1/6
China's deflationary environment continues to improve, with high-than-expected numbers in February. CPI inflation was 1.3% year on year and 1.0% month on month. Month-on-month inflation has been positive since December and mostly positive since July.
english.news.cn/20260309/3fc64… 2/6
The Spring Festival always makes January and February data noisy, but ever since Beijing decided to go after the problem of involution last May and June, we've seen deflationary pressures ease. But we also saw investment growth decelerate sharply. This isn't just coincidence.

1/8
Bloomberg: "China will issue 300 billion yuan of special sovereign bonds to recapitalize some of its largest banks, marking an expansion of Beijing’s efforts to fortify the nation’s financial system against a cooling economy and market volatility."
bloomberg.com/news/articles/… 2/8
Chinese banks are caught between record low net-interest margins and worsening loan quality, and so are forced to recapitalize, but this just reflects the same set of inconsistencies between high growth targets and low consumption that we see everywhere else in the economy.

1/7
Xinhua: "China will actively boost consumption and implement an income growth plan for urban and rural residents, according to a government work report submitted Thursday to the country's top legislature for deliberation."
english.news.cn/20260305/4203c… 2/7
This is certainly the right thing to say – the only sustainable way to raise the consumption share of GDP is to raise the household income share – but it tells us very little.

Raising the household income share means reducing the business and/or government shares.

1/6
Xinhua: "China targets an economic growth of 4.5 percent to 5 percent this year."

While this is the lowest target in decades, it's still roughly twice what I think the economy can sustainably deliver without a lot more more non-productive investment.

english.news.cn/20260305/d0f4b… 2/6
It is a good sign that Beijing has set a lower target this year (certainly better than rigidly sticking to a 5% GDP growth target), but the truth is that it doesn't change much. China will still have trouble – for all its promises – getting consumption growth to accelerate.

1/12
Very interesting Bloomberg article on one of my favorite topics – how, in a hyperglobalized world (i.e. one with very low transportation, communication, and financial-transaction costs), countries that control their external accounts effectively...
bloomberg.com/news/articles/… 2/12
externalize domestic economic conditions by passing them on to the rest of the world via trade- and capital-flow imbalances. These imbalances are automatically absorbed by those of their trade partners who choose to exert less control over their external accounts.

1/9
Good piece in Nikkei Asia by former acting deputy U.S. trade representative Wendy Cutler on trade-related discussions during Trump's upcoming trip to China. She argues, however, that for a president focused on...
asia.nikkei.com/opinion/trump-… 2/9
rebalancing, Trump must "hold China's feet to the fire," including pressing for export restraints in sectors like steel and autos and tougher action on transshipments – or tariff dodging via third countries.

1/7
Bloomberg: "China is balancing productivity gains from AI with labor stability, as automation could displace workers and trigger an economic spiral."

I think this whole AI-will-cause-unemployment argument is very confused.
bloomberg.com/news/articles/… 2/7
Getting workers to become more productive doesn't cause workers to be fired. In fact that's the only way to make them richer.

What really matters is whether or not wage growth for the overall economy keeps pace with productivity gains.

1/5
SCMP: "“China needs to move decisively towards consumption-led growth,” Sonali Jain-Chandra, IMF mission chief for China, said in an interview with the South China Morning Post."
scmp.com/economy/china-… 2/5
Yes, but how? The IMF has urged China to put into place a stronger social safety net, but even if China were to do so, until it is credible (which will take years, even decades) it will have little impact on current consumption.

1/5
Bloomberg: "The scale of the problem is staggering. Trade data released Thursday showed a record $112 billion gap between what China reported exporting to the US and what US Customs said actually arrived last year."
bloomberg.com/news/features/… 2/5
"Put simply," Bloomberg continues, "that suggests that as much as a quarter of what Asia’s top economy shipped to American shores last year slipped under the tariff radar."

1/6
Bloomberg: "Instead of fighting over quotas and rules, officials should be rolling up their sleeves and thinking honestly about where the EU has a fighting chance of competing — not “picking winners, but letting the losers go.”"
bloomberg.com/opinion/articl… 2/6
This might be perfectly good advice in a "normal" trading environment, in which countries maximize exports in order to maximize imports and domestic consumption, trade is broadly balanced, and production shifts according to comparative advantage.

