Chinese Trade Deficit: What? Yes, Chinese Trade DEFICIT

By David Caploe PhD, Chief Political Economist, EconomyWatch.com

By David Caploe PhD, Chief Political Economist, EconomyWatch.com

By David Caploe PhD, Chief Political Economist, EconomyWatch.com

By David Caploe PhD, Chief Political Economist, EconomyWatch.com

While you would barely know it from reading the New York Times or most other Western media, in March China indeed posted its first monthly trade deficit – USD 7.24 billion – in six years.

And there are two reasons you wouldn’t be likely to have heard about it:

a) in true “economediatic” © fashion, it was announced and reported on Friday night / Saturday morning US time, which, as we’ve made clear, is almost always the time when “bad” news is made public; and

b) in the weeks before, as we’ll demonstrate in a moment, the American media, at least, was full of the usual ill-informed jeremiads against the “UNDER-valued” renminbi – [br]

and, of course, the announcement of a multi-billion trade DEFICIT makes such claims a bit less credible, to put it mildly,

since, according to the nonsensical academic economic conventional wisdom, a trade deficit is prima facie indication of an OVER-valued currency.

Interestingly and predictably enough, the US media frenzy demanding appreciation of the yuan – in true “global media society” fashion –

elicited a strong counter-reaction in the Chinese blogosphere – where discourse is much freer about economics than politics – AGAINST any upward revaluation,

a fact that made any such move even less likely – and, in our view, rightly so – than it was already.

To take only two of many “China MUST revalue” items, both appearing on April 8, the first was a news piece by the Times’ generally shrewd correspondent, Keith Bradsher, claiming that “China Seems Set To Loosen Hold on Its Currency.”

To be perfectly honest, we were skeptical when we read it, about both its likelihood and, even more, what would be the point of it all, as even Bradsher seemed to be:[br] [quote]

Insisting on anonymity because of the delicacy of the issue in Beijing, they predicted that China’s policy shift could easily occur before President Hu Jintao arrives in Washington next week for discussions with President Obama and other world leaders on improving nuclear security.

[/quote]

Well, he was certainly right about the sensitivity of the issue – which we’ll get to in a moment –

but, at least so far, he and all the people he references in the piece got it ALL wrong when they predicted such a move would come before the start of the nuclear security talks.

And given the firestorm these and other Western media items provoked in China, the timing of any such shift has now been moved back months, if it’s ever going to happen at all.

That said, it’s interesting to see how little effect Bradsher thought a revaluation would have:

[quote]

A stronger renminbi could prove to be a mixed blessing for the United States.

[/quote]

Indeed !!!

[quote]

If China cuts back sharply on purchases of Treasuries, then the Obama administration could find it harder to finance American budget deficits.  

[/quote]

Well, that would be great, wouldn’t it ???

[quote]

But with the Chinese economy booming, a small move in the renminbi may still leave the central bank struggling with trade surpluses and a tide of speculative investment into China.

That could force it to continue buying Treasuries with the extra dollars.

[/quote]

Notice the use of the conditionals, “may” and “could”.

Now there WAS some interesting information about the “policy politics” of this debate within the Chinese government:

[quote]

Chinese officials have been publicly wrangling over what to do about the currency for a month.

[/quote]

And the fact that the debate has become public, of course, is a sign of how serious an issue it has become for the elite.

[quote]

The central bank [which, not surprisingly, tends to be in tune with the central bankers of OTHER countries] favors a prompt move,

while the Commerce Ministry, aligned with exporters, has opposed currency appreciation.

[/quote]

And this is the key division within the governmental elite.

[quote]

The Obama administration has stayed scrupulously silent, fearing that public comments could backfire by stirring a nationalist reaction in Beijing against international pressure.

[/quote]

But, of course, in this age of the global media society, it’s not only the statements of government officials that people can access –

it’s also precisely media accounts like this, and that’s what got Chinese bloggers so upset in the less-than-a-week since this appeared.

The final chunks of useful information from this piece –

especially in the context of what “good” an upward currency revaluation of the renminbi would actually achieve –

came in this section re the likely impact on Chinese inflation and export competition:

[quote]

A stronger currency helps hold down prices by making imports cheaper.

[/quote]

Although, as we’ve noted, China’s major imports are raw materials for manufacturing, especially iron ore, whose pricing system was just unilaterally changed by the major multi-national corporate players in that field, so it’s unclear what effect, if any, a revaluation would have.

