China posted a 48.5% increase in exports in May over its level the prior year, which led to much consternation and chest thumping in DC. Recall that Treasury Secretary Geithner was under considerable pressure from Congress to certify China a currency manipulator on April 15 (one of two semi-annual opportunities). China posted a rather surprising trade deficit for March (conveniently announced a few days before the Treasury report was due) and engaged in its usual fulminating, which led the Treasury to back down. Some attributed the unexpected deficit to the timing of the New Year (when factories are closed); some claimed the shutdowns were extended to make sure the surplus fell.
Now that China’s surpluses appear to be rising with a vengeance, Congress is pushing for a remedy and the Chinese are escalating their rhetoric. From The Hill (hat tip reader John D):
In an article published on its English-language web site, Xinhua said lawmakers were “playing a dangerous game” that will “inevitably mislead the American public, and poison the atmosphere of Sino-U.S. economic cooperation.”
Later, the article adds that “(t)hese congressmen claim they are the white knights defending the interest of the American people, but in fact, they are nothing more than a bunch of baby-kissing politicians trying to swing voters by manipulating the yuan debate.”…
Treasury Secretary Timothy Geithner testified Thursday before the Senate Finance Committee that China has not given any indication that it’s ready to act in the short-term, and Sen. Chuck Schumer (D-N.Y.) made it clear lawmakers’ patience is growing thin.
Schumer has introduced a bill that would tax Chinese imports to make up for the perceived unfair advantage of an undervalued currency, and warned Geithner the Senate was “going to do it soon.”…
Some European leaders, facing their own slow, jobless recovery from the so-called Great Recession, have called for a united U.S.-European front against China on the currency question.
Interestingly, some Asian analysts believe the strength in Chinese exports is temporary, and the euro devaluation will lead to a reversal. From News N Economics (hat tip Marshall Auerback):
A negative export growth trend has been established – explicitly in the Philippines and likely going forward in China … And these countries have strong trade ties with Europe – the Eurozone was 15% of 2009 world GDP (PPP value) according to the IMF.
Therefore, recent nominal appreciation of the Philippine peso and Chinese yuan against the euro, and expected real appreciation – Europe’s self-imposed economic contraction stemming from harsh fiscal austerity measures will drag prices downward – may very well hamper the economic recovery for key Asian economies via the export channel.
Export growth in the Philippines has been slowing to top trading partners…
In China, though, a resurgence of export growth among its top trading partners bucks the trend seen in the Philippines.
…Chinese exports are quite volatile in the beginning of the year. I suspect that Yu Song and Helen Qiao at Goldman Sachs are right, that export growth will initiate its trend downward starting in June:
We believe the very strong exports growth in May is likely to be a temporary phenomenon, much like the very weak exports data recorded in March, and expect June data to show a visible normalisation,…
The recent nominal depreciation of the euro against the Chinese yuan and the Philippine peso, 11% and 8%, respectively, since April 1 2010, will pass through to both Chinese and Philippine exports at a lag. And further real depreciation – the nominal exchange rate adjusted for relative prices of goods and services – of the euro against the yuan and the peso is almost certain. Europe’s self-imposed fiscal austerity measures will crimp economic growth and deflation is bound to take over across Europe and relative to Asia.
As such, recent external shocks from Europe will likely show up Chinese and Philippine trade data in coming months. Doesn’t look good for Asia, especially for those economies like the Philippines and China for which exports provide a robust growth impetus.
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The export of opium to China began as a way to block the drain of European silver to Asia. i.e, exchanging opium for silver in trade as way of reducing perennial trade deficits with the East. Asia was the global sinkhole of silver for over a century after the Europe begin heavy trade with Asia.
Fast forward to today, and the US is trying to force open the Chinese markets once again in the face of a huge trade deficit.
See, major trade imbalances always lead to no good.
While I’m certainly not advocating another round of Opium Wars (although we do have a good supply in Afghanistan, hmmm) I am deadly serious that major sustained trade imbalances have historically always led to major problems. They are not something to be taken lightly.
