It’s not hard to understand why Asia’s worried about Europe
On the forefront of the Chinese economic releases this week was the trade data, where headlines shouted +48.5% Y/Y export growth in May. This report didn’t go unnoticed in Washington, as renewed obsessions with the Chinese peg against the US dollar fired up again.
But the Chinese release overshadowed the Philippines April trade report, which in my view, illustrates more transparently the slowdown in external demand that is likely underway across the region. In the Philippines merchandise exports increased 27.4% over the year in April, which was half the rate of the Bloomberg consensus and that in March, 42.7% and 43.8%, respectively.
A negative export growth trend has been established – explicitly in the Philippines and likely going forward in China (see Goldman Sachs report below). And these countries have strong trade ties with Europe – the Eurozone was 15% of 2009 world GDP (PPP value) according to the IMF.
Therefore, recent nominal appreciation of the Philippine peso and Chinese yuan against the euro, and expected real appreciation – Europe’s self-imposed economic contraction stemming from harsh fiscal austerity measures will drag prices downward – may very well hamper the economic recovery for key Asian economies via the export channel.
Export growth in the Philippines has been slowing to top trading partners.
The chart illustrates the contribution to overall export growth from the Philippines six largest trading partners – together these countries account for roughly 50% of total exports. The contributions to the Philippines export income growth has been slowing or flat for some time to China, Singapore, and Germany. Slightly more worrisome is the Netherlands contribution having turned negative for two consecutive months.
The Netherlands and Germany account for roughly 13% of total export demand from the Philippines. The euro has depreciated 8% against the Philippine peso since April 2010 (through June 11 and see chart below), and the lagged effects of the nominal depreciation will continue to pass through to exports.
In China, though, a resurgence of export growth among its top trading partners bucks the trend seen in the Philippines.
The chart illustrates the contribution to overall export growth from China’s six largest trading partners – again, these countries jointly demand roughly 50% of total Chinese exports. China’s May report was indeed strong: the US added a large +8.3pps to overall Chinese export growth in May, and Hong Kong contributed another robust +6.2pps of growth. In contrast to the Philippines April numbers, The Netherlands contribution to Chinese export growth remained strong, contributing 1.5pps in May.
Chinese exports are quite volatile in the beginning of the year. I suspect that Yu Song and Helen Qiao at Goldman Sachs are right, that export growth will initiate its trend downward starting in June:
“We believe the very strong exports growth in May is likely to be a temporary phenomenon, much like the very weak exports data recorded in March, and expect June data to show a visible normalisation,” said Yu Song and Helen Qiao at Goldman Sachs.
In their Goldman report (no link) Yu Song and Helen Qiao argued that the Chinese numbers remain clouded by the following distortions:
- “The exports acceleration was likely to be partially induced by a potential cut to the export VAT rebate for some commodity exports: There have been a number of domestic news reports that this might happen soon as a part of the broader policy package to reduce pollution and energy consumption.
- But it probably also reflected changes in the domestic economy: Our proprietary GS Commodity Price Index (GSPCC) (Bloomberg ticker: ALLX GSCP) suggest that the domestic prices of main commodities have been mostly trending down in May which might have encouraged more exports in this area.
- Strong export activities might also be impacted by the Lunar New Year effects as many exporters resumed production after taking time off during the holiday season which often last for weeks. [although they say this cannot be validated until a further breakdown becomes available later this month].”
The recent nominal depreciation of the euro against the Chinese yuan and the Philippine peso, 11% and 8%, respectively, since April 1 2010, will pass through to both Chinese and Philippine exports at a lag. And further real depreciation – the nominal exchange rate adjusted for relative prices of goods and services – of the euro against the yuan and the peso is almost certain. Europe’s self-imposed fiscal austerity measures will crimp economic growth and deflation is bound to take over across Europe and relative to Asia.
As such, recent external shocks from Europe will likely show up Chinese and Philippine trade data in coming months. Doesn’t look good for Asia, especially for those economies like the Philippines and China for which exports provide a robust growth impetus.
We’re nowhere NEAR out of the woods yet.
Rebecca Wilder
As usual, thanks Rebecca
=====
***This report didn’t go unnoticed in Washington, as renewed obsessions with the Chinese peg against the US dollar fired up again.***
And that’s bad because our leaders have probably once again siezed on an easy solution — demonize China and, to a lesser extent, Germany — rather than do serious analysis. As far as I can see, the root of US trade problems is not a chronically undervalued RMB, it’s a chronically overvalued US dollar. If so, the cure is not whinging about China, it’s attacking our domestic problem … well … domestically.
