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Wednesday, 10 August 2011

China’s growing trade surplus should be worrying Beijing, as the cumulative imbalances might blow up in their face, eventually. Berlin and The Hague should pay attention too.

Two weeks ago, on July 25th , I wrote on the excellent piece by Marcel de Boer of the Dutch financial newspaper Het Financieele Dagblad (, concerning the trade surplus of Germany. Here are some pertinent snips of this truly excellent article:
Normally, it doesn’t take long before a country with a trade surplus sees its currency increase in value. However, as the Euro was deployed, this was not possible. Within the Euro-zone, Germany had an undervalued currency, while the countries that imported Germany’s export suffered from an overvalued currency.
Implicitely, this was like a tax charge on German imports, according to Pettis. A charge, that acted like a subsidy for the German industry. In the peripheral countries, the industry was ‘taxed’ to subsidize imports. In a short matter of time, Germany could turn its lagging competitiveness into a lead: in 2000 Germany had a small deficit on the trade balance, but in 2007 it was the largest exporter in the world. In the meantime there had been no significant growth of imports, rather to the contrary.

As a consequence of the common currency, a situation evolved within the Euro-zone that could be compared with the relation between the US and Greece: as a consequence of underconsumption in China, together with the coupling of the yuan to the dollar, overconsumption evolved in the US.
But the equasion goes further. China could (and still can) only keep its currency ‘cheap’ by buying American sovereign bonds at a large-scale. This was the same in the Euro-zone during the last decade. Germany (just like The Netherlands and other northern countries with a trade surplus) bought on a large scale sovereigns from the peripheral countries (i.e. German banks, insurers and pension funds). This is the logical consequence of the booked surplusses on the current account.

Against these surpluses, there are equally large deficits on the capital account. Eventually, the external account must be balanced. An outflow of money from Germany evolved and the flow led to the peripheral countries. Countries that were used to interest rates of 15% or more, before the euro was introduced. And suddenly these countries received almost ‘free’ money, not in the least, because the ECB kept its borrowing rates too low in order to further support the German economy.

I was reminded of these valuable insights (especially the ones printed in red) when I read the latest news on the Chinese trade-surplus in (again) Het Financieele Dagblad:

Trade surplus China has grown again (link in Dutch)  
In spite of an ailing world economy, the Chinese exports grew again in July. The trade surplus of the 2nd economy in the world reached the highest level in more than two years.
The Chinese exports soared with 20.4% in July, compared to last year, to an amount of $175.1 bln. Imports soared with 22.9% to an amount of $143.6. This led to a trade surplus of $31.5 bln. In June the surplus was just $22.3 bln.
The grown trade surplus of China aims the attention again at the monetary policy of the government in Beijing. Trade partners of the quickly growing economy blamed China earlier for deliberately keeping the value of its currency – the yuan (renminbi) – low, to fire up exports.

In spite of export figures that were better than expected, analysts fear that the Chinese economy won´t be immune for the problems in the world economy in the coming months. China is for its sales highly dependent on the consumer confidence in Europe and the United States. And that is shrinking. A decrease of Chinese exports is therefore expected.
This could lead to a call for government stimulus, like lowering the interest rates. But worries on an increasing inflation, make that Beijing´s hands are tied, as stimulus could lead to overheating and inflatory pressures.

In my opinion, it is a blessing in disguise that Beijing´s hands are tied. The Chinese government – and as a matter of fact, also the Dutch and German governments – are playing with fire with those imbalances on the trade and capital balances. More stimulus to the Chinese economy would only worsen the imbalances, as these would probably lead to more exports, instead of more consumption on the domestic market.

As the earned Chinese money is not all used for buying goods and services from the west, the surplus money is currently floating into infrastructure (ports, highways, industrial and trade centers), CRE and bonds of ´all the usual suspects´: Portugal, Greece, Spain, Ireland and the USA. 

If one or more of these countries would default, there would be a big destruction of Chinese capital.

Besides that, it could also lead to acrimony by the people in those countries´when the Chinese are taking over everything´: this is the kind of time where friendly and/or hostile take-overs from other countries are not accepted by the people.

And for the people that notice that the rise of Chinese imports as a percentage was higher than the rise of Chinese exports (red text), I have a disappointing message: the trade deficit has still grown by ± $3 bln, as 20% of $145 bln is more than 23% of $116 bln

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