There’s a broad agreement that the global economy has been experiencing a new China shock since 2020. But where did it come from? And which countries are likely to be hit the hardest? A 🧵with some surprising findings. 1/ First, let’s define the new China shock. China’s global export share hit a new high at the peak of the pandemic, when commodity prices collapsed and demand for Chinese-made goods spiked. The more remarkable thing is that it’s held on to that share since. 2/

Why is China’s stock market booming if most economists, including me, don’t think the stimulus measures announced or reported go far enough to solve China’s economic problems or even its cyclical slump? I think it’s how the stimulus has been designed. A🧵 1/ The measures aimed at the real economy are mostly incremental, small, and inconsequential. But the measures that the PBoC announced to support the stock market are new, unlimited, and significant. 2/

Does China have a bond bubble? Or does China’s bond market reflect its economic weakness? I think the answer to both is yes. I also think the PBoC is making a huge policy mistake. It’s confusing for the latter for the former. Let me explain. 1/ If you just look at government bonds, the market is rational. China’s household savings rate is marginally higher than it was pre-pandemic. But less of that savings is going into housing, so the net financial surplus has increased a lot. 2/

A common misconception about China’s economy is that weak retail sales reflect weak household consumption. In fact, HH consumption accounted for >60% of GDP growth last year, a 30-year high, and the boom only ended in Q2. So why are retail sales a poor measure of HH demand? 1/ There are two main differences between RS and HH consumption. First, RS don’t capture a large share of the services HHs consume – education, medical care, housing, etc. But this isn’t the recent problem. Stripping those services out of consumption widens the growth gap. 2/

China's third plenum wraps up tomorrow, and we should get an outline of how the top CCP leaders plan to reform the economy. I expect the plan to focus on three big areas: 1/ The main focus is likely to be on productivity. The post-GFC shift toward housing and infrastructure was a nightmare for China's productivity growth. Will shifting resources toward manufacturing and technology unleash "new quality productive forces"? I'm skeptical. 2/

The debate about China’s excess capacity and its exports has become silly and political. Yet there are clear examples of weak domestic demand driving a surge in its exports, helped by a cheap currency and government support. Yes, we need to talk about excavators. 1/ China became the top exporter of excavators and related construction machinery in 2022. This surge in exports followed a sharp downturn in its domestic demand for excavators as its housing boom went bust. 2/

China's annual migrant worker survey is out, and, as ever, it's a banger. Just a few of the hits:
1. Migrant employment in the construction sector fell by 6.5 million in 2023, the largest annual decline since the survey started in 2008. 1/ Of course, it was the service sector that absorbed those workers. The re-opening of consumer-facing services helped 7.2 million migrants find work in the sector. Something policymakers should think about as they put all their eggs in the manufacturing bucket. 2/

It was an honour to testify at the @uscc_gov last week on “China’s Economic Policy and its Role in Global Manufacturing” with @ChimitsF and @gordon_h_hanson. Here’s a quick summary of my testimony. 1/ uscc.gov/hearings/consu… China’s development objectives shifted dramatically in 2020 in ways that are still not widely appreciated. Maintaining a relatively large manufacturing sector and becoming the global leader in seven strategic technologies are now the state’s primary economic targets. 2/

It’s been widely reported that Mexico overtook China as the top exporter to the US in 2023. But there’s a problem with these stories. They rely on US import data, and US imports from China are understated by nearly 25% due to systematic tariff avoidance. An investigative🧵1/ As the chart above shows, the relationship between the US import and Chinese export data has flipped. Before 2018, the US always recorded imports from China worth about 25% more than China reported sending to the US. 2/

China’s property crackdown was partly motivated by a desire to shift the economy back toward manufacturing, which was supposed to raise productivity and root out its supply-chain vulnerabilities from a hostile US. So how’s that going? 1/5 One of targets in the current five-year plan was to stabilize the manufacturing share of GDP. That looks to have been achieved. But it hasn’t exactly had the desired impact on GDP growth. 2/5

Actually, economists know how to measure China's consumption fairly accurately. @TheEconomist argues otherwise only because the author doesn't seem to know how the system of national accounts works. 1/ economist.com/finance-and-ec… "Social transfers in kind" get special treatment in the SNA. They are excluded from household gross disposable income and HH consumption for all countries, including China. But they're added to both (and subtracted from gov cons) in the "adjusted accounts". From the 2008 SNA: 2/