=====
In any case, it sure looks to me like the world’s leaders other than the US and China have decided that avoiding a world wide depression was too easy, so they are going to do their damndest to create one. That bodes ill for China, Germany, and other exporters I think.
=====
And China has a whole bunch of other problems including increasing inflation — to the extent that you can believe Chinese numbers. As far as I can see, the Chinese probably are not manipulating their economic statistics, but
their data collection is so idiosyncratic that the numbers — especially isolated values — simply can’t be relied on. (So much for the monolithic Communist state). Perhaps I misrecall, but I thought that Chinese trade numbers had been trending generally downward for a number of months.
=====
BTW, I personally think that the chances that the Chinese are going to stop manipulatng their currency and start allowing foreign funds to flow freely into China are close to zero. The Chinese seem to have convinced themselves that Japan’s failure to control the appreciation in the yen in the 1980s was the root cause of Japan’s crash and lost decades. At least that’s what the Chinese claim and it’s at least as plausible as anytning I’ve heard from western economists. I don’t think China is going down that road if they can possibly avoid it — the increasingly strident opinions of Paul Krugman and others notwithstanding.
VTC,
If the problem is an overvalued exchange rate, then it is by definition not a domestic problem. It takes two to exchange rates. The most direct tool in exchange rate manipulation for a floating rate counrtry is monetary policy. If the US wanted a weaker dollar, the Fed might, oh, drop the overnight rate to zero. Oops…
Rebecca,
It may be that China’s trade data from May are misleading. However, in using the Philippines as a foil for China, you have essentially chosen data reflect your view over data that contradict your view. That’s no way to make a point, and no way to instill confidence. There are a dozen other Asian countries you could have used – and should have, to avoid this “I like these figures better than those figures” approach. Does most of Asia look like China, or the Philippines?
If you think China’s May data are misleading, show us why that might be. The part of your comment that does that best is cribbed from Golfman, so why not just shove that to the top?
***If the problem is an overvalued exchange rate, then it is by definition not a domestic problem. It takes two to exchange rates. The most direct tool in exchange rate manipulation for a floating rate counrtry is monetary policy. If the US wanted a weaker dollar, the Fed might, oh, drop the overnight rate to zero. Oops… ***
That’s fine technically. But one problem, as I see it, is that it takes 137 or so to set exchange rates, not just two. And further there are factors other than the cost of production, shipping, etc that go into the setting of exchange rates — safety (Return Of Investment) being a dominant one at the moment.
Further, the US being the proud owner of the world’s de facto reseve currency, can not manipulate its currency the way that Mexico, for example, can. If we did manage somehow to make the dollar weaker, the rest of the world would very likely adjust their currencies to unstrengthen them (relative to the dollar) within a few hours. A few arbitragers would make a lot of money. Others would lose an offsetting amount and everything would end up back where it was with possibly different numbers, but unchanged ratios between them.
I’m pretty sure that any practical approach to decreasing the US dollar effective exchange rate entails import constraints (tariffs although they may not be called that) and export subsidies (that may also be called something else). Illegal under WTO rules? You betcha. Since when has the US paid any attention to inconvenient treaties? Ask a plains indian if you can find one about the reliability of Uncle Sam as the counterparty to a deal. David Ricardo wouldn’t like it? David Ricardo lived two centuries ago. Once he recovered from the shock of seeing the steady stream of mindless garbage distributed by television, and accepted that Britain (probably wisely) walked away from its empire half a Century ago he might view the world differently than he did back then.
Anyway, I think the problem of the overvalued US dollar (if it is in fact overvalued) has to be solved in the US because the fx markets clearly are not solving it and we continue to run huge current account deficits with just about every organized collection of humans on the planet. That makes it a domestic issue to my mind.
“In any case, it sure looks to me like the world’s leaders other than the US and China have decided that avoiding a world wide depression was too easy, so they are going to do their damndest to create one. That bodes ill for China, Germany, and other exporters I think. “
Vt, I agree, there is no circumstance under which a global economic breakdown benefits exporters. That’s the problem with China and Germany – not that they are pushing export growth via domestic subsidies, politics, or exchange rate mechanisms – but that they leave themselves vulnerable to external shocks. The euro will likely get a bounce from fake Eurozone trade numbers (i.e., Germany) in coming months; but as the austerity measures crimp growth, that will dissipate….quickly.
