A blog on Chinese economy & society

Posts Tagged ‘surplus

Runaway inflation in China

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China is to release April CPI today and the consensus is about 2.7%. While this seems well within the 3% target, actual inflation on the ground is quite another story. One telltale sign is that PPI is forecast at a scary 6.7%. How long will it take for this to be transmitted downstream, or should we look for the factories bellying up instead?

The inflation story is so worrisome that even the PBoC has repeatedly cautioned against “heightened inflation expectation,” which it sees as a result of excess domestic and global liquidity, raging commodity prices, and rising wages and other domestic costs.

Since China’s growth relies heavily on investment, i.e. capital intensive, it is more sensitive to commodity price swings. The trade figures released yesterday largely confirmed this. Although China reported a surplus in April, as opposed to the slight deficit expected by many economists, it’s still down 87% YOY, despite decent recovery in global demand. The main culprit was surging imports, especially of commodities. Iron ore import was up 27% YOY, soya beans was up 13%…you get the picture. Considering the massive hikes in wages I blogged about earlier, unless China succeeds in reigning in its economy, commodity-induced inflation will eventually be transmitted to CPI, as early as May according to the pessimists.

And CPI may breach the 3% threshold even if  China succeeds in its endeavor. This is because China is mainly relying on policy measures to surgically cool down the property market, which is seen as the main problem, instead of truely mopping up liquidity. As such money squeezed out of property market simply flows to other sectors of the economy like farm produce. After a 40x (!!!) run up in price last year, garlic has gone from RMB9 per kilo in Q4/09 to RMB12.2 in April. 80% of farm produces monitored by the National Bureau of Statistics are seeing similar price increases and this is causing great consternation among the general public. Yes there are climate issues, but speculation definitely plays a significant part.

I had thought that China would hold off interest rate hike for much longer given the uncertainties in the global economy. I’m still of this belief but the Chinese government is now having rapidly diminishing room for maneuver, and might actually be forced into an unilateral hike in Q2, especially now that the ECB has entered into the competitive printing business as well.

From Bloomberg: Europe Rescue Lets China Tackle Asset Prices, PBOC Adviser Says

The European initiative will enable Chinese leaders to “focus more on containing risks in the domestic economy instead of worrying too much about the global risks,” said Li, appointed in March as one of three academic advisers to the People’s Bank of China.

He’s being nice. Helicopter Ben x2 means that China will be submerged in a tide of liquidity if it doesn’t act decisively.


Written by Cindy Luk

May 11, 2010 at 2:33 am

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

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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

China to see trade deficit in March

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In a forum in Beijing today, Cinese Premier Wen Jiabao spoke against protectionism blah blah blah. The major point to take home, however, is China will see its first trade deficit since 2004 in March, of about USD 8bn.

What does this mean, besides any implication on the currency debate? Well, ever since the beginning of this Great Recession (or GD2, as I would prefer to call it) Chinese exports have been a leading indicator of US consumption. So could this dramatic deficits foretell something more sinister, like a double dip? One month does not a trend make, of course, but this does raise serious alarm, especially in light with all this crazy talk of an official end to recession.

Written by Cindy Luk

March 22, 2010 at 5:56 pm

Currency War

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You know it’s election year when the media is full of propane gas. After New York Times’ press release yesterday arguing it’s all China’s fault, Martin Wolf at the FT is chiming in as well. He’s also attacking Germany along the way. The article is so dumb I was surprised that Yves Smith at Naked Capitalism chose to highlight it. I’m reproducing the discussion I had with her underneath.

Cindy6 says:

March 17, 2010 at 3:38 am

I can argue just as well it’s the debtor nations that want to have their cake and eat it. If they don’t want these trade deficits, tighten up. There will be no funny money to spend on imports anymore. They can also enhance their competitiveness by cutting prices, which no one on this planet or mars can do anything to stop, and boost exports tremendously. But no…that will be too painful for the civilized people. You see, only Latinos and Asians should be subjugated to stiff austerity programs administrated by the IMF.

