Thread by @GlennLuk

IMO conflating mfg goods with holistic global trade here.

China runs a mfg. goods surplus of ~$1,763B.

But it runs a structural deficit in *every other key trade category.

(moreover, the mfg. goods figure itself is likely overstated relative to underlying fund flows)

https://twitter.com/brad_setser/status/1856729408612024393

This is what’s excluded from the above number:

1️⃣ $909B of primary goods imports (food, natural resources)
2️⃣ $241B services (mainly travel/tourism)
3️⃣ $386B profits of foreign firms operating in China

As well as a 4️⃣ $258B “factoryless manufacturing” adjustment.

1️⃣ China has a large structural deficit in natural resources (iron ore, petroleum) and food (soybeans, corn).

e.g. China imported $332B of petroleum and $272B of ore during the period.

This brings the net goods surplus to $854B for the 12 months ending 6/30/2024, per GACC.

This figure is further adjusted by $258B to match with underlying fund flows due to the “factoryless manufacturing adjustment. I’ll get back to this later.

The brings the goods surplus on the Balance of Payments to $596B.

2️⃣ China runs a structural deficit in services, mainly driven by its “imports” of outbound travel, tourism and education.

Indeed, the principal reason why the CA surplus spiked in 2021-22 was from pandemic restrictions on travel.

It ran a $241B deficit LTM 6/30/2024, per SAFE.

This brings the overall trade surplus to $355B.

3️⃣ China runs a structural deficit where foreign companies make much larger profits in China ($386B) than Chinese firms make outside China (est. $52B).

These net profits are repatriated out of China to support jobs, income and demand in RoW.

Examples of U.S. MNCs tapping into Chinese household demand:

▪️ Apple selling ~45M iPhones p.a.
▪️ Tesla selling ~650k electric vehicles
▪️ Nike selling $5.5B worth of shoes and apparel

The huge profits these companies generate don’t show up in the goods surplus.

Chinese MNCs make significantly less on their overseas operations, as they have only recently started expanding overseas.

I’ve estimated this figure by modeling passive investment income on China’s large foreign reserve and foreign lending portfolio and taking the residual.

In the context of this debate about just how much China depends on the world (and vice versa), this figure is highly relevant, as it represents net economic value that flows out of China to RoW.

These “active” profits are also a core component of modern global trade.

This lowers the holistic trade and “active” investment balance to merely $22B, or 0.1% of China’s GDP.

Adding on the aforementioned passive investment income and some miscellaneous BoP items gets us back to the official current account surplus of $211B, or 1.2% of GDP.

4️⃣ The “factoryless manufacturing” adjustment is
part of an ongoing debate on the scale of distortion effects of “factoryless manufacturing” on trade figures reported to customs.

It represents the difference between physical flow trade measured by China Customs and the underlying funds flows used in recent BoP data tabulated by SAFE.

I’ve laid out the case on why I think the adjustments SAFE made correct these distortions and improve the accuracy of the Balance of Payments data.

Brad disagrees and instead claims China is now understating its true current account surplus by upwards of $500-600B.

https://twitter.com/glennluk/status/1851833290551943541

Not going to get into that particular debate here.

Because even without the “factoryless manufacturing” adjustment, the trade and investment surplus (factoring in net FDI) would be $280B, which at 1.5% of GDP is 6-7x smaller than the manufactured goods surplus.

Arguing that the world doesn’t export to China by zero’ing in on a single category (manufactured goods) where it runs a surplus and ignoring every other category where it runs a structural deficit presents an unrealistic view of holistic trade in today’s complex global economy.

It’s implicitly based on a strict definition of trade (customs definitions of exports and imports, of only one category of physical exports) that doesn’t consider the complex realities of modern trade, like the hundreds of billions in profits by foreign MNCs earned in China or outbound travel and tourism by Chinese households.

It’s important that we form an objective, accurate view of China’s holistic trade relationship with the world.

It is counter-productive to rely on cherry-picked data to support exaggerated narratives like the one about how much China truly relies on global demand and its capacity to absorb exogenous shocks.

Distorted or inaccurate narratives carry the risk of suboptimal policy formulation — e.g. entering negotiations with China with an exaggerated sense of how much leverage we really have.

Or underestimating China’s own ability to retaliate.

END.