Chinas trade balance points to inflation
by Rebecca Wilder
The Customs Administration announced record trade flows in and out of China in December. Specifically, exports grew at a 17.7% annual pace, while imports surged 55.9% over the year. This is a remarkable one-month rebound; reported export growth beat consensus expectations by a factor of 3.5 (+ 5% export growth and + 32.5% import growth, according to Bloomberg).
China is experiencing robust domestic demand growth, as illustrated by the surge in imports. Furthermore, there is likely significant price pressure built into this report since the data are measured in nominal $USD. The December trade report suggests that inflation pressures are underway in China’s economy; expect a big jump in coming inflation reports.
I wouldn’t be surprised if the government allows the yuan to appreciate sooner, rather than later, in light of this report.
Rebecca Wilder crossposted with Newsneconomics
A thought occurs to me:
Is the increase perhaps from re-stocking by companies, and/or part of end of the new year (Chinese) tidying up accounts in Feb.?
With “robust domestic demand growth”, it seems that inflation is a matter of meeting supply as a result of diminishing demand from the U.S.. When supply and demand are in harmony is inflation possible? It seems to me that the Chinese have solved their capacity problem, and further stoked their economic engine.
“The Southeast Asian and the East Asian countries are on the road towards launching a $120 billion emergency fund, which is to be released in March. This is considered to be an alliance which is one of its kinds and will look at protecting itself from financial crisis that will happen in the near future. This scheme is called the Chiang Mai Initiative Multilateralisation (CMIM), China, Japan, Hong Kong, South Korea along with 10 others from the Association of Southeast Asian Nations (Asean) will now be able to swap its own currency against the U.S. dollar incase they face any kind of liquidity crunch. [1] SEOUL: East and Southeast Asian countries said on Monday it will launch a $120-billion emergency fund in March, the first such alliance in the region to shield themselves from a financial crisis. Under the scheme, known as the Chiang Mai Initiative Multilateralisation (CMIM), Japan, China, South Korea, Hong Kong and the 10 members of the Association of Southeast Asian Nations (ASEAN) can swap its own currency into U.S. dollars in case of a liquidity crunch.” [2]
I found this on the ASEAN website (released today), and even though it claims that the “scheme”, “is one of its kinds”, there are 8 Latin American countries bringing a currency called a “Sucre” into a similar fund and it seems the Euro is much the same as well, but maybe I am failing to recognize some distinction?
The Chinese have also entered into a trade agreement with the ASEAN group: ” The ACFTA comprises a market of 1.9 billion with a combined GDP of about US$ 6 trillion and a total trade volume of US$ 4.3 trillion.” This agreement began on Jan. 1, 2010 and is now the third largest arrangement of its kind, the European Union and NAFTA being the one and two.
I wish I had a Yuan for every time I’ve heard that the Chinese economy is dependent on our consumption levels.
When supply and demand in the goods market are balanced, money growth is rapid and the financial system is able to transmit the effects of money growth, then yes, inflation is possible. Likely, maybe. Don’t know that’s the case here, though.
China’s growth means that unlike a great many other parts of the world, deflation is not a worry. I’m not sure, though, how a single month’s surprise in the trade account changes China’s inflation outlook. Is the tacit assertion here that we know so little about Chinese economic performance through other sources that a single month’s trade data – no matter how surprising – fils in big chunks of the picture?
k,
I think it is Dean Baker who leads the charge on the inflation-is-caused-by too much demand in relation to supply, but I don’t know much about this. It seems that if it were true, that we could simply forecast how much demand might exist and print and produce our way to Utopian bliss.
But supply and demand in harmony seem a sign of a healthy, growing economy at the stage applicable to China.
Hi Kharris.
Yes, one cannot bank a single data point to conclude inflation. But when M2 is consistently growing around 18% over the year each month, expect inflation…at some point. There are other telling signs, like the central bank raising the 3-mo lending rate (unexpectedly). It’s out there, and building.
Rebecca
As of November the BLS index of the price of US imports from China was down 2.5% from the previous November and over that 12 months the index only rose in one month — August.
Where is the evidence that Chinese export prices are surging.
Second, Chinese exports consist of a very large element of reexported components — they import components, assemble them into final products and export the final product. Since exports have been expanding nicely for several months while inventories were being cut one should expect Chinese imports to surge at some point to replenish inventories.
Aside from the point that Chinese oil imports are now larger than US oil imports I fail to see why you should jump to the dire conclusion you have drawn from a one month jump in Chinese trade. Rather,
it is much more a good sign that the world economy is experiencing solid growth.
Please explain to me why this has to have the dire inflationary consequences you are drawing from this one observation.
China’s manufacturing-based, export driven, economy, relies less on domestic consumption than what the U.S. economy does, so wage inflation is less an issue for them. The ASEAN trade agreements will also open markets. Is it not likely that the Chinese government will simply freeze wages as needed? Their propensity for high savings rates should provide some slack.
