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Archive for the ‘trade’ Category

Andy Xie: Inflation exported from the US will come back to haunt it

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In an interview on Bloomberg, Andy Xie explains how US stimulus is causing inflation in emerging markets and how this will be re-exported back to the US via higher commodity prices.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Before you scream traitors, please bear in mind it’s only natural that capital seeks growth, real growth that comes from either productivity or population growth. And within the developed economies, both are in short supply. Japan’s stagnation is NOT due to any policy failure or “stimulus not big enough”, but rather because it has seen both peak productivity and declining population.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

These words are so true. I have blogged about wage increases in all kind of places before.

However, he then went on to explain how unemployment will not be able to check this imported inflation, and here’s where I disagree with him. While I do believe in imported inflation for the matured economies, I don’t think the workers in these economies are in a position to bargain for wage increases. Instead, inflation will have a double whammy on the average Joes as their assets prices and wages keep falling while everyday living expenses increase. The only spin you can put on this nightmarish scenario is that being squeezed on both sides, the painful adjustment will be quicker, or as Xie put:

The West must wait for the Wangs and the Gandhis to become rich enough so that they demand Western wages and spend like the Smiths and Gonzalezes.

It is a long and painful process for the West. And there is no way around it.

Written by Cindy Luk

August 19, 2010 at 3:14 am

China buying more JGB

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In an attempt to diversify from the USD, China bought more JGB in June.

China purchased a net 456.4 billion yen ($5.3 billion) of Japanese debt in June, following net buying of 735.2 billion yen in May that was the most in records dating from 2005, according to a report released today by the Ministry of Finance in Tokyo.

This is expected as the nation switched to a soft peg referencing to a basket of currencies.  Although Japan is the 4th largest export market of China, making up about 10% of its exports, the trade is more or less balanced. As such China’s trade surplus against Japan was only about USD20bn in 2009.

Since China has so far bought about USD20bn JGB this year, has it used up its quota then? Not likely. China has been under-weighting JGB in its reserves since 2006. If China does indeed intent to bring its currency to be trade weighted, there’ll be more JGB to buy, at the expense of US Treasuries naturally.

A side effect of buying more JGB is pushing up the Yen and Japanese Finance Minister Yoshihiko Noda commented yesterday that he’s watching the matter. But this may be a price that Japan has to paid, as it becomes increasingly relying on foreign lenders. Savings rate tumbled in  to a mere 2.2% in 2007 from 11.4% of a decade earlier, as economic stagnation and an aging population takes it toll.

Written by Cindy Luk

August 10, 2010 at 4:00 am

Andy Xie: China should hike interest rate rather than revaluate its currency

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From Century Weekly, Xie’s views on interest rates and exchange rate. Insightful as usual.

But acting on the currency first, especially in small steps, would further inflate China’s property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan’s value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.

This was exactly what happened in 2005, making the bet on RMB revaluation a sure win and attracting more hot money inflows. Despite capital control, lots of hot money still manage to get in, as the system is rather porous. A major receptor for these speculative inflows is the Chinese property market.

By all measures (stock value to GDP ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields, and vacancy rates) China’s property market is one of the biggest bubbles ever. It’s probably much bigger than the U.S. property bubble relative to GDP.

Xie doesn’t have much kind words for those who tout currency appreciation as “good for China” in the sense it helps contain inflation.

Why is this policy option so popular among interest groups? Because it would fuel the hot money inflow, which in turn would support and expand the property bubble. Of course, inflating the property bubble will only worsen inflation. And the odds are that a small currency appreciation would only make the property bubble bigger and inflation worse.

In a standard economy, currency appreciation cools inflation by decreasing import prices. China’s imports are mainly raw materials, equipment and components. A small currency appreciation would have virtually no effect toward cooling inflation. So while a small appreciation might be justified politically, it should not be used to fight inflation.

On the other hand, a major appreciation or revaluation could cool inflation by removing further currency appreciation expectations. It would trigger a hot money exit from China, creating a liquidity crunch that would almost certainly burst the property bubble. I doubt anyone would support such a policy move.

