Thread by @Brad_Setser

Some on this site have challenged my decision to highlight the size of China’s manufacturing surplus in the New York Times… and also questioned why I question China’s (modest) reported current account surplus.

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The decision to highlight the manufacturing surplus was easy.

Why: the $1 trillion increase in the manufacturing surplus (& the $500+ billion increase in the goods surplus) is in fact the story. The services deficit is basically unchanged relative to its pre-pandemic size.

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China’s estimated auto capacity also comes straight from the Times and their very good auto reporter. I did add a forecast for the increase in EV capacity over the next few years, but my argument maps to that industry exports like Mike Dunne.

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nytimes.com/interactive/20…

It is true that I didn’t highlight China’s reported current account surplus in my piece for the Times – but that’s for the simple reason that I think China’s 2021/22 methodology change has led China to under report its surplus

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Remember that China has two different measures of its goods surplus – and the gap between the two is now bigger than the services deficit. My estimates for the “true” external surplus revert back to China’s pre-2021 methodology

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And I also question the reported deficit in investment income – given that China has a large positive net international investment position and global rates have increased. The reported increase in the deficit flies in the face of common sense, and any model

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But why should anyone trust my estimates of China’s balance of payments over SAFE’s official data

Well, for one the disappearance of errors in the Chinese BoP data is a bit of a tell ...

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But I also have been doing this for a long time (20 years now) and have chalked a bit of a track record – so I I hope I have earned enough credibility to challenge SAFE (which initially was not transparent about its revised BoP methodology)

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cfr.org/blog/Setser

I was among the first to realize that the annual Treasury survey data (custodial) data was doing a better job of picking up Chinas purchases of US assets than the monthly TIC data & thus among the first to identify China’s large purchases of Agencies

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ifri.org/en/papers/powe…

I was among the first to realize that the fall in China’s reported reserve growth in 2006 was a function of SAFE swaps with the domestic banks, which led to a surge in Chinese portfolio outflows/ slower reserve growth

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cdn.cfr.org/sites/default/…

More recently I was among the first to highlight that the stability of China’s reserves was a function of hiding interest income, and the increased role of the state commercial banks in fx management

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cfr.org/blog/how-hide-…

And I was among the first to highlight the significance of the “diversified use” of fx reserves that SAFE disclosed back in 2020 (an admission of policy bank funding)

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safe.gov.cn/en/Publication…

Perhaps most significantly, in spite of pressure from Taiwan's authorities, I worked with STW to put out a paper arguing that fluctuations in Taiwan’s central bank balance sheet implied that the CBC had more foreign currency assets than disclosed

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cfr.org/sites/default/…

We estimated that this hidden portfolio was around $150b (using the balance sheet data of the central bank, the balance sheet data of the lifers and the BoP); and Taiwan subsequently disclosed $140 billion in previously hidden foreign exchange assets

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I hope that record gives me the crediblity to question China’s current account data, which started to diverge from the customs goods surplus (adjusted for the services) deficit in 2021, when China surreptitiously changed its balance of payments methodology.

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I don’t expect everyone will agree with my argument – but I would hope that those defending SAFE’s modest reported surplus and trying to claim that China's economy is in external balance would take my points seriously ...

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