1/8
This ECB study notes that if US tariffs force China to redirect exports from the US to the EU, "the euro area could see imports from China rise by up to 10% in 2026."

ecb.europa.eu/press/blog/dat… 2/8
The report also notes that "additional Chinese exports could bring down headline inflation by around 0.15 percentage points in 2026," which would, in turn, allow the ECB to cut interest rates.

1/7
China Banking News says that Beijing's top economic policy focus in the second half of 2025 will be boosting domestic demand. Second, it will focus on cracking down on "involuted" competition, and third, it will try to stabilize property markets.
chinabankingnews.com/p/chinas-top-3… 2/7
I agree, but it's worth noting how difficult each of these will be. China cannot boost the role of domestic demand in driving growth simply by wishing for more consumption. The only way to do it sustainably is to implement income transfers that either undermine...

1/5
This very good FT article on China's inability stop expanding its already-excess reliance on manufacturing makes what I think are two especially important points.

via @ftft.com/content/f7979a… 2/5
First, that the surge in manufacturing investment in the past 3-4 years had nothing to do with Chinese or global manufacturing needs but was instead driven by the need to externalize the cost of China's property-sector collapse. As property investment plunged, this was...

1/6
Yicai: "Weak domestic demand has been the main cause of the Chinese yuan’s 15 percent depreciation since 2022, so robust and timely counter‑cyclical policies are needed to restore the currency to fair value."

yicaiglobal.com/news/boosting-… 2/6
According to Zhang Bin of the China Finance 40 Forum, "the exchange rate is mainly determined by how yuan assets stack up against overseas assets in terms of returns, rather than the amount of foreign exchange obtained by exports."

1/10
Industrial profits in China were down 4.3% year on year in June, and down 1.8% during the first half of 2025, even as revenues rose 2.5%. The drop was led by SOEs, down 7.6% in the first half, while private-sector companies saw profits rise by 1.7%.
english.news.cn/20250727/7b9bb… 2/10
Beijing wants to prevent what it sees as disruptive pricing competition by limiting the ability of businesses to compete on prices, but I don’t see how they can succeed. Price cutting is not the problem—it is simply a symptom of the problem.

1/9
This $400 billion investment fund deal with Japan may indeed be "unprecedented", but its hard to see how it helps to address any of the reasons for the US trade imbalances.
nytimes.com/2025/07/23/bus… 2/9
It does not change the demand-supply imbalances in Japan or the rest of the world, and it does not change the US role in absorbing the resulting savings imbalances.

In other words it will have no impact on the US trade deficit.

1/8
Caixin: "Chinese policymakers are stepping up efforts to stamp out rampant “involution-style” competition across a range of key industries. Since a Politburo meeting in July last year, addressing the problem has become a top priority because of...

caixinglobal.com/2025-07-24/in-… 2/8
the damage it’s causing to the economy by distorting market pricing, eroding corporate profit margins, and undermining industrial efficiency."

And yet the article also notes that "in the second quarter, the national industrial capacity utilization rate fell to 74%."

1/4
Goldman Sachs Group calculates that "wages grew 3.9% from a year ago in the second quarter — the lowest reading on record, with the exception of the pandemic years."
bloomberg.com/news/articles/… 2/4
The only sustainable way to raise the consumption hare of GDP is to raise the household income share. If, instead, household income is growing more slowly than GDP, then either consumer debt must surge or the imbalances must get worse.

1/4
Bloomberg: “Just because China holds a large market share in certain products doesn’t mean it should be accused of overcapacity,” Vice Finance Minister Liao Min said. “Such claims are oversimplifications and fail to capture the full reality.”
bloomberg.com/news/articles/… 2/4
He's technically right, of course. Many countries produce more in certain sectors than they can absorb domestically, and so export the balance. The fact that China is a major exporter in certain sectors isn't the problem.

1/8
Interesting SCMP article on Beijing's attempt to root out local government financial mismanagement: "The focus on addressing systemic inefficiencies has taken on greater urgency in light of China’s economic difficulties."
sc.mp/4zrzt?utm_sour… 2/8
The article continues: "The country’s budget deficit reached a record 2.65 trillion yuan between January and April – a 50 per cent increase compared with the same period last year."

1/14
Much interesting stuff in this new paper by Tamim Bayoumi and Joseph E. Gagnon, including their claim that "the persistence of the US current account deficit reflects inflows associated with the size of US financial markets and perceived safety of its...

@GagnonMacro

https://twitter.com/PIIE/status/1943070913982828571

2/14
assets, with net inflows ebbing and waning depending on financial sentiment about prospects for the US economy."