For China to achieve a soft landing from the current property bubble – if this is at all possible – interest rates must steadily increase by 2 percentage points in 2010, another 3 points in 2011, and further in 2012. Such a trajectory for interest rates would not burst the bubble, but it would prevent real estate interest rates from further declining in an atmosphere of rising inflation.

And insight on the real cause of Chinese trade surplus: that of suppressed consumption.

I am surprised that China is still running a trade surplus. …The surplus, I think, can be attributed more to distortions in domestic pricing than the currency’s cheapness.

First, high property prices are a major deterrent to middle class consumption…. But first-time buyers, such as newlyweds, have to save more to purchase property. Indeed, since prices are so high, parents have to save to help them…

Second, prices for middle class goods and services are very high. Autos stand out: Prices in China for cars, even those built domestically, are the highest in the world. …

Third, China’s taxes on the middle class are too high. The top marginal income tax rate of 45 percent applies at quite low income levels by international standards. The 17 percent VAT is also among the highest in the world. Because China tends to invest its tax proceeds, high taxes suppress consumption.

So to balance trade and boost consumption, structural changes in the economy is needed rather than tweaking the exchange rate. Yes, this will take a decade to bear serious fruit and won’t help those facing elections in November. Well, too bad. Life sucks.

Written by Cindy Luk

April 13, 2010 at 3:01 am

All clear on the RMB front

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Yes, a deal has been stuck.

Hu Jintao is going to attend the April 12 nuclear summit. So there’s no way no way that China will be named a currency manipulator a mere 3 days later. But a sudden change of heart by China to soften the peg is very likely afterward. Like I said yesterday, China could appease by simply broaden the trading band, which may not result in any appreciation at all given its trade deficit.

Written by Cindy Luk

April 1, 2010 at 2:52 pm

Posted in China, Macro, trade

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Currency rhetoric cools off

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Amazing! It seems that the sino-american brinkmanship is playing out again, for the umpteenth time!

Rhetoric seems to be cooling off on both sides. The 3 freshly minted members of China’s Monetary Policy Committee, a key government advisory on…monetary policy, are voicing  pro currency adjustment opinion in the public. The US report on trade barriers focus on stuff other than the exchange rate. China is signaling more willingness to join the chorus on Iran. So, maybe, a backroom deal has already been reached.

Given China’s trade deficit in March, maybe the government feels more at eased at widening the RMB trading-band as the immediate adjustment will be minimal, that is, if you buy SocGen’s view that China’s trade deficit is at least a medium term phenomenon. So effectively China can promise moving from a hard peg to a soft one, while making minimal change in reality. The RMB might even depreciate if called for, to scare off any hot money inflow betting on an appreciation. This way China regains some level of monetary independence and can choke off imported inflation if needed. And Team Obama get to tell Americans in November how they stared big bad China in the eyes and didn’t blink.

If this plays out, I think it will happen in Q2 indeed, so that hopefully the whole thing will blow over by baby-kissing time. The attendance list of the Mar 12th summit’s still worth watching for confirmation though.

Written by Cindy Luk

April 1, 2010 at 3:07 am

Posted in China, Macro, trade

Tagged with , , , , ,

Andy Xie believes that trade war can be averted

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Xie is my favorite China economist by far. He penned an article in the New Century magazine, discussing the probability of trade war and calling for more rapid interest rate hike. The piece is in Chinese so you’ll have to bear w/ my translation.

Chinese exports to the US are mostly owned, designed, and marketed by large American MNCs. Across-the-board tariff increases will cut their profits, leading to collapse in the equity market, which in turn will cause a second-dip in the real economy. The current US government doesn’t even have gust to prosecute those that blew the bubble and wrecked its economy, it will in no way dare to hurt its economy this way.