Deflation is not really that scary if you’re a creditor (I know, I lived thru one. It’s wonderful, ur purchasing power kept increasing:) Just like inflation is much more palatable to debtor. Yes, China and Germany don’t want to foot the bill for global imbalances. But then, why should they, it’s not like the debtors are doing anything remotely helpful. At least the Greeks tried…

  • Yves Smith says:


    The creditor nations are the ones that took steps to keep their currencies cheap and preserve their surpluses. For instance, China has been running a currency peg since 1994.

    Moreover, what is true for you as an individual creditor is not true for a creditor nation. Creditor nations do much worse in deflationary periods. They have to restructure their economies fundamentally, which leads to widespread unemployment. The debtors merely default selectively and depreciate their currencies. The historical record is pretty clear on this issue.

    • Cindy6 says:

      Was the RMB/USD exchange rate considered cheap back in 1994? I don’t think so. In fact, I remember quite well China was under tremendous economic and political pressure to DEpreciate during the ‘98 crisis, as most other Asian currencies did already. Even Japan succumbed, at a great expense to its prestige within Asia. So you see, the peg has never been a tool to accumulate surplus, but a vote for stability. Besides, no one called the RMB cheap back then, why is it cheap now after after a 20% appreciation?

      Basically global imbalances need to the debtor nations to consume less and the creditors to consume more. But now, the debtors are not willing to do anything serious, so why should the creditors care? Of course, this will not end well. So it would become a game a chicken and a war of attrition.

      As for the pain suffered after the endgame, I would postulate that the creditors will last a LOT longer, since their savings will alleviate unemployment. In fact, this is the other side of Keynesian that the likes of Krugman never talk about. Fiscal stimuli should be funded by money saved up during good times. China can keep the factories humming with its reserve, for a while, and give the products to the peasants. In fact, this is the essence of last year’s rural home appliance program. There’s talk of continuing with another rural home improvement program. Given the disaster in SiChuan, I think this will be money well spent.

      Another factor you should bear in mind in your comparison w/ GD1 is that China’s urbanization rate is barely 45% now, about the level of the US in the 1910’s. Worst comes to worst, the migrant workers can just go back to their farm. Unemployment will not lead to starvation. The labor shortage we hear about this year is partly aggravated by workers don’t bother to return to the factories after the economy improves.

      Now, what could the debtors do? They can default of course. Existing debt has never been the problem. The problem lies in their fiscal deficits, that they need fresh, new money to continue their day to day existence. Even if the debtors default selectively, do you think the other investors will continue lending at these rates? And if you think losing an empire, suffering a horrendous war, and losing a reserve currency is actually doing better, then we live in alternate universe.

      The bottom line is if inflation is more preferable to deflation to the creditor nations, then we wouldn’t be having this discussion. China and Germany are only doing what’s in the best interest of their citizens. The same reason why the Fed will continue printing, to the detriment of other nations.

Yves Smith says:
March 17, 2010 at 5:57 am


First, deflation is not a healthy state of affairs. Look at Japan, look at the US late 19th century where there were farmer uprisings, the UK in the early 20s. The deflation imposed on countries at various times is considered to be the prime reason that no one now (save gold bugs) wants to go back to the gold standard. Mild inflation is considered to be the least bad of monetary growth choices, and there is a school of thought that the view that 2% was a good level might be wrong, there is now some thought that somewhat higher levels might be better. I have no idea re the optimal level of inflation, but deflation is destructive to growth.

Any currency peg (if a hard peg, which China’s was, and is still pretty hard) will lead to distortions. I say later in this thread quite explicitly that when China’s peg became too low is subject to debate (some say as early as 1999) but there is no question it was too cheap by 2002.

Re urbanization, the 45% figure you cite is based on China’s own distorted metrics. China has unusually high density thresholds for a community to be classified as “urban”. Many significant manufacturing centers are called “villages” or “towns” when no one from abroad would call them that. Houston and Brisbane would also be “towns” in the Chinese schema.

Your charge re debtor nations is off base. Unless a country goes into a trade surplus, it is impossible for it to lower its outstanding debts on an aggregate level. So China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt. If you want the US to delever, there is no way other than for the US to go into a trade surplus, or at least lower its trade deficit substantially so its GDP growth rate will exceed its rate of debt accumulation.

