Brad Setser Profile picture
CFR senior fellow. Views are my own. Retweets are not endorsements. Writes on sovereign debt and capital flows.
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May 20 8 tweets 3 min read
"But the size and scope of China’s EV-oriented industrial policy would make even the most-devoted dirigiste policymaker blush."

Luke Patey in the Wire, with a great forthcoming chart from the CSIS team

1/x Image The irony of the free trade always is the best policy arguments made by the Economist is that keeping markets open even as China kept its EV market closed is that it effectively "rewards" China's dirigiste policies by ceding global market leadership to a non-market economy --

May 20 17 tweets 4 min read
The Economist's article on the EV and battery tariffs is far better its "We remember Economics 101 so we don't need to bother with China's actual policies" leader.

Both question the continued use of the original 301 case as the basis for new tariffs.

Image The argument is a bit academic. Given the "free trade is always the right policy no matter the distortions created by your trade partner" view of the leader, the Economist and others are opposed to the actual tariffs, not the legal mechanism (a 301) used ...

May 19 4 tweets 2 min read
China's emergence as a large auto exporter was incredibly sudden. But the pressure had been building for years. There was significant overcapacity in China's ICE sector back in 2017 ...

1/ Image And there were concerns that the shift to EVs amid declining overall demand would only add to overcapacity in the sector at the start of 2018 ...

May 18 8 tweets 3 min read
Watch out Germany --

In dollar terms, China's auto exports continue to soar

and imports are also sliding (which matters for Germany)

1/ Image the pace of the swing in China's auto trade is stunning -- in the middle of 2021 (3 years ago) China could accurately be described as primarily an importer of finished cars

2/ Image
May 18 7 tweets 3 min read
Why worry about a second China shock?

Well, because it has a real risk of happening the automotive sector globally

China's exports of autos are absolutely soaring

and it isn't just a story of EVs

1/ Image For conventional cars, internal demand in China has shrank dramatically --

Partially because total demand for cars has stalled (it is below its 2017 level) and partially because of pro-EV policies that led to a big rise in EV sales and production

2/ Image
May 18 11 tweets 4 min read
This NYT headline "Biden’s China Tariffs Are the End of an Era for Cheap Chinese Goods" might describe the results of Trump's across the board tariffs, but it isn't an accurate description of the results to Biden's more targeted tariffs. See the actual data below

1/ Image The EV tariffs won't end an era of cheap Chinese EVs in the US market. The will prevent that era from ever starting -- autos are a sector of the global economy that China only is starting to dominate (its emergence as an exporter is new)

May 17 9 tweets 3 min read
The April data for foreign exchange settlement provides the strongest evidence to date that the CNY came under significant pressure in the spring.

Adjusted for forwards it shows $50 billion of net sales -- the PBOC balance sheet by contrast showed trivial sales.

1/ Image I certainly thought the spikes in settlement in December 2020 and December 2021 were significant; March and even more so April send a signal in the opposite direction.

2/ Image
May 14 4 tweets 2 min read
Obviously the section 301 tariff review in the US will dominate the news --

But the CNY still matters. And the first measures of pressure on the CNY in April are out. The PBOC balance sheet shows modest ($3b) in sales (a contrast v q1)

1/ Image The state banks reduced their foreign assets by about $15 billion in April, so a combined fall of $20b -- definitely not small, but also not huge (relative to China's stockpile)

Settlement data isn't yet out

2/ Image
May 13 9 tweets 2 min read
Tariffs don't work is (it seems) a fairly common response to the 301 review increase in US EV tariffs.

The thing is, well, China's auto export success is the best counter example to that argument ...

1/ Just to review a few auto basics:

China has higher bound tariffs (25%) on autos than the EU (10%), the U.S. (2.5% on cars, 25% on light trucks) and Japan (zero)

May 12 8 tweets 3 min read
EVs tend to get all the attention. But the bulk of China's vehicle exports are traditional internal combustion engine cars. And that is where the is clear overcapacity (WSJ reports 40 m in capacity v 15m and falling domestic sales)

1/ Image there were concerns (see Keith Bradsher) about overcapacity in China's ICE sector even before EVs took off. Total car demand is now under 25m and it was never over 30m in a sustained way, but folks built for a much higher number. Now supply is potentially basically elastic

May 10 9 tweets 3 min read
The US tariffs on EVs and other strategic goods are likely to be the first of many responses to the current Chinese export surge:

"Higher tariffs .... will also hit critical minerals, solar goods and batteries sourced from China"

1/ Image I expect the EU to follow, in their own way, given the scale of China's industrial base in these goods and thus its export capacity (countries that want to give their own sectors a chance to scale up likely have to react)

May 6 8 tweets 4 min read
I generally am a fan of the Economist.