Western military supremacy proved decisive in the confrontation, despite China’s trade surplus relating to its superior – or more desired- production of goods.
When I say European silver, I mean European silver plundered from the New World.
purple,
Just a historical note of interest:
The following year (1566) there arrived in Manila some of the first ships and so began the commercial relationship. Although there were some confrontations with the Chinese, with time the attitudes towards the Spanish changed and the first formal relations were established between the Chinese and the Spanish of the Philippines.
The Noa de China—-also called the Galeón de Manila—-crossed the Mexico-Philippines route uninterrupted for two hundred and fifty years. In Asia it was known as the Noa de Acapulco for its destination to the famous Mexican port.
Of the new commercial trade, Mexico received an impressive amount of merchandise and exotic treasures: cloth made from Chinese silk, from cotton, raw silk, spices, oriental crafts, fine woods, works in copper, the nests of certain Asian birds [used to make soup believed to help keep one’s “vital energy” in equilibrium], civet oil (for use in the manufacture of perfumes), rice, mango, tamarind, cloves, pepper and saffron, amongst many others.
Within a short time the interchange grew to include lacquer ware, painted screens and ivory carvings. Mexico, for its part sent bars of silver and gold, minted coins, cochinilla from Oaxaca, cocoa, coffee, corn, sugar, many varieties of chili peppers, needlework, soap, nutria, playing cards, sombreros, horses, cattle, oil and wine amongst other things.
Silver became the product in greatest demand. In the two and a half centuries that the trade with the Orient lasted, it is calculated that close to 400 million pesos of silver left New Spain [Mexico]. The “vox populi,” according to a note by Alexander von Humboldt, said in a joking manner that the galleon left for the Philippines full of “silver and priests” from Mexico.
–Rodrigo Rivero Lake, El Arte Namban Mexico
Chuck Schumer got a problem with China?
You mean this Chuck Schumer?
http://www.salon.com/news/opinion/glenn_greenwald/2010/06/12/schumer
Has it ever occurred to the good Senator that now would be a good time to take a hard look in the mirror and straighten up what’s wrong at home, instead of blaming others?
What the hell does he wants? Start a trade war?
… or a whole lot of other economies around the blue planet, for that matter.
Seems to me I heard some tall, black, eloquent talking dude not too long ago waxing optimistic on US’ plans to increase exports some (xxx)% in 3 (?) years… no?
Any thoughts on what this analysis portends for that particular plan? Oh yah, and isn’t that guy’s currency climbing against the EURO… what might that do to his plans for export based “robust growth impetus”?
…
The utter absence of corrections in US financial system, bailing out the crooks w/taxpayer future earnings (crossing fingers on that one), no (meaning zero) realignment of industrial priorities to meet real needs… All manner of western currencies proliferating in volume while diminishing underlying value…
I think Timmy & Ben’s recovery “plan” is backing up the sewers and they’re going to overflow in the streets. There’s more cannibals then bodies to feed them.
Something’s got’a give.
“Seems to me I heard some tall, black, eloquent talking dude not too long ago waxing optimistic on US’ plans to increase exports some (xxx)% in 3 (?) years… no?”
Is that the same guy who talked about ‘fat cat bankers’?
Yah… among other things. “Talk” is about all he does AFAIC, however.
If the Euro falls relative to yuan, what is the prevent the Chinese from manipulating the yuan-euro exchange rate the same way they manipulate the yuan-dollar exchange rate?
They don’t because 60-70% of their export is toward dollar dominated market europe is about 1/3. (US, Asia, middle east, latin america are all US dominated export destination.)
Their high growth is Asia, latin america, middle east. Some effort in africa, but seems not growing as fast.
So euro fluctuating 10-15% is not that big a deal. Yuan-dollar however can’t fluctuate beyond 2-3%
Also, europe is much more fragmented market than US. (german, france, ..to name a few) They all have different taste, rate of growth, market.
