China appears to have changed its intervention rule, and now intervenes (via the state banks) at the mid point of the band, not the strong side of the band ...

A true old school follow-the-money blog

1/

cfr.org/blog/chinas-ne… Hope others find this chart as helpful as I did -- the yuan has spent very little time on the strong side of the fix (the theoretical mid point in the band) and, more importantly, the proxy for state bank intervention shoots up if spot is close to the fix

2/

Probably the most important chart for the world economy right now -- Chinese export growth in both q1 and q2 was close to 10%; Chinese import growth has been flat (q2) or negative (q1)

With exports 20% of GDP, implies a huge net export contribution ...

1/ This excellent FT story provides the narrative to go along with the hard data -- China's localities have tremendous incentives to subsidize the production of overcapacity in new and old sectors alike. & with internal demand weak, exports result

2/

ft.com/content/f7979a…

The census advance June trade data shows the goods trade deficit (which in accurately measured at a high frequency) fell back to around $1 trillion USD in June

1/ The big swing in the data came from consumer goods (which includes pharma) and is partial payback for a super strong q1 ...

2/

The EU opted not to fight a trade war with the US (and the Commission is taking some flak as a result).

China is already fighting an industrial policy war with the EU -- and winning

1/

cfr.org/blog/china-als… I think I have a pretty good understanding of why the deal with the US is controversial inside the EU.

But its impact ultimately hinges (technically) on the elasticity of a more or less global 15% (+/- 5) US tariff

2/

geopolitique.eu/en/2025/05/08/…

Americans, understandably focused on the (past and present) antics of Donald Trump, tend to underestimate the shift in elite European views toward China

1/

https://twitter.com/fteconomics/status/1948232453732147247

Von der Leyen is perhaps a bit more hawkish than the European consensus, but there is no way this kind of message would have been delivered 4 years ago --

2/

Turns out that there was indeed a disturbance in the force -- the global balance of payments that is -- back when China changed its balance of payments methodology in 21/22 ...

(see the black line in first figure in the first box in the IMF's ESR)

1/ That disturbance -- which I felt, and so did Logan Wright and Adam Wolfe -- came as China used a new internal data set (then undisclosed) to adjust its exports down and move its imports up (relative to its previous methodology, note the fit v the old data before 2020)

2/

A deep dive -- a really deep dive some might say -- into the IMF's new External Sector Report.

It is a step in the right direction, but the IMF is still understating the scale of global trade imbalances and the scale of China's surplus.

1/

cfr.org/blog/better-la… Pierre-Olivier Gourinchas' blog draws attention to how both the US deficit and Chinese surplus widened in 2024 (v 2023) and how this widening was unwelcome as it pushed China's surplus (and the US deficit) above the estimates in the IMF Model

2/

imf.org/en/Blogs/Artic…

I actually think this is real progress.

The Commission has (I hope) recognized that it can no longer make do with pretend deals that offer the illusion of progress without resolving the very real underlying problem ...

1/

https://twitter.com/Alea_/status/1947513711523995912

Europe (and Germany) has sort of gotten mugged by trade reality.

German exports of autos to China, for example, are down by about 50% relative to their levels in 2014 -- 0r 2022 ...

2/

Really hard to overstate the extent to which the years after the pandemic have been marked by a shift in the global goods surplus (correctly measured, in customs) to China ...

1/x China's neighbors have protected themselves from the second China shock with undervalued exchange rates of their own. the combined surplus of East Asia is huge ... close to 1.5 pp of WGDP, over 1.5 pp of the GDP of Asia's trade partners

2/

"German officials, who have pressed for a quick deal, no longer see an agreement with the U.S. as the most likely outcome"

Great reporting from the WSJ

1/ "German leaders initially understood Trump’s letter ... as a last-minute ploy to extract better conditions. They finally snapped after finding out about U.S. officials’ pressure this past week for the EU to accept higher baseline tariffs and no relief for its auto sector"

2/

Well, most goods that China exports also could (in theory) be sold at home ...

But will push back a bit more broadly. So far at least, China's exports have held up well in the face of the tariffs ...