[quote]

It also gives China’s central bank more room to raise interest rates and brake economic growth

[/quote]

Again, the idiocy of academic economic conventional thinking – if the Chinese government wants to raise interest rates, they can do so, regardless of how the currency is valued.

After all, the US has had a zero interest for years, for which the “value” of the dollar has been totally irrelevant, and is soon going to be raising interest rates – and all for reasons that have NOTHING to do with the “value” of American currency.

[quote]

while lessening the risk of drawing more speculative investments into the country.

[/quote]

While the whole question of “hot money” is a real one, there is no reason to think it’s going to stay away from either China or India, which has much stronger limits on capital inflows than China,

as long as they remain the two fastest growing economies in the world –

again, mere jargon that looks impressive, but is, as just above, irrelevant.

[quote]

A slightly stronger renminbi that fluctuates each day against the dollar would mainly hurt low-margin, labor-intensive industries in China like shoes and textiles.

Many Beijing officials have been worried about job losses in these industries if the currency appreciates.

[/quote]

This, however, is EXTREMELY germane, and one of the real concerns of the Ministry of Commerce.

[quote]

Much of this production is already starting to move out of China, notably to Vietnam and Bangladesh, where labor costs have stayed low.

[/quote]

Now this is indeed the case, but it also points out that the “real economic” issues here have nothing to do with currency valuations,

but EVERYTHING to do with low wages, for which a stronger or weaker currency has only a marginal effect – AT MOST !!!

If labor costs in China are rising, then it’s hard to argue with the Commerce Ministry that an ap-preciation of the yuan is only going to make things worse for the Chinese employment situation.

So if this is happening ANYWAY, what is the necessity – let alone urgency – of a currency revaluation ???

[quote]

And Chinese factories producing these goods have been struggling to find enough workers over the last two months as the economy grew powerfully this winter,

[/quote]

Which, again, points out the mystery that is China:

on the one hand, wages are rising, so low-cost manufacturers are leaving for Vietnam and Bangladesh;

and yet, on the other, this says there’s a massive labor SHORTAGE in China.

However this seeming contradiction may be resolved,

it’s perfectly clear that currency values HAVE NOTHING TO DO WITH IT –

so why the big stink about them from the US ???

[quote]

stimulated by heavy bank lending, strong demand for workers in the retail sector and rising government spending on high-speed rail lines and other infrastructure investments.

[/quote]

Which only underscores what we were saying before:

China’s rapid – and, admittedly, potentially inflationary – economic growth is being fueled by a whole range of factors that HAVE NOTHING TO DO WITH CURRENCY VALUATIONS !!!

So what is the point of all this moaning and wailing about China’s currency ???

Based on that news piece, the same day the Times ran a “Room for Debate” on China’s expected upward revaluation of the renminbi –

a generally excellent regular feature of the Times, where they gather, usually, diverse viewpoints about a key issue of the day,

although in this particular case, there wasn’t much diversity of opinion, as can be inferred from the headline: What China’s Currency Shift Could Mean –

which, of course, is making a HUGE presumption that there WOULD, in fact, be such a shift,

a potentiality made LESS likely, in fact, precisely BY articles like this in the-easily-accessible-through-the-Internet-even-in-China Western media.

In this context the two-fold significance of China’s trade deficit in March becomes clear:

on the one hand, as we have demonstrated, none of the arguments about the urgency, let alone necessity, of an upward valuation of the Chinese currency hold water once their assumptions are questioned;

on the other, the fact China DID run such a deficit MAY – and we are conscious here of OUR use of the conditional – indicate that, in fact, the Chinese economy IS starting to run out of steam,

which is undoubtedly why those who announced it hastened to proclaim that it would soon return to its “normal” surplus.

Now if THIS is indeed the case, then not only will arguments about currency valuations disappear into well-deserved oblivion,

but we MAY be witnessing the beginning of a long-term turnaround in the fortunes of the Chinese economy –

and THIS would indeed be significant, not just for China, but the entire world.

It remains unclear whether this might be the sort of “hard crash” that some observers have been predicting for a long time,

or the “soft landing” we are inclined to espouse, based on our basically positive view of the Chinese elite’s capacity for both short- and long-term economic policymaking.

For good or ill, this is a question to which the “real world” will provide the answer – let’s just hope we’re all smart enough to be able to read it correctly.

David Caploe PhD

Chief Political Economist

EconomyWatch.com