The bellicose rhetoric is based on a Chinese belief which has some basis: that their people did the hard work and made the sacrifices and that these were brilliantly deployed by their leadership. But the fact is, there are important players in China — their central bankers and importers — whose views are closer to America’s. But no currency realignment is going to be enough. A meaningful currency realignment would devalue the Chinese reserves by 40% or more and decimate the investment engine the Chinese state has constructed. And tariffs on Chinese goods will only lead to restrictions on American exports to China. In any case, finance capital really wants something else: the opening up of the Chinese capital markets to American banks and funds. A thorough structural reform of the relationship must include a lowering barriers to high technology American exports and to restrictions on Chinese indirect investment in the US — for starters.
“A meaningful currency realignment would devalue the Chinese reserves by 40% or more and decimate the investment engine the Chinese state has constructed.”
Which investment engine? The domestic investment engine (infrastrucutre, etc.) would benefit from a rising yuan and selling/using some of their forex reserves. Need to import more raw materials, no problem, China’s got $2.5T lying around to pay for them.
Any idea that the forex reserves themselves are an “investment engine” is ridiculous. I’m sure there are plenty of folks in the Chinese government who are more than bright enough to realize that, due to the trade imbalance, the dollar has to fall at some point. They’re not buying treasuries for the investment value.
“And tariffs on Chinese goods will only lead to restrictions on American exports to China.”
That would be a serious problem if we actually had any significant American exports to China. Go ahead and put up the trade walls – our trade balance will improve, our economy will get more stimulus than the US government can provide, and China’s economy will collapse. Not that I consider that last thing desirable, but it will hurt China a lot more than the US.
“A thorough structural reform of the relationship must include a lowering barriers to high technology American exports and to restrictions on Chinese indirect investment in the US — for starters.”
For starters, huh? Why don’t we continue by making the yuan a freely convertible currency?
BTW, which “high technology American exports” are you talking about? Got a problem with the export restrictions on radar absorbent materials for stealth aircraft?
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They want to sell it, we want to buy it.
That’s not a trade war. That’s trade.
As long as they want to punish their citizens by taxing them with government mandated exchange rates, the game is afoot. Keep making ipods. (Nevermind your entire manufacturing assembly line economy will fail to evolve because is doesn’t have too, thanx to the peg.)
Keep taking our dollars, and sending us TV’s.
No ones got a gun to their head.
See what I’m getting at? They cant stop and don’t wanna stop. I suspect they will DE-value (yes De-value) their currency and keep the factories humming. They seem hellbent on supporting the West’s standard of living. I don’t get it but that’s what they are telling me by their actions.
Their bureaucrats are at least as stupid as ours.
“As long as they want to punish their citizens by taxing them with government mandated exchange rates, the game is afoot. Keep making ipods.”
That would be lovely for us ‘mericans if it wasn’t for the fact that they expect us to honor those $2T+ in dollar denominated securities they hold. Buying on credit is wonderful until the bill comes due. You’d think that point would be clearer than ever after the collapse of the housing bubble.
Thats kinda my point. They are holding to mortgage now. Takes two to tango.
The US isn’t going to honor those bonds if it comes down to it. That will be fairly obvious at some point. And there’s not much China can do.
It’s always interesting to see people talk about China’s economy as though it were a Western style capitalist state with a Western perception of what’s important.
just walking on the streets of Guangzhou, I thought China seemed like the most capitalist place I’ve been. Industry was buzzing…1000s of small merchants, competing hard and cutting costs, and not a Target, Home Depot, or Wal-Mart in sight–I did see one Starbucks at the local 5-star Western hotel and there were a fair number of McDs and KFCs.
The banks are still mostly controlled or dominated by the state. The control of finance and large scale production defines the nature of an economy.
Markets have always existed , for thousands of years, but Capitalism (with a large c) has not.
So the chinese lied for the March statistical data (before the due date for the US to make fake angry noises), and then added the surplus to the May data.
That’s Capitalism for you with a large “C” from Communism.