Xie is more optimistic than I am. People are not entirely rational and Washington is looking for blood this time. Does Obama strike you as a staunch free-trader? Not to this blogger anywayz. The only thing that might hold back the US from a full-scale trade war is a prospective rise in interest rate. Last week’s lousy treasuries auctions are more helpful in pulling us from the brink than any other rational argument.

To me a key event to watch is the April 12 summit in Washington over nuclear nonproliferation. What does this have anything to do with the economy? Well, nation states have other business to look after besides things economic. The US has been trying to talk Hu Jingtao into attending the meeting personally. Giving the Chinese emphasis on face, I doubt he’ll go if there’s any chance that China will be named a “currency manipulator” 3 days later.

The 2nd half of the article relates to interest rate and Xie is calling for a sooner hike rather than later. He sees a huge bubble in the Chinese property market and wants tighter monetary policy.  One of the arguments against interest rate hike is that this will attract more hot money inflow to an already overheating economy.

Already there are a large amount of hot money inflows into China. What they are chasing is not interest income, but a bubble. If China hikes interest rate, the hot money may actually leave worrying about the upcoming burst. This will lessen the RMB’s pressure to appreciate, rather than intensifying it.

This may be true, if the interest rate hike is drastic enough. However, given the mildness of  the world recovery and the Chinese authorities’ natural and historic tendencies to moderation, I doubt the hike will be sharp enough to scare off further hot money inflows. Creating a one-side bet against the RMB a la 2005 is not desirable from China’s perspective. I think China most likely will tighten through controls on new bank loans, unless inflation surpasses the 3% target. Then China may feel the need to utilize the interest rate sledgehammer, or maybe even currency appreciation.

Written by Cindy Luk

March 30, 2010 at 5:43 pm

What will China do in a trade war?

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Many people still seem to believe that the recent saber-rattling is just of the normal type, that both sides scream a lot but will eventually see the light and settle down to talk. But the mood in both the US and China are a lot more somber this year. Call me a pessimist, but I think a showdown in trade is inevitable.

What Washington will do is quite obvious. What’s the point of labeling someone a currency manipulator if you can’t stick punitive tariffs to its exports? The question is what China will do in retaliation. The folks calling for blood now seem oblivious to the cost right now. Maybe they don’t know, or maybe they just want to lash out at the “culprit”.

Would it hurt China? Oh, you bet! Despite all the talk of developing a domestic economy, the Chinese economy is 40% export. Although China is a lot less dependent on the US as a key customer now compared to a decade ago, any MAJOR customer is still important in this environment.

The question is at what cost? What will China do to retaliate? The natural suspect of dumping Treasuries is usually brushed off as not feasible since it will cost China in terms of capital loss to its existing holdings. What this argument fails to note is that the Chinese do NOT buy treasuries out of their kindness, out of love for Washington, or even out of their freewill, but out of necessity from holding too much excess US dollars coming from their trade surplus. If export to the US is slapped with punitive tariffs, China’s trade surplus will naturally shrink, leaving it with less dollars which in turn will translate into less purchase of treasuries.

Now of course, lost business to China will naturally go somewhere else. So someone somewhere will eventually end up with excess dollars and buy treasuries. But this trade adjustment will take some time and there’s no telling how much they actually save up from the trade to buy treasuries. Theoretically they could have spent it all. Vietnam, a most likely beneficiary, actually runs a trade deficit. On the other hand, the impact on interest rate will be immediate, especially given the aggressive borrowing schedule from the Treasury. Already China is reporting its first trade deficit since 2004 for March, and we are seeing turbulence in 10-yr yield. Could this be a harbinger of catastrophe to come?

In this scenario, China doesn’t even have to do anything. This is just the natural outcome from diminishing trade surplus. As for the hope that economic pain will push China to revaluate, keep on dreaming. If trade collapse, the natural order of things is to devaluate, isn’t it?

In the end, it will come down to a masochistic competition of pain tolerance, and I’m not holding my breath for a people steep in entitlement.

Written by Cindy Luk

March 25, 2010 at 12:42 pm