But they (perhaps echoing the IMF?) made a common error in attributing the fall in FDI after 2017 to "deglobalization"/ rising tensions with China

Image The swing in 2018 is in fact a function of the OECD BEPS reforms and the US tax cuts and jobs act, which led to a huge unwind of "special purpose entities" in European "financial" (umm ... tax) centers

the sign changed and the swing was huge.

2/ Image
May 5 21 tweets 5 min read
Joseph Cotterill of the FT seems keen on Sri Lanka’s macro linked bond.

I am not. Three (major) problems not mentioned in the FT article:

1) It is linked to the wrong variable;
2) The payoffs are asymmetric;
3) It doesn’t generate debt sustainability

1/ many First issue. Linking to the wrong variable: dollar GDP.

Sovereign debt tourists think in fiscal terms. I hoped sophisticated bond holders would know better. The IMF even more so. But no. The debate now is all about index eligibility.

May 3 6 tweets 2 min read
"“We immobilised the assets together; we would like to mobilise them together as well" - Daleep Singh, White House deputy national security adviser.

Important point from Mr. Singh, & a very important chart from the FT in their Big Read on the freeze v. seize debate

1/ Image Note two things about the chart:

a) There is a clear upward trend in Euroclear's profit on the frozen reserves (as bonds roll off into a deposit account)
b) The q4 profit was EUR 1.5b, or EUR 6b annualized

May 2 8 tweets 3 min read
Let me build on this @michaelxpettis thread.

China's reserve manager almost certainly doesn't currently hold the bulk of the dollar assets held by China's state sector, let alone by all Chinese residents

Image SAFE has disclosed that it diversified its formal reserves away from dollar (going from 79% in 05 to 59% in 15 -- and the latest data point is ~ 58% but it is very lagged). So SAFE maybe holds $1.8-1.9 trillion of its formal reserves (and other f. assets) in USD

2/ Image
May 1 11 tweets 4 min read
American pharmaceutical companies are apparently running a low margin business in the US -- very modest (reported) profits relative to their US sales, and smaller reported US profits than before the TCJA.

(from work in progress with @Mike_Weilandt)

1/ Image Indeed, since the passage of the TCJA (the pharma tax cuts and Irish jobs act according to one pundit) US pharma companies have reported less profit in the US and more profit abroad

2/ Image
May 1 4 tweets 2 min read
A reminder that the vast majority of Treasuries held by foreign central banks have a maturity of 5 years or less --
Last data point here is from mid 2023, tis from the latest survey of foreign portfolio investment in the US Image Given the inverted curve I was expecting more evidence that foreign official investors had shortened the maturity of their Treasury portfolio. Image
Apr 30 14 tweets 3 min read
Why doesn't Japan just let the yen float (even further) down? One answer shouldn't be a surprise to any American who has observed just how much Americans care about the price of oil --


(chart thanks to @Mike_Weilandt) Image There seems to be an asymmetry around a lot of commentary around intervention. Dollar sales generate a lot more attention that dollar purchases (and the compounding of interest income on accumulated assets)

2/ Image
Apr 19 4 tweets 2 min read
FX settlement data for March shows the first sign of significant pressure on the yuan -- roughly $30b in fx sales in settlement. Contrasts with $7b rise in in balance sheet fx reserves

Settlement v balance sheet gap is big.

1/ Image The settlement v PBOC balance sheet gap (which should correspond in theory to fx sales from the state banks) is also large in the trailing 12m (captures activity over the last year)

2/ Image
Apr 15 13 tweets 4 min read
A lot of political reporting still casually equates the interest of (German) business operating in China with the interest of the Germany economy. Politico for example ...

1/ Image The same applies to arguments that link Tesla's production in China and its exports from China to the success of the US economy (as opposed to a US company). The confusion isn't limited to Germany

Apr 13 8 tweets 3 min read
I was on NPR yesterday, highlighting just how little US tax the major US pharmaceutical companies pay

1/… Large US revenues typically do not generate any taxable US profit (thanks to profit shifting)

2/ Image