Monday, March 22, 2010
Chimerica is Breaking Up: China Likely to go From Huge Trade Surplus to Trade DEFICIT In March
In a command economy, the government decides what numbers it wants, and then instructs its economists and government agencies to arrive at those numbers.
If they don't, they're killed or thrown into prison.
So when China's official daily newspaper - China Daily - writes that China will probably run a trade DEFICIT in March, it is hard to know if it is real.
Indeed, it seems suspicious that China Daily linked the deficit in the same opening sentence with America's threats to label China a currency manipulator:
The country will probably see a "record trade deficit" in March thanks to surging imports, Minister of Commerce Chen Deming said on Sunday, while warning that Beijing will "fight back" if Washington labels China a currency manipulator. Speaking at the three-day China Development Forum that ends on Monday, Chen said: "I believe there will be a trade deficit in March" - which will be the first since May 2004.And this comes hot on the heels of tremendous pressure from both the House and Senate on China to revalue its currency.
So it is tempting to assume that this is just a blunt effort to get the U.S. to back down on its efforts to revalue the Yuan.
However, as Société Générale's Albert Edwards wrote on March 2nd (via Zero Hedge):
this critical shift:
Clearly to the extent that the rise in China's official reserves depended on the size of its trade deficit, there will be reduced purchases of US Treasuries. But China has, in part, merely been swapping official dollar purchases of US Treasuries with surging imports of dollar-denominated commodities on the trade account (see chart below).
In other words, China's huge purchases of commodities from Australia, Brazil and elsewhere have overtaken exports.
But even if it isn't, it shows that the entire environment everyone assumes we are operating in - China as the giant net exporter with huge trade surpluses - might not continue for much longer. In other words, "Chimerica" is starting to break up.
And those huge Chinese purchase of U.S. treasuries are no longer guaranteed.
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"In a command economy, the government decides what numbers it wants, and then instructs its economists and government agencies to arrive at those numbers. If they don't, they're killed or thrown into prison."
ReplyDeleteWe had just wonderful success with this approach up until 1953. I mean who could ever forget Beria, Molotov, and Malenkov? :-)
Andrei Vyshinsky
Remember, this is the Chinese Century; the first step is almost accomplished: the financial ruin of America, next comes the chaos and anarchy in the US followed immediately by the secession of many states from the failed union (especially the ones in the West Coast); finally, the military invasion of continental US carried out by the mighty PLA and the subsequent resettlement of vast territories by Chinese nationals (China needs to relocate at least 1/3 of its entire population elsewhere and the North American landmass is a suitable place).
ReplyDeleteEmpires come and go, this time the United States is the declining superpower. Painful realities that will be difficult to swallow by many patriotic Americans.
if china every grows a set of balls it may try to take back taiwan,good luck. china does not have the military or logistical capacity to ever take on america.maybe america will let china cash in its worthless u.s. treasurys for all our chineese resturants
ReplyDeleteI don't know what the ruckus about China's trade deficit is all about. It was simply a matter of time as their export markets dried up except at cut rate pricing levels. Societe Genarale produced a report last fall that called for a 'shocking' China trade deficit.
ReplyDeleteMy approach to Treasury securities comes from the understanding that China needs more and more crude oil to power its new 'waste like an American' economy. Hence, it needs dollars and one way to get them is to buy less Treasuries or sell those it has. Look for Japan to do the same thing.
China has been selling dollars short to buy longer Treasuries on the carry. That trade is so ... 'yesterday'! The new trade is sell everything and buy dollars in order to conserve crude oil at a remove. Don't tell me the markets aren't efficient!
The mantra of this new Great Economic Meltdown is 'Too Late'. Greece was bailed too late. Subprime mortgages weren't regulated out of existence until it was too late. China didn't float its currency overseas until it was - and is - too late.
Too late to eliminate credit derivatives such as CDS's but that's another story.
I think your final comment has the most weight, with China moving into a trade account deficit, who will buy US debt? This will be critical, pushing the yield curve even steeper, as the long bond may well be facing 6% and above before long. The US has long been able to "print their way out of debt", by printing endless amounts of US dollars, to cover trade accounts, unemployment shortfalls, bank failures, wall street "Pin money", but if the Chinese fail to buy US debt, then more US dollars will be needed to buy their own debt. Up till now as much as 30% fo treasuries have been purchased by the Fed, so how much more will the Fed need to purchas to maintain a low rate policy??
ReplyDelete