Mike Bird (@Birdyword) makes an important point here. Basic trade theory suggests that in a well-functioning global trading system, large trade imbalances cannot persist because the imbalances themselves lead to economic shifts that ultimately...

force a reversal of the imbalances.

For example large trade surpluses typically cause adjustments — usually stronger currencies, higher wages, or rising interest rates — that raise the household share of GDP relative to that of the tradable goods sector, boosting...
consumption and lowering the savings share of GDP. But surpluses can persist if governments put into place policies that prevent these adjustments from taking place, although this means distorting other parts of the economy — including, most importantly, balance sheets.

It’s no coincidence that the three biggest trade surpluses of the past 100 years — the US in the 1910s-20s, China in the 2000s-10s, and Japan in the 1970s-80s — occurred in countries that suffered from very similar balance-sheet distortions.
They all experienced soaring debt, surging real estate prices and — certainly in the cases of the US and Japan, and increasingly likely in the case of China — out-of-control asset price bubbles whose eventual puncturing coincided with long, difficult economic adjustments.
Bird argues in this article that South Korea and Taiwan are relying excessively on monetary support to prevent the loss of their export competitiveness. This is similar to what we saw in the US in the 1920s, Japan in the 1980s, and China in the past decade. Each suppressed...
interest rates and prevented the currency from strengthening.

In the end, protecting “export competitiveness” always means the same thing: artificially forcing up domestic savings rates (and keeping wages from rising) in ways that distort domestic balance sheets.
The important point here is that policies that distort trade and lead to large persistent trade and capital imbalances create damage, not just to the deficit countries but also, ultimately, to the surplus countries.

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More from @michaelxpettis

4 May
Good article. China isn't building airports to meet expected travel needs, but rather to boost economic activity, in the hopes that this becomes self-reinforcing and eventually raises travel needs enough to justify the additional airports.

But we know from the historical precedents that this can become highly self-reinforcing in the wrong way. As long as China accelerates its building of airports, and with it the increase in its debt burden, it can generate enough growth in economic activity to seem to...
justify the building. Once debt constraints kick in, however, the extent of overbuilding in the past will put downward pressure on future growth, which will in turn reduce the need for additional airports and so increase the previous extent of overbuilding.
Read 4 tweets
4 May
Useful summary of the debt debate by The Economist's Philip Coggan. @prospect_clark

While we are now challenging one mistaken belief – that government spending is constrained by the need to fund it with taxes and borrowing – we may be replacing it...

with another mistaken belief: that government spending is constrained by inflation.

In fact inflation isn't a constraint on government spending. It is one of the possible consequences of the real constraint, which is the impact of government spending on boosting the...
demand for goods and services relative to its impact on the supply. If government spending results in an increase in total production that is in line with or exceeds its impact on total demand, there is no constraint, inflation or otherwise.
Read 8 tweets
1 May
This isn't quite true. According to the PBoC release, China’s debt-to-GDP ratio declined 2.6 percentage points in the first 3 months of 2021 from 279.4% to 276.8%. As is too-often the case, they don’t give us the numbers on which they...

base their claims, and so it is a little difficult to know exactly what they mean, but among other things I calculate a slightly higher debt ratio for the end of 2020 (RMB 284.8 trillion of total social financing divided by RMB 101.6 trillion of GDP is 280.3%).
More importantly, while their claim that China’s debt to GDP ratio declined in the first quarter is technically true if GDP is calculated over the previous 12 months, this suffers from a major base effect.
Read 7 tweets
1 May
Those of us concerned about the cost to the US economy of unbalanced trade have to distinguish between imports driven by differences in manufacturing productivity and imports driven by lower labor costs (relative to differences in productivity).

Because Mexican wages are in line with Mexican productivity, when GM offshores production to Mexico, the money Mexicans earn by exporting to the US is recycled through wages into an equivalent amount of imports, and these come either directly or indirectly from the US.
In that case higher US imports from Mexico are matched by higher US exports (either to Mexico or to some other country) and the net result is a shift in US manufacturing from less productive industries to more productive industries.
Read 9 tweets
29 Apr
Important article by @Birdyword, who discusses the shift from bank loans to buyers' deposits in the liabilities of Chinese property developers. As usual I'm especially interested in the balance-sheet impact: as long as things are going...

well, the shift barely matters, but it matters a great deal if the developer ever gets into trouble and is unable to finish a project.

This creates at least two problems. First, a default by a large developer can cause what is effectively a "run on the bank"...
as other buyers around the country become reluctant to put up further deposits with other property developers. This process that can be highly self-reinforcing as it forces property developers to cut back further on operations, and so alienate even more deposits.
Read 7 tweets
29 Apr
Another very good Frank Tang article. There is a lot of confusion about the systemic impact of aging on the rebalancing of the Chinese economy. The article cites Cai Fang as worrying that “China’s population could peak before 2025,” and that...

this "could cause growth to plunge and lead to insufficient demand. It would generate an unfavourable impact on our push for consumption."

I think that's the wrong way to think about it. One of the main impacts of a declining population is to reduce overall growth.
Because the value of investment today depends in part on future growth, this also reduces the value of existing investment in property and real estate (implicitly forcing up the debt burden even further). A declining population makes rebalancing demand all the more urgent.
Read 6 tweets

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