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China Is Not Rebalancing, Its Flawed Dependence On Huge Exports Continues

China talks a game of trade reform but actions speak louder than words.
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Michael Pettis takes a look at China's alleged weak export growth
  1. China's export growth may have slowed compared to recent months, but it is nonetheless up 7.1% year on year in August. I don't know what the global figures are, but I suspect that China continues to grow its share of total exports.
  2. This should seem pretty remarkable given the problems the Chinese economy faced, but it isn't. The government continues to release measure after measure aimed – almost desperately – at keeping total production rising. And production has risen, even if only slowly.
  3. The real problem, which Beijing still seems unable to address, continues to be very weak domestic demand. Imports were barely up year on year, rising nominally by 0.3% and almost certainly falling in real terms. This is the third month of surging exports and flat imports.
  4. This shows just how terribly weak domestic demand continues to be. Between rising uncertainty, high unemployment and downward pressure on wages, Chinese households are completely unable to increase their consumption and, with it, their imports.
  5. The trade surplus for August was $79.4 billion, the sixth highest monthly trade surplus on record. This may no longer seem a big number, but it is 35% higher than the record-breaking August surpluses of 2020 and 2021, and it is 129% higher than in 2019.
  6. Year to date China's trade surplus is $571 billion, or 54% higher than it was last year at this time. This is equal to roughly 4.8% of China's GDP.

Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis

It's important to understand that the US dollar as a global reserve currency and the end of Bretton Woods II is what makes this possible.

The US is the world's consumer of last resort. Things have become increasingly unbalanced ever since Nixon closed the gold convertibility window. 

Now, nations can inflate at will and they do. The result is soaring deficits and massive trade imbalances that were self-correcting under a gold standard. 

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For discussion, please see Nixon Shock, the Reserve Currency Curse, and a Pending Currency Crisis

This post originated on MishTalk.Com.

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