And on the exchange rate – the yuan has appreciated roughly 5% on a trade-weighted basis (according to Westpac index) since April. And, as you point out, inflation is rising; so it seems that for now China’s following a policy of real appreciation. But for how long? As you suggest, it might be a while. In my view, as long as the government thinks that they can control “speculators” from driving up agricultural prices, for example, the wage appreciation is welcomed.
Rebecca
VtC,
So you are essentially taking a Bush-Think foreign policy approach to eccnomic policy. If you see something you don’t like, blow it up.
One of the problems with being really, really rich and powerful is that the things you do have large consequences. That large-consequence thing means that some of your actions are sort of like one-way valves. Once you enter the valve, you can’t actually go back. We can’t just undo our treaties. We can undo them, but there will be large consequences which we cannot predict. We move forward into some new situation, without knowing what it will be.
One of the reasons we push on China is that China represents a nearly 1-to-1 FX arrangement with the US, rather than 137-to-1. If the US finds a way to weaken the dollar, but not against China, the impact is weakened. If the yuan strengthens against the US$, there will be less tendency for US$ strength against the euro and yen, all else equal.
Imposing trade barriers ahs the effect of reducing US consumption of imports. Subsidizing exports has the effect of reducing US consumption of US exports. There are other ways of reducing US consumption, ways that would also tend to raise the US savings rate (the heart of our trade problem) and lowering our trade deficit. A VAT would be one. A carbon tax would be another.
Now, one difference between a carbon tax and maniputating trade at the border is that manipulating trade at the border is easy to explain and pleases isolationists and jingoists, while a carbon tax looks like the entire cost is paid by US residents. Those two impressions rely on ignorance. A public that hates higher pump prices, even though every penny of the increase goes to either holding down other taxes or holding down the deficit, is happy to be told that trade barriers do all their harm elsewhere. We can have the smart, hard policy or the risky easy policy. Nothing new here, since all the smart, easy policies were done as soon as somebody thought them up.
***So you are essentially taking a Bush-Think foreign policy approach to eccnomic policy. If you see something you don’t like, blow it up.***
Yep. Starting a trade war with China is ever so much more mature than trying to address the real problem if it turns out not to be the undervalued yuan. Truth is that the US current account deficit has grown pretty steadily since 1990 while China has gone though a number of situations including a few current account deficits and a lot of very modest surpluses that appear to me to be pretty much uncorrelated with matching US deficits. The Chinese surpluses have ballooned only in the past five years years or so. China has also gone thru several different monetary policies in the past 20 years including a peg to the dollar from 1990 to 2005 (during which time China’s CA surplus was modest), A peg against a market basket of currencies from 2005-2008 (during which time CA surpluses soared.) and a repeg to the dollar after our noble and intrepid financial community drove the world’s economy off a cliff. I think there may have been a short period of actual float in there in 2005 as well, but I’m running out of time and its not important.
You’re entitled to your opinion. However I think it is rooted in a trade model that almost certainly does not describe how trade actually works. That, plus the almost certainly false notion that economists understand even the simplest things about economics something of which I can see precious little evidence. I continue to search for some area where economists seem actually understand things and are able to do better at prediction than an alien from Arcturus would do if provided with the data set and asked to project future trends based only on the numbers. What I continue to find is a lot of philosophizing, virtually no experimental validation, very little constructive introspection and … well no matter. Bottom line. Economists are often very smart people. But Economics is in no way, shape or form a science.
***One of the reasons we push on China is that China represents a nearly 1-to-1 FX arrangement with the US, rather than 137-to-1. If the US finds a way to weaken the dollar, but not against China, the impact is weakened. If the yuan strengthens against the US$, there will be less tendency for US$ strength against the euro and yen, all else equal. ***
to point out just one reason that analysis is largely flawed, you apparently you feel that Chinese currency manipulation is somehow responsible for the US importing 10 million bpd of crude oil that our exports can not pay for? How does that work?
BTW, the 2005 unpegging of the RMB form the dollar which a naive soul looking only at the numbers might believe caused the Chinese Current Account Surplus to soar was as a result of US pressure. One might even believe that it was a really dumb idea that we are now anxious to repeat.
Anyway, I believe that the notion that forcing the Chinese to revalue their currency will somehow solve the US’s tendency to ship dollars (and jobs) overseas is supported only by highly questionable theories and a lot of lazy thinking. And I’d point out that if anything, the evidence — such as it is — suggests that it could make things worse if there really is a meaningful link between the RMB and dollar — something that past data (sample size one) suggests might be the case.
====
Bluntly, the crew in Washington and their enablers remind me of a five year old setting out to fix a mechanical alarm clock with a hammer and screwdriver.