Despite all the talk about how the world is standing in the way of China's growth, the world (including the US) continues to supply China with one thing it cannot generate domestically -- demand for its manufactures.
China's surplus again topped 10% of its GDP.
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Even with relatively high commodity prices, China's overall trade surplus (in goods) is approaching its pre-global financial crisis peak. As is the surplus in manufacturing.
Even scaled to China's GDP
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And of course in dollars the surplus is WAY bigger than it was prior to the global financial crisis (dollars are an OK proxy for scaling the surplus v the size of its trading partners).
The world still supplies China with a ton of net demand.
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What is striking - at least to me - is how rare it is for China's surplus in manufacturing to shrink. It happened after the global financial crisis & after the '15 commodity crisis + USD/ CNY appreciation. But not after the Trump tariffs/ COVID ... rather the contrary
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Imports of manufactures have also been squeezed out of China's market over time -- I don't know anyone who forecast at the time of China's WTO accession that it would eventually in result in a 5 pp fall in China's manufactured imports v its GDP
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China simply doesn't import many manufactures for its own use (it imports chips for reexport) ...
Net of processing imports, exports are about 14% of GDP and manufactured imports are now under 4% of GDP.
This is true "deglobalization"
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China couldn't run these kinds of surpluses globally without the big US deficit in manufactures -- we don't yet trade with Mars (& I increasingly doubt that Elon is gonna let us start)
China may complain about the chip restrictions, but the US is still helping it grow ...
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But China doesn't just rely on the US to supply it with net demand for its manufactures that it cannot generate internally.
This chart, together with the charts on China's sudden emergence as a net exporter of autos, should prompt a bit of reflection in Europe ...
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Foreign demand for US bonds was a bit too strong in 2023 and 2024; it has pushed the dollar up to untenable levels.
But there is a some risk of a real reversal now
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Not sure that Trump's comments over the weekend about the future path of US rates (and issuing bills until he installs a compliant Fed chair) will increase global appetite for US bonds
Just a reminder that Saudi Arabia runs a current account deficit these days -- and its break even oil price (for the balance of payments) is around $90 a barrel ...
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The latest balance of payments data only runs though q1 -- but the difference between the oil price and Saudi's breakeven implies a much larger deficit in q2 than in the past few quarters
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Saudi external asset accumulation over the last 4 quarters has been financed by debt, not out of its oil proceeds
One of the surprises of the first half of the year was that China held the yuan stable even in the face of significant new US tariffs.
China's q1 BoP data helps explain why -- China was in a quite strong underlying position
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in the past few quarters, China's reported current account surplus jumped up to $150b a quarter (it is still understated, I think it is really ~ $200b a quarter) and the state banks have added $50-100b a quarter to their foreign assets.
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The balance of payments signal from China's state bank flows (plus PBOC flows) isn't as strongly as in 2020 and 2021, but it has been pretty consistent ...
Not sure the issue will come to a head on July 9th (it is always possible to provide more time for the negotiations) but have long thought that the "232" sectors would be the hardest part of the negotiations with the EU (and other allies)
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Pharma frankly should be easy -- as the US trade deficit in pharmaceuticals is made in America, as it stems from a flawed US tax policy. But that isn't how the Trump administration sees it ... and the real negotiations probably cannot start before the US case.
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And with autos, the Trump administration's push for a quick deal with the UK set a baseline (10% tariff and tariff rate quota for 2024 export levels) that all the big auto exporters now needs to match ...
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It is way too early to write any assessment of the full impact of President Trump's turn toward tariffs as a core tool of US economic policy.
But there is no doubt that immediate impact was ... well ... a much bigger external deficit.
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The swing in goods trade tied to tariff front running was bigger than any swing during the pandemic (admittedly, it was very concentrated in pharma and precious metals)
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Some of the impact of tariff front running will dissipate with time -- but there are more subtle signs of deterioration in the underlying balance. The investment income balance for example remains in a deficit (a big structural shift that is offsetting the oil swing)
It is now ancient history -- but Turkey experienced a massive carry trade unwind in March and April that led it to burn through over $30 billion in reserves in 6 weeks or so ... and it is worth taking a look at how this registered in Turkey's balance of payments
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Unsurprisingly, there was a $8b or so outflow from Turkish lira denominated bonds in April -- an outflow equal to peak inflows. But as big as that was, it doesn't explain the ~ $35b swing in fx reserves
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The biggest swing was actually in short-term bank flows (a counterpart to the offshore lira carry trade in London), which fell by $12b in April ($15b in outflows in the last 3ms generates the $60b annualized outflow in the chart)