1/

https://twitter.com/robin_j_brooks/status/1947016956105605167

The export price data is volatile, and there isn't yet a number for June -- but q2 export prices (into the tariffs) look up a bit v late last year

2/

China is now resisting pressure on the yuan to appreciate. That isn't (yet) the conventional wisdom, but the evidence is now clear at this stage.

A new blog --

1/
​
cfr.org/blog/case-chin… This is I think the key chart -- China added close to $40b to the combined foreign assets of the state banks and the PBOC in June (close to $50b to the state banks, minus $10b at the PBOC). And the only month of sales was April, just after liberation day ...

2/

China's manufacturing surplus continues to grow --

Exports are still rising relative to GDP

Imports, excluding processing, are falling (and now are well under 3 percent of GDP, way below their level when China joined the WTO)

1/ China manufacturing surplus is now 10.5% of its GDP -- not that far from its peak levels before the global financial crisis

(June manufacturing data projected off the overall customs data)

2/

One thing that has surprised me is the upward march in long-term JGB yields

The BoJ's reluctance to hike (perhaps it wants a weak yen to help buffer the auto tariffs/ Bessent should raise this when he is in Japan this week) is part of the story. But not the whole story

1/ We know from the Bank of Japan's Financial System Report that the banks gorged on 10 year and over paper during the period of yield curve control, and are now looking to reduce their duration holdings -- so that is part of the story

2/

Very much agree.

The second China shock is real, and at Autor and Hanson note, a threat to US and European production and technical leadership in a number of industries of the future ...

1/

https://twitter.com/greg_ip/status/1944802003260985803

One example highlighting the magnitude of the challenge -- China's auto export surge continues ...

The widespread forecast that exports would naturally level off in 2025 hasn't been born out.

2/

As the Bloomberg story on Friday about the changing swaps position of the state banks highlighted, the direction of pressure on China's currency has shifted. The state banks added almost $50b to their net foreign asset position in June, likely to help block appreciation!

1/ The increase in the net foreign asset position of the state banks over the last 12ms is now $300 billion -- real money (it has more than offset the reduction in PBOC balance sheet reserves)

2/

There are lots of reasons why China posted a $115 billion (customs) goods surplus in June. Strong exports to Europe is one of them. Another is the rebound in exports to the US (up $10b v May) after the Geneva deal

1/ Exporting through SE Asia to avoid US tariffs is a very real thing (see the story about Chinese firms making furniture in Vietnam in the Journal) but it didn't drive the June data

2/

Trade war? Tariffs? It isn't in the Chinese trade data.

The seemingly inexorable upward march in China's surplus continues ...

1/ The 5.8% y/y increase in exports understates the strength in China's exports. Not because of export price falls, though those may be in the data as well. Rather because the base last June was close to $310 billion (high) -- the $325 billion in the 2025 data is a jump up

2/

So President Trump has sent the EU a "letter" proposing a 30% tariff on August 1 -- and a similar letter to Mexico which presumably would only apply to non USMCA trade.

About half of US imports are from the EU and USMCA countries

1/ The Commissions thinks (hopes) this is a negotiating tactic -- and autos are already 25% and I think pharma is still exempt (strange) --



2/ ft.com/content/43487e…

A quick thread highlighting the (many) puzzle's in China's balance of payments data --

The first, of course, is why did errors (now the statistical discrepancy)/ hot money flows disappear with the property bubble? (my answer is that they didn't really)

1/ A related puzzle: why did hot money outflows (errors) fall off the cliff at the same time as FDI inflows? (my answer is that they didn't really, but it is a puzzle)

2/

A bit of work in progress. The net foreign assets of China's state commercial banks doesn't include the net foreign assets of the policy banks. So I converted net "other" in the BoP into a monthly series, and plotted it against net foreign assets.

Good fit

1/ The gap between the cumulative flows since 2010 in the two series (mostly from 2014 to 2018) implies ~ $1 trillion in net foreign assets in the policy banks, consistent with the work of @AidData

Note this is an upper bound estimate in some ways.

2/