If it may be assumed that the consensus of the comments on this thread is correct; that the Chinese are priming their economic pump and stocking the shelves of their factories, as a forward looking preparation for their new trade agreements, then that assumption begs an interesting question. Are China’s industrial policies allowing them an advantage. Or, put differently, how much of an advantage is proactive policy, as opposed to reactive policy?
Hi Spencer,
First, I wouldn’t have expected US import prices from China to increase much (if at all), given the competition for export demand. And second, the data come via a private subscription (I saw a chart on Goldman Sachs’ website) at CEIC, who follow all pricing data in China. According to their database, import prices surged last month, contributing to much of the growth in imports.
I wouldn’t be surprised if inflation doubled (it’s currently 0.6%) next month on base effects and pressures coming from money growth close to 30% and credit growth over 30% for months now. It’s bound to happen. To me, this report is just the beginning.
Best, Rebecca
Hi Spencer,
First, I wouldn’t have expected US import prices from China to increase much (if at all), given the competition for export demand. And second, the data come via a private subscription (I saw a chart on Goldman Sachs’ website) at CEIC, who follow all pricing data in China. According to their database, import prices surged last month, contributing to much of the growth in imports.
I wouldn’t be surprised if inflation doubled (it’s currently 0.6%) next month on base effects and pressures coming from money growth close to 30% and credit growth over 30% for months now. It’s bound to happen. To me, this report is just the beginning.
Best, Rebecca
Ok, I give up. Does anyone have the GAC link for the information being discussed?
The first thing that comes to mind is that both the import and export numbers look wildly improbable. Perhaps there is a computational error. Or maybe some adjustment has been causing previous numbers to be too small and all the correction has appeared in one month. I have a little trouble believing that jumps like this in Chinese trade activity and in the activities of the countries they are importing from and exporting to wouldn’t cause big jumps/drops in some of the world’s equity and commodity markets.
I did some randomish checks — Baltic Dry, US rail traffic, Shangai stock exchange composite. Things look pretty calm.
Maybe this is one set of lizard entrails that is best ignored for a few weeks, then rexamined in conjunction with other data.
Chinese official statistics is notoriously unreliable, however most ‘sources on the ground’ agree that business is booming and unemployment is down. There is however the issue of the run away real estate bubble, and the inflation number will probably hit 10%. Chinese policy maker will have a choice of much higher interest rate or appreciation of the Yuan, and they will favor interest rate adjustment more over appreciation.
Ronin,
A “run away” real estate bubble seems very unlikely. Our bubble was caused in part by foreign capital inflows. These large inflows afforded the pace of securitization to drive down interest rates. Cheap money and high leverage ratios lead to an imbalance of investment capital in relation to incomes. The Chinese have high savings rates and restrictions on short-term foreign capital inflows. The savings rates allow some slack and their monetary policies should be much more influential without the fluctuations caused by inflows and outflows. This was in part the argument that the Chinese made to refute the IMF recommendations, this ties back to the Argentina debacle and the Washington Consensus failures. It turns out that the Chinese and the Malaysians were correct, and their example is a stain on the IMF that is resulting in agreements such as those that I mentioned above. The era of militarism, neocolonialism, and imperialism, may be coming to an end.
Wealth has been flowing from the poor nations to the wealthy nations for centuries, we are very probably entering an interesting era. The pressure on resources is forcing changes that will bring nations into balance with each other, but the developed nations must become far less waste-full.
I do no know about China, but in general, and for the US in particular Import price indices tend to be heavily skewed to industrial raw materials and are not representative of general indices of domestic inflation.
For example in the US industrial raw materials account for about a third of imports while fuels accounts for about another 20% of imports. Thus in the import data these two items account for over half of the import prices. But for the total economy these materials account for a much smaller share of final prices.
I do not have the data handy, but for examples raw materials accounts for just 3.5% of the S&P 500 by capitalization. The data for the total economy would be of the same order of magnitude. The data for raw materials as a share of total final costs would be very similiar. Thus, in US import data raw materials have a weight roughly ten times what it is in an index of final prices like the CPI of the GDP deflator.
Over the last 6 months most spot raw material prices like scrap steel, copper, aluminum, etc, have jumped some 33% to 50%. But these price increases have had essentially no impact on final prices as measured by the CPI of the GDP deflator. Compared to labor costs, and this is almost as true for China as it is for the US, raw materiel prices play a very minor role in final inflation.
There have been times when industrial raw material prices lead a generalized rise in inflation, and every US inflationary experience included soaring metal prices. But there have been just about as many false signals from metals prices when they surged and overall inflation did not.
As a MarketMinder.com contributor, I often hear this viewpoint. Recently, we published our take on this: http://www.marketminder.com/a/fisher-investments-lopsided-trade/876063c6-c3a4-4a3b-b3d5-1313ebe6c64e.aspx?source=home
This comment has been removed by a blog administrator.