Cindy6 says:
March 17, 2010 at 3:50 pm

“Any currency peg will lead to distortions.” Bretton Woods led to distortions? Stable currency and prudent fiscal policy are of no use to the world?

“urbanization…figure you cite is based on China’s own distorted metrics” So the US std is the truth and only truth now? The fact that many Chinese towns had higher population density 200 years ago than Houston now should never be considered? For the record, Japan defines its urban area as population density of 4k ppl / 1sq. km. , compared to 1k in China and 386 in the US. I don’t have the corresponding figures for S. Korea & Taiwan at hand, but I bet they converge towards China rather than that of the US.

“China’s insistence that it keep the RMB cheap to maintain its surplus with the US means we will continue to get more into debt.”
Not true. The US (or France or whichever) can always increase exports and depress imports by lowering prices. Yes, this is deflation I’m arguing for. This was how Germany regained its competitiveness in the 90’s, by “internal depreciation”. And yes, it’s painful, which is why the Germans now absolutely refuse to let the debtors whine their way out of the medicine and steal their hard-earned savings.

“If you want the US to delever, there is no way other than for the US to go into a trade surplus”
Not true either. The debtors can delever by good old fashion default. What can China do to a nuclear-armed soverign nation? Not even the PIIGS are pushovers. This is unsecured credit card debts! Trade deficits self-correct. China via UST, Germany thru bank loans. All the debtors have to do is get their fiscal house in order and the threat of higher interest rate would be a hollow one. But then, this would mean Austerity. How dare those sneaky parasitic savers!

So, at the end of the day, trade war is inevitable.

Written by Cindy Luk

March 17, 2010 at 10:00 am

China to increase minimum wage

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China is increasing its minimum wage across the board (the wage rate is set at provincial or even city level) in order to alleviate its labor shortage problem and also to help developing its domestic market. On the heels of recent announcement from Jiangsu to raise minimum wage by 13%, Shenzhen (a leading manufacturing hub down south) is to increase its wage rate by at least 10%. This trend is likely to be replicated throughout the nation.

By increasing labor’s share of profit, China is effectively making its exporters less competitive and reduce its trade surplus to placate the protectionist voices in key markets. The increase wages will go towards enhancing domestic consumption and building a middle class. A much better way to address the global imbalance than revaluing the RMB, which will only benefit China’s competitors.

Written by Cindy Luk

March 3, 2010 at 1:55 am

China will not revaluate the RMB

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I think China will not revaluate the RMB to placate the West, currency manipulator or not.

Why should it? Europe and Japan may have some merits in criticizing its currency policy as the Yuan has effectively depreciated against the Euro and the Yen.  However, the RMB/USD peg has been in place since 1994, surviving the trough of the Asian Financial Crisis when the RMB was widely considered OVERVALUED. The recent US call for RMB appreciation is like someone selling lemonade being out-competed and, instead of offering better product or better prices in his own shop, insisting that his competitor should raise prices to make life easier for him. There is nothing in this world or next stopping  US exporters from cutting their prices in dollar terms and gaining global market share but, oh, that will imply dredged deflation and really too painful for the chosen people.

But then, global trade needs to be balanced to stave off protectionism. And a bankrupt customer is not a very good one either. Andy Xie, my favorite China economist, has long advocated that China boosts domestic consumption by increasing wages and tighten environmental regulations. This way while the competitiveness of Chinese exporters will be shaved, helping to balance trade, the benefits actually accrue to the Chinese people.

Hu Jintao, the President of China, has recently made an important speech at the Party School of the Central Committee of CPC (yes, there’s such a thing, and hugely influential as well), signaling China’s push to develop its domestic economy and reduce reliance on exports. At the top of the agenda is to increase income distribution of household sector. Sure enough, Jiangsu, the 3rd largest export province, readily announced that they’re raising the minimum wage by a whopping 13%. Other manufacturing hubs like Dongguan, which is actually experiencing labor shortage at the moment, are likely to follow suit.

Higher wages and potential new taxes on polluters, precisely what Xie had argued for instead of RMB appreciation which will only benefit China’s competitors.

Written by Cindy Luk

February 11, 2010 at 12:19 am

Posted in China, Macro

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