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Brad Setser

@Brad_Setser

Feb 26 • 7 tweets • 2 min read • Read on X

To make a point that Michael Pettis also makes, China is going to have trouble "reshaping global trade on its own terms" so long as the US and the EU are the ultimate course of most of its trade surplus

1/

ft.com/content/c51622…

The countries in China's RCEP all run global surpluses (or at least most do). So in addition to being a rather thin agreement, it isn't actually close to a self contained block.

Some for now is true of any CNY payments network along the BRI ...

2/

ft.com/content/c51622…

traditional trade reporting is very focused on bilateral trade deals and bilateral flows.

But in this case the global data is important, and tells the opposite story: namely China's global trade still cannot balance without the US

3/3

first post should read that the US and the EU are the ultimate "source" not "course" of China's surplus. The EU makes up for its structural deficit with China with a structural surplus with the US, leaving the US deficit to balance most of China's underlying surplus

@GlennLuk so I think folks who try to think of this without thinking of how overall trade balances are missing the forest. Chinese manufactured export are 2x its imports of manufacture these days; the surplus is actually critical to overall flow again

@GlennLuk and no doubt China is now a capital intensive exporter, not a labor intensive one -- and in clean tech a tech exporter as well. but driver of a lot of those exports = end demand in US and Europe ... which all the bilateral data misses

@GlennLuk but I don't think Pettis is wrong to note that the US has a comparative advantage in generating demand, and China still relies on that to some signficant degree -- despite all the things discussed in the FT's big read. It just seems to be a big omitted variable

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Brad Setser

@Brad_Setser

Feb 27

https://twitter.com/michaelxpettis/status/1762345913270313362

A chart that illustrates how it is fundamentally impossible for China to construct a block centered around the developing world that replaces the US/ EU ...

there is an obvious problem, namely the size of China's surplus

1/x

https://twitter.com/michaelxpettis/status/1762345913270313362

Here is the same chart without China -- it looks totally different. That's the point.

Note one other thing: the big deficits are in India and Turkey.

2/

That is a real problem for a Sinocentric block that aims to replace the US and Europe as a source of end demand. India is absolutely not prepared to run bigger deficits with China -- and Turkey really needs to bring its deficit down.

3/

Read 8 tweets

Brad Setser

@Brad_Setser

Feb 22

A chart, prepared with the help of @Mike_Weilandt, showing exactly many are saying the Chinese intervention data doesn't quite add up right now.

Hint -- the green line (PBOC balance sheet reserves) and the red line (fx settlement) aren't telling the same story.

1/

Given the general weakness of the CNY (against the USD) and the fact that spot has generally been weaker than the fix, it would be reasonable --based on past experience/ correlations -- to expect the PBOC to be selling fx/ reducing its reserves

2/

But, as the green line in the first chart shows (reproduced below), the PBOC clearly is adding to its reserves. It has been consistent in the last four months data -- so it isn't an accident.

and it is strange, given the CNY's underlying weakness

3/

Read 10 tweets

Brad Setser

@Brad_Setser

Feb 17

A reminder that Europe (and Germany) now relies on the US for security, relies on the US for energy -- and also relies on the US for demand.

Euro area exports to the US are over two times euro area exports to China --

1/

Over the last year, the euro area countries exported EUR 450b to the US -- and only EUR 200b to China.

2/

Admittedly, trade with the US is inflated by the tax avoidance strategies of US pharmaceutical companies, who produce their patent protected meds in say Ireland and sell them back to the US at a inflated price. But US demand for European autos and auto parts is also up

2/

Read 5 tweets

Brad Setser

@Brad_Setser

Feb 16

February means end year balance of payments data --

& Turkey is always interesting: complex banking system, policy twists and great data thanks to the CBRT

On the surface it looks like financial inflows picked up in 2023 ...

(thread)

1/

But the bulk of the bank inflow (in deposits) was actually the CBRT borrowing ahead of the election -- it wasn't a real private flow.

Taking it out generates a more accurate snapshot. Some improvement, but still a big gap between external funding and the current account

2/

Simsek's pivot to orthodoxy is having some impact -- but it hasn't really translated into demand for TL assets (at least not yet). The current account though is coming down a bit with somewhat more restrictive policies.

3/

Read 11 tweets

Brad Setser

@Brad_Setser

Feb 16

Woah Nelly. China's holdings of US assets in the US TIC data jumped in December. Bigly.

Man bites dog type data release. Runs contrary to most narratives.

The rise was broad based across the key categories in the TIC data!

1/

As this chart shows, the headline US series (major foreign holdings of Treasuries, so Chinese treasuries held by US custodians) jumped up -- but so did holdings at Euroclear/ Agency holdings and even US dollar deposits

2/

I was actually starting to get a bit nervous as China's holdings had been trending below my "model" forecast (which assumes China has maintained a 58-59% dollar share). It seemed maybe China just might be diversifying just a bit.

But not in December!

3/

Read 7 tweets

Brad Setser

@Brad_Setser

Feb 14

Interesting blog from @snlester --

Raises an important set of issues, especially in a world where other countries are increasingly adopting "Chinese policies" (industrial subsidies, local content requirements) to counter China.

Some reactions

1/

ielp.worldtradelaw.net/2024/02/what-c…

First observation: a lot of Chinese policies are probably better described as unfair rather than illegal.

The WTO allows domestic production subsidies (but not subsidies that explicitly do import substitution). So most subsidies are allowed but can be countervailed.

2/

China's EV and battery production subsidies for example aren't illegal under any interpretation of the WTO's rules.

But the EU can offset their negative effects on EU producers if shows "adverse effects"

3/

Read 20 tweets

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