The idea that capital account imbalances can drive trade imbalances may seem counterintuitive to many, but it is implicit in how the balance of payments works.

1/10
According to Bloomberg, China’s share of US imports fell to 7.1% in May, the lowest since 2001, and less than half of the 14.8% in September 2024.

But while that may seem like progress on the trade front, in fact it isn't.

bloomberg.com/news/articles/… 2/10
The US trade problem is not a China problem so much as a problem with the role of the US in accommodating global imbalances. It does this as much through its capital account as through its trade account. What matters is the overall imbalance, not the bilateral imbalance.

1/8
Robert Skidelsky, who has written great books on Keynes' life and work, wrote (with Vijay Joshi) a really good essay—way back in 2010—on the problems of unbalanced trade, and why Keynes' bancor proposal at Bretton Woods made so much sense.
@RSkidelsky
robertskidelsky.com/2010/06/23/key… 2/8
As the revival of interest in Keynes' bancor proposal gathers pace, it is worth pointing out the similarities to his proposal and to more recent proposals in the US and elsewhere that deficit countries place a kind of Tobin tax on all capital inflows.

1/6
Reuters: "Chinese government advisers are stepping up calls to make the household sector's contribution to broader economic growth a top priority at Beijing's upcoming five-year policy plan."

reuters.com/business/finan… 2/6
Reuters continues: "Household consumption currently accounts for 40% of gross domestic product - some advisers propose China should aim for 50% over the next two five-year cycles."

1/6
Good Caixin article on developer debt resolution: "As China’s real estate slump drags on with no recovery in sight, distressed developers are shifting toward more aggressive debt restructuring for survival, forcing creditors to swallow deep losses."

caixinglobal.com/2025-07-07/cov… 2/6
"For three years," Caixin continues, "developers relied on an “extend and pretend” approach, rolling over debt in hopes of a market rebound. But home sales have collapsed, worsening property companies’ finances."

1/12
A Tsinghua-related think tanks argues that "China should issue 30 trillion yuan in treasury bonds to swap local governments’ hidden liabilities to re-energise growth momentum and cut off financial risks at their root."
via @scmpnewssc.mp/gz8bj?utm_sour… 2/12
This would help in two ways, according to the report. It would transfer debt from local government balance sheets to the central government balance sheet, giving them more breathing space to prop up the economy, and it would reduce interest payments.

1/8
A China Finance 40 Forum research piece by Yu Fei and Guo Kai argues that when adjusted for purchasing power and for volumes, Chinese consumption is much higher than the current consensus.
pekingnology.com/p/chinas-consu… 2/8
They are probably right, although I would caution that using purchasing power adjustments in a system in which producer prices are highly subsidized by households is likely to substantially overstate the real extent of the purchasing power adjustment.

1/6
A decision by China to offer more debt relief could be a “game changer for the poor and the system,” said Kevin Gallagher, the director of the Boston University Global Development Policy Center. “It’s really in China’s strategic interest to do that.”

nytimes.com/2025/07/01/bus… 2/6
Ironically, debt relief is also in the economic interest of creditor countries, especially if, as in the case of China, the economy is highly dependent on export surpluses.

That's because capital flows are just the reverse of trade flows.

1/8
The euro is up 14% against the dollar this year, as well as against the yuan (11%) and the yen (4%), driven by financial inflows rather than by economic fundamentals (i.e. higher relative productivity grown).

bloomberg.com/news/articles/… 2/8
If sustained, it will almost certainly have an adverse impact on EU manufacturing. In that case ECB rate cuts may keep unemployment from rising (by boosting domestic consumption), but they won't prevent the EU economy from shifting out of manufacturing towards services.

1/4
I just finished Martin Daunton's excellent survey and analysis of the last 100 years of globalization. There is an enormous amount of material here (nearly 900 pages) and it may not be an easy read for those who aren't already very familiar with much of this history. 2/4
But for those who are, or who want to be, it's well worth the effort. While the book is ostensibly about the process of globalization, and the role of government and government institutions in that process, especially in pivotal periods during the 1930-40s, the 1970s and...

1/4
Good John Authers article on business profits in the US: "After-tax profits account for an unprecedented 10.7% of gross domestic product, when in the last 50 years of the 20th century, they never exceeded 8%."
@johnauthers_
bloomberg.com/opinion/articl… 2/4
"The only time approaching their current share of the economy was in 1929 on the eve of the Great Crash. If the nation is to deal with inequality, money must be redistributed from somewhere; corporate profits are an obvious source of funds."