bank -- i.e. China -- have lend so much money to the Debtor -- i.e. the US -- that the lender is in a precarious position.

Often I pose this questions to many of my friends, who range from sycophantic "China is great" friends to those blinded by China's growth rate: Now who is the stronger in the relationship, China or the US?

On another note, I often find many believers of the raising power of china and one eclipsing the US often can only point to China's reserved and growth rate as evidence of power. But often such commentators fail to see one basic facts about money in Economics. Money is useless except for the purpose of exchanging goods and services. A country's reserved is pretty much useless as a means of projecting power.

In the case of Singapore, with the obsession of build up reserved for the sake of it, frankly all that money can only be useful say for limited defence against the Singapore dollar. Another other crisis is pretty much useless. Let's imagine this scenario, if the US decides to renege of paying out the money we loan them, what can we do? Send the Tai E Long in to recover? Sue the US nation in our court?

Now some will say in an extreme crisis like say war, and we decide to draw down on the reserve, does one honestly think that we will be getting back our money in its proper value?

If we start a fire sale of our assets abroad, buyers will clearly know they can expect a highly discounted asset value.

Or in the case of war and we lose on our diplomatic front(because we piss off our neighbours say) and the UN freezes our overseas assets, what use is the reserve then?

For some strange reason, countries such as China, Singapore and some Asian economies seemed to have this obsession with accumulating reserve for the sake of it and not sharing out some of the largess for social good. It seem many leaders of these nation don't realise the money, especially excessive surpluses have no value what so ever. More importantly is developed the economy sustainably -- not necessarily environmentally but economically by ensuring a balance between internal and external investment driven growth and accumulating sufficient reserve to defend against currency attack.

It is worth reminding the LKYs of these world that too much of a good thing can also be bad for one's holistic well being!

Anonymous said...

we don't live in bubble, and to view the sino-u.s. situation in pure economic terms is bubblish).

the u.s. may be obliged to honor its debts, but if it decides not to - there's not much anyone can do about it. that's true, and that knowledge has added to its hubris. it's increasingly antagonism of china is but one example.

mind, beijing is playing the model global citizen because the world's eyes are on 2008, but don't count on the party maintaining that calm once the olympics are past.

one more defeat in congress of a cnooc or haier deal may well be the slap in the face that pushes china over the edge.

doing the math, the party may well decide that china can afford to weather a global economic meltdown. should it dump its u.s. securities into the market and send the dollar into free fall. after all, the firm fist of communism-as-usual is still fresh in the minds of most chinese.

a frosty relationship with the u.s. will also untie beijing's hand in dealing with taiwan. stretched american forces, combined with an increasingly tenuous washington-moscow relationship will certainly embolden the chinese...

the bottom line is the rules of the game seem to put china at a disadvantage, but history proves that humanity has a startling habit of cutting off its collective nose just to spite the face.