1/4
As this WSJ article points out, countries are keeping their exports competitive in the face of US tariffs by increasingly subsidizing them, with the subsidies ultimately being paid for in the form of suppressed consumption.
wsj.com/economy/trade/… 2/4
This means that we are increasingly caught up in a globalized Kalecki Paradox: when one country subsidizes manufacturing exports at the expense of wage growth, it can grow more quickly, but when all countries do it, they collectively grow more slowly.
engelsbergideas.com/notebook/europ…

1/7
Reuters: "China's biggest solar firms shed nearly one-third of their workforces last year, company filings show, as one of the industries hand-picked by Beijing to drive economic growth grapples with falling prices and steep losses."
reuters.com/business/world… 2/7
"The job cuts illustrate the pain from the vicious price wars being fought across Chinese industries as they grapple with overcapacity and tepid demand. The world produces twice as many solar panels each year as it uses, with most of them produced in China."

1/5
The New York Fed finds that "U.S. firms and consumers continue to bear the bulk of the economic burden of the high tariffs imposed in 2025."
libertystreeteconomics.newyorkfed.org/2026/02/who-is… 2/5
That is exactly how it should be. Tariffs are effectively a tax on consumption and a subsidy to production (of tariffed goods). They work by transferring income from households (net importers) to producers of tradable goods.

1/7
My latest piece was written for friends who are EU policymakers or advisors. In it I argue that there is a difference between an inefficient manufacturing sector and a globally uncompetitive manufacturing sector. We shouldn't conflate the two.
engelsbergideas.com/notebook/europ… 2/7
A country's manufacturing sector is not globally uncompetitive because it is inefficient, but rather because its wages are higher relative to productivity than those of its trade partners.

Efficiency is about how effectively an economy uses resources to create value.

1/4
Very interesting and timely paper. The authors find that "industrial policies lead to trade surpluses if the government pursues an unbalanced policy mix, such that domestic demand does not rise as much as supply. These surpluses are absorbed by the rest of the world, which...

https://twitter.com/LucaFornaro3/status/2020755500762042543

2/4
in response runs trade deficits. Absent policy interventions, trade deficits reduce the competitiveness of the domestic tradable sector, stifling innovation and productivity growth. Innovation policies can help the rest of the world to mitigate these negative spillovers."

1/6
According to Greg Ip, in the US economy today, "rewards are going disproportionately toward capital instead of labor. Profits have soared since the pandemic. The result: Capital is triumphant, while the average worker ekes out marginal gains."
wsj.com/economy/jobs/c… 2/6
And as Marriner Eccles, FDR's Fed chairman, explained in the 1930s, this creates a dangerous illusion. The extent of business profits depends almost wholly on the purchasing power of ordinary people, which in turn depends on wages.

1/5
Reuters: "The EU should consider either an unprecedented 30% across-the-board tariff on Chinese goods or a 30% depreciation of the euro against the renminbi to counter a flood of cheap imports, a French government strategy report said on Monday."
reuters.com/world/china/fr… 2/5
I think it's only a question of time before the EU will intervene in its external account to protect its manufacturing sector, just as China has done for decades and the US is increasingly trying to do. It can implement all the reforms that have been proposed to improve...

1/11
SCMP: "China’s potential growth rate could fall to about 2.5 per cent in the coming years unless action is taken, prominent Chinese economist Zhou Tianyong has warned."
sc.mp/itwrt?utm_sour… 2/11
“Without a strong turnaround in total factor productivity and a meaningful expansion in household consumption, it will be difficult for China’s economic growth to reach 4 per cent or higher,” he added.

1/8
Jason Furman: "A weaker dollar may improve the economy’s long-run balance, but it does so by forcing Americans to cut back on spending. That is like telling children to eat more spinach today so they will be healthier in the future."
nytimes.com/2026/02/03/opi… 2/8
Furman is right. Currency appreciation reduces consumption costs in the short term by making imports cheaper, but in a hyperglobalized world, it also undermines domestic manufacturers by making them less competitive against foreign manufacturers.

1/4
Yicai: "China's macro leverage ratio – a measure of total debt relative to nominal GDP – rose by 11.8 percentage points to 302.3 percent in 2025, exceeding the 10.1 point increase recorded in 2024, according to a new research report by CASS.
yicaiglobal.com/news/chinas-de… 2/4
There is a lot of disagreement about the real debt-to-GDP ratio in China, especially given the difficulty of counting hidden debt, along with an "abnormal" rise in payables and receivables that reflects inability to pay debt more than it reflects rising revenues.

1/7
SCMP: "Chinese scholars have called for greater urgency in reducing reliance on US dollar assets, particularly after Washington and its allies froze about US$300 billion in Russian foreign exchange reserves in 2022."
scmp.com/economy/global… 2/7
Although this may be a favorite new topic among academics – and not just Chinese academics - few seem to understand that a country cannot restructure global capital flows without also restructuring global...