China isn’t just trying to be the leading high-tech manufacturer. It’s also wants to manufacture everything. This goes against the typical development pattern and most economists’ advice. So why does Xi want to do it, and can he pull it off? A long🧵 1/ This is from a note I wrote a few years ago (so all the charts are stale). I was re-reading that for a new project I’m working on, and then also read this great blog post from @andrewbatson on the topic. So maybe it’s vaguely topical? 2/ andrewbatson.com/2023/10/03/chi…

Why did some EM central banks hike rates early and aggressively in 2021-22, while others were able to lag the Fed? We argued early last year that the difference between wheat and rice prices had a lot do with it. Now that’s all reversing. 1/ Inflation in EMs that eat more wheat than rice rose sharply as wheat prices spiked, but the run up in rice eating countries was much smaller. 2/

China’s not in a balance sheet recession. It has a different kind of problem than Japan in 1990 or the US in 2008, even if the outcome may look similar – subpar growth, weak inflation, etc. An unapologetically technical🧵1/ Richard Koo coined the term “balance sheet recession” to describe how a decline in the value an economic sector’s assets that pushes it into some sort of insolvency then forces that sector to pay down its debt, leading to lower investment and growth. 2/

The deflation debate in China seems to be the inverse of the inflation debate in the US 2 years ago. One camp is looking at it from a micro perspective, arguing deflation will be transitory. While those looking at the macro picture argue for a stronger policy response. A 🧵1/ Team micro has a good case. CPI deflation can be fully explained by the 26% fall in pork prices. Ex-pork, inflation ticked up. Core inflation and service price inflation also both accelerated. Pork will be a drag in YoY terms through Oct, but the index should rebound in Q4. 2/

Why does consumption account for such a small share of China’s GDP? This is a big question, and there’s a lot of misleading information out there. But a cross-country comparison of the flow of funds data can help us understand what’s going on. A long thread… 1/ To understand why, we can start with an accounting identity:

Private consumption/GDP = HH income/GDP * (1 - HH savings/income).

China's HH income share is relatively low, but it’s the savings rate that is the major outlier. 2/

Chinese youth unemployment is at a record high 20.4%. A lot of ink has been spilled the past few months explaining why that’s happened and what it says about China’s economy. The thing these stories all have in common is that they are all bullsh*t. 1/ First, the “record high” is for a measure of unemployment that only dates back to 2018. We have no idea what youth unemployment looked like before then, at least measured in a consistent way. That alone should make us cautious. 2/

Pop quiz! According to China’s stats bureau, did residential real estate investment fall by 7% YoY or 17% YoY in April?

Trick question. It's both.

What’s going on? How can they have lost track of the most important sector in the economy at this critical turning point? 1/ First, a bit about the data. The NBS reports China’s real estate data in year-to-date format for the levels (yuan or volumes) and growth rates. The chart above shows how the two measures for investment have diverged the past 2 months. 2/

Why have two official estimates of China’s trade surplus diverged by $270bn over the past year?
It’s not data manipulation. Turns out, it’s another case of multinationals exploiting preferential tax rules and messing up the global balance of payments data. Let’s investigate! 1/ Here’s the basic issue. According to China’s customs agency, its trade surplus was $970bn in the year through March, while the State Administration of Foreign Exchange data pegs the goods surplus at only $670bn in the balance of payments. 2/

How China is reshaping global value chains in 3 charts. First, a decent chunk of the decline in its imports this year is due to a decline in the processing trade. Final assembly of goods for export to the US really is moving out of China now. 1/ But that doesn’t mean China is being engineered out of supply chains. In fact, it seems to be capturing a larger share of the value-added in the production of iphones and the like, while it gives up final assembly due to US tariffs. 2/

A local government financing vehicle in Zunyi, Guizhou officially became the first LGFV in China to restructure all of its bank loans last week. This is a big deal since it's a precedent for how other off-balance sheet debts may be restructured. A🧵 1/ finance.caixin.com/2023-01-03/101… LGFV debts or local government “hidden debts” are a big problem. For @asr_london I estimated that their off-balance sheet debts and contingent liabilities rose to CNY47tn (39% of GDP) in September, up from CNY20tn (27% of GDP) at the end of 2016. 2/