I was surprised by this item from the BBC:
Chinese trade surplus at new high
Wednesday, 10 September 2008
China’s trade surplus hit a monthly record of $28.7bn (£16.28bn) in August as the gap with the US and Europe widened, despite weaker world demand.
China’s global trade gap for the month was 14.9% wider than the same month in 2007, official state data showed.
Exports rose 21.1% to $134.9bn, while imports were up 23.1% to $106.18bn in August, the customs agency said.
Meanwhile other official figures showed consumer inflation hit a 14-month low of 4.9% in August, from 6.3% in July.
Exchange rate issues
August’s trade gap trumped the last record high of $27bn in October 2007.
China’s trade surplus with the US rose 16.6% to $17.5bn during the month, and the gap with the 27-member European Union, China’s biggest trading partner, increased by 25% to $16bn.
The data is likely to add fresh pressure on China to revalue its currency, as its trade partners have claimed that an artificially low yuan is giving its exporters an unfair advantage.
Stephen Green, a Shanghai-based economist with Standard Chartered, said that adjusting for inflation and changes in the exchange rate between the yuan and the US dollar, it was still clear China’s exports were growing fast.
“China’s export sector is still pumping out more than 10% more stuff this summer than it was last summer – something you would hardly realise from news reports of tens of thousands of factories closing,” he said in a research note.
He said it was likely thousands of “small, inefficient producers are going out of business” – while large exporters were still expanding production.
My surprise came from two sources.
- First, the trade weighted real value of the Chinese yuan has been rising. In August, it was about 17.6% stronger than it was in June 2005, just before the revaluation.
- Second, the US trade balance with China seemed to have stabilized, when expressed as a share of US GDP.
To the first point, consider the trade weighted real value of the Chinese yuan, measured against a broad basket of currencies.
Figure 1: Log real value of Chinese Yuan, against a broad basket of currencies. Dashed line at 2005M07. Source: BIS.
Now, what is true is that these exchange rate effects will only be passed on to trade flows with a lag. So it may be that the stabilization in trade balance will arrive eventually. An additional complication is that CPI’s are an imperfect approximation to the appropriate price index for evaluating competitiveness, i.e., the gate price of the goods that are exported. (I’ll sidestep the issue of what the value added component is in Chinese exports, which is relevant to the question of the Chinese trade elasticity: , )
To the second point, consider the following graph of the US-China goods trade balance, and the US overall trade balance.
Figure 2: US-China bilateral goods trade balance as ratio to estimated GDP (teal), 12 month moving average of bilateral balance ratio (thick blue), and US goods and services trade balance (seasonally adjusted) as ratio to estimated GDP (red). Dashed line at 2005M07. Source: BEA/Census July trade release, Macroeconomic Advisers release of 16 Sept. [xls], and author’s calculations.
What is true is that as a share of GDP (as estimated by Macroeconomic Advisers), the trade deficit has stabilized. Of course, the BBC report was citing (i) August trade figures (ii) derived from the Chinese statistical sources, and (iii) converted into USD from CNY — while I am showing US import figures for July, normalized by US nominal GDP. So the differences could be easily explained.
In my view, the trend should be for some shrinkage in the US-China trade deficit exactly because the relative price of Chinese imports into the US is rising, as the CNY has appreciated against the USD.
Figure 3: Log US import prices for goods from China (blue), and log USD/CNY exchange rate (period average) (red), both normalized to 0 in 2005M06. Dashed line at 2005M07. Source: BLS, Import/Export price release for August, FRED II and author’s calculations.
That being said, import prices are only about 5% higher (in log terms) relative to 2005M06; that works out to (in a simple minded way) a 25% pass through of exchange rates into import prices. The true pass through coefficent might be greater. But of course, we’d only know if we had a good idea of what was happening to unit labor costs in China.
Now, given the long swing in the USD down in value against the EUR, there’s no guarantee that the Euro Area – China trade deficit will shrink. And indeed, the expansion in this trade deficit is exactly what Brad Setser has been stressing in several of his posts. My guess, though, is that the precipitous slowdown in Euro area growth recorded in 08Q2 — and likely to persist into 08H2 — will put a substantial dent in Chinese exports to that region. The question is then what will sustain Chinese growth.
On this question, Arthur Kroeber presents a fairly sanguine view in the latest issue of the China Economic Quarterly (not online):
China’s economy is headed for a soft landing. Headline GDP growth decelerated to 10.4% in H1 from 11.9% in 2007 due to a decline in the trade surplus contribution to growth and a modest decline in industrial investment. These have been partially offset by acceleration in construction investment and slightly stronger consumption growth.
Relevant to the issue of exactly how fast exports are growing, he observes:
The weak US dollar has made China’s dollar-denominated trade growth seem larger than it really is. Trade values in renminbi terms are a more accurate representation of the impact of trade flows on GDP growth; both renminbi and newly-available volume data show a continued slowdown in export growth. In renminbi terms, in the first seven months of 2008 export growth fell by three percentage points to 12% year on year due to weaker demand in the United States. Meanwhile import growth accelerated by five percentage points to 19%, largely as a result of higher commodity prices. As a result China’s trade surplus fell 17% year on year (see “Weaker in yuan”).
This was written before the release of the August Chinese trade figures, but I think these are nonetheless important points to keep in mind when considering the more recent Chinese and US data on Chinese trade flows. And to that you can add Michael Pettis‘s observations about the potential for data distortions due to the Olympics.