China’s trade surplus in December came in above expectations at $78.2 billion. Equal to 6% of China's December GDP and 1.2% of the rest of the world's GDP, this acts as a substantial drag on foreign demand and will make recovery for the rest of...


the world harder, even as it boosts the Chinese recovery and enables Beijing somewhat to moderate its huge 2020 increase in the country's debt burden.

China's trade surplus was $537 billion for 2020, or 27% above last year's and the second highest ever recorded (after...

the $594 billion of 2015), but with $370 billion in the past six months, I think this may have been a record six-month trade surplus for China. Without significant structural change, of which there is as yet little evidence, I do not see this surplus disappearing quickly.

A lot of analysts are explaining the surplus as a consequence of China's economic opening up earlier than the rest of the world, but while this might explain the 3.6% rise in exports in 2020, it does not explain at all the 1.1% contraction in imports, not does it explain...

why export growth continued so substantially to outpace import growth in recent months. Like with any country, China's export earnings must be recycled, either through the capital account (investment abroad) or the current account (imports), and the fact that a steeply...

rising share is recycled through the capital account mainly means that the higher export earnings are not being distributed to workers or households.

For structural reasons, in other words, China is converting its export bonanza into savings, something the world has too...

much of, and not into demand, which the world urgently needs. As I have long argued, anyone who expects that the end of the Trump administration will also bring the end of trade conflict simply does not understand the trade dynamics of the past 10-20 years.

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More from @michaelxpettis

15 Jan

An important point over which Chen Yulu is right to worry. The US-China trade relationship is a kind of machine that converts US consumption into Chinese savings, which in turn are likely to fuel more liquidity bubbles and speculative capital flows.


This wouldn't be the first time something like this will have happened. The three biggest trade surpluses of the past 100 years were the American surplus of the 1920s, the Japanese surplus of the 1980s, and China's more recently. I don't think it is at all a...

coincidence that the first two were associated with devastating asset bubbles, mainly in the surplus countries but also to a lesser extent in the big deficit countries.

The mechanism is complex, but there is likely to be a big difference between China's allowing inflows...
Read 5 tweets
15 Jan

According to this article, "The private sector is likely to increasingly take the lead from the public sector in spurring China’s economic growth. Infrastructure investment was a key driver of China’s growth last year, supported by strong fiscal...


stimulus. But increasingly, private-sector consumption and investment will play a more important role."

I think it would be far more accurate to say that the private sector is only temporarily likely to take the lead from the public sector as we see a partial reversal of...

the huge relative increase in the role of the public sector in 2020 (accounting, along with real estate development, for more than 100% of last year's GDP growth). This will happen mainly because, as the article notes, consumers will probably spend some of last year's...
Read 5 tweets
15 Jan

The biggest cost to the US economy is when workers are willing but unable to find productive jobs. That is why a major economic stimulus can bring short-term growth to the US economy without worsening the long-term debt burden. But unless...


a substantial part of domestic demand is prevented from leaking abroad too easily, the US will bear the full cost of the stimulus while sharing the growth benefits with countries that are less aggressive in paying for domestic stimulus programs, especially with countries...

like China that have responded to the collapse in domestic and foreign demand mainly by supporting domestic production.

A US stimulus that doesn't cause the trade deficit to explode, in other words, will be far more effective than one that does. This is true not just...
Read 5 tweets
14 Jan

Interesting article. Beijing can talk all it likes about the need to stabilize credit growth, and it will even seem to be successful in the first half of 2021, but inly because of a one-off surge in consumption caused by a partial reversal of the...


drop in consumption in 2020. This will allow Beijing to pressure state-owned firms to pay down debt, and maybe even to permit the occasional default. Unfortunately, however, even this "stabilizing" of credit will not be enough to make up for the big jump in credit in 2020.

Once the one-off benefit of a sharp consumption recovery wears off, sometime in the first half of 2021 (assuming no resurgence of Covid-19), it will again become impossible for Beijing to stabilize credit growth in any of the next few years as long as it...
Read 4 tweets
13 Jan

Good article, except the final paragraph: "Policymakers hope the world's second-largest economy can deliver on expectations for 8 per cent growth in 2021, a number that will make stabilising the macro leverage ratio just that little bit easier."


I don't think this is the right way to think about it. GDP growth and credit growth are not independent. If they were, it might make sense to assume that a higher GDP growth rate would make the debt more manageable, but in fact without a transformation of China's economy...

the only way for China to achieve higher a GDP growth rate is with even faster growth in debt. Counterintuitively, it is slower GDP growth rates that will make it easier for China to manage its debt burden. If Beijing is satisfied this year, for example, with 6-7% GDP...
Read 5 tweets
12 Jan

Interesting and important article. For years analysts have argued – and some still argue – that Chinese public-sector investment, including the rapid expansion of its railway system, remains productive and good for China’s economy.


But if that’s the case, why would Beijing worry about the associated debt, and why sharply reduce its plans to expand mileage in favor of trying to “to maximise the benefits of its massive existing rail”? If this spending had been productive all along, financing it with...

debt wouldn’t matter because the debt would have grown by less than the capacity to service the debt (for which GDP is supposed to be a proxy). The associated debt wouldn’t be a problem at all.

Clearly Beijing understands – perhaps a little late – that while all of this...
Read 5 tweets

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