“China’s travel-account deficit began to increase sharply in 2014. = 80% of deficit in service trade” It is calc frm forex trade at banks in China, payments by credit cards and smartphones, ATMs by tourists going overseas and students studying abroad.”https://t.co/RvSRXadcqTpic.twitter.com/4LJShOEm3g
While China’s surplus grew by $2 trillion from 2009 to 2018, its external assets rose by only $740 billion in the same period. What explains the $1.2 trillion difference? “Net errors & omissions” and disguised capital flight? One for @Brad_Setserhttps://t.co/RvSRXadcqTpic.twitter.com/imBDdPiBj6
this is a relatively straightforward BoP question —
a) there is a bit of capital flight embedded in the current account (the overstated tourism balance) b) errors and omissions (hot money, flight capital has been roughly equal to the surplus in the basic balance since 14)
I have written about this in the past, but in the context of explaining why the equilibrium level of intervention by China has fallen (e.g. reserve growth no longer tracks the current account surplus)
Bottom line: there is capital flight, but it is covered out of the goods surplus– and the net foreign asset position of the Chinese state remains massive even if it isn’t growing as fast as before.
I personally would not spin this as something all that alarming
There is plenty to worry about in China: notably the domestic financial system’s fragilities and the ongoing inability of China to sustain its growth without rapid growth of credit and investment.
But I don’t really see a case for worrying about the BoP
The IMF says China had $2.1 trillion in external net assets as of 2018 — the third-largest total after Japan’s $3.1 trillion and Germany’s $2.3 trillion, but well below its current-account surplus.
Normally, a current-account surplus moves in tandem with an increase or decrease in external net assets. But while China’s surplus grew by $2 trillion from 2009 to 2018, its external assets rose by only $740 billion in the same period.
The IMF says China had $2.1 trillion in external net assets as of 2018 — the third-largest total after Japan’s $3.1 trillion and Germany’s $2.3 trillion, but well below its current-account surplus.
Yu Yongding, an economist and former member of the People’s Bank of China monetary policy committee, offered a theory. If a Chinese company exports products worth $1 million to the U.S., it logs the amount as sales in trade with the U.S., according to Yu. But sometimes, only $500,000 ends up in the company’s bank account in China, while the other half remains abroad.
Yu said the accumulation of such money explains a portion of the $1.2 trillion. In China’s official statistics, a category called “net errors and omissions” covers such hazy transactions. For the 2009-2018 period, China recorded minus $1.1 trillion in this segment — suspiciously close to $1.2 trillion.
Net Errors and Omissions
Let’s label that correctly: Capital flight.
IMF Forecast
Trump Placated?
The IMF believes China’s net current account surplus will turn negative in 2022.
Setser does not see that yet and it’s easy to dismiss the IMF because the IMF is wrong far more often than right.
Yet, assume the IMF is correct. Does this placate Trump?
Not quite. It is highly likely that China’s surplus with the US simply moves elsewhere.
In response, a friend of mine summed up things nicely: “The world has just changed too radically for tariffs to work like Trump expects. It’s like trying to fight World War III with muzzle loaded guns.“
If Trump puts tariffs on the entire world, few manufacturing jobs will return because everything is so automated. The only “success” Trump will see is turning the US into the highest cost producer.
Our Currency But Your Problem
This all goes back to Nixon who closed the gold window on August 15, 1971, ending redemption of dollars for gold. Nixon’s treasury secretary then famously stated “The dollar is our currency but your problem.”
Following Nixon’s “temporary” move, fiscal deficits exploded globally and the US bore the brunt of trade deficits.
Trade imbalances are now Trump’s pet peeve. But Tariffs cannot possibly fix the problem.
Trump is fighting a 1968 Vietnam-style “guns and butter war” (wanting both) with tools that cannot possibly work.
Mike “Mish” Shedlock
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Mish has one thing right. If we had to use gold, this would have never happened. Credit has allowed Americans to hock their houses and live it up. That won’t work much longer. The problem here is the money leaves the economy. $200 billion paid to American workers gets spent in the community again and again. Taxes on American goods are likely 35%, when all tax is considered. All is because of the excess credit.
2 things were primary causes of the Great Depression. One was a new thing, called consumer finance. The other was the US building large trade surpluses through lending to bankrupts around the world. Trade was settled in gold, not bonds. Americans lost their jobs, because their customers were broke, leading to more broke customers. The same is coming to a Chinese state near you.
SmokeyIX
4 years ago
Testing one, two.
Mish
4 years ago
Realist made one of the best comments ever on this website.
If tariffs can change what country holds our deficit, then an ideal tariff would be country neutral, and penalize the worst offenders the worst (whatever measure you are using), and the least offenders the least.
Thus, you would use competition to drive better behavior.
Mish
4 years ago
How then is it that Trump “started a trade war”?
Well – He did – by classic definition
It’s not winnable either – by his tactics
“What Trump has done is acknowledged the war has already been under way [for fifty years] and the US is getting beaten to a pulp.”
Menaquinone
4 years ago
Chinese economic reports are unreliable to say the least. Distorted is closer to the truth. All bad news is hidden or suppressed. If the data show stagnation then a good bet is collapse. Tariffs only began months ago. China demands compromise. China has no leverage. The US economy is prospering in contradiction of main stream propaganda “news”. President Trump knows the rules of war. When the enemy is in retreat one must commit all reserves and pursue with maximum aggression. Tariffs are going to 50% as soon as China makes the slightest resistance as an excuse.
The purpose of tariffs is to replace the income tax on wealth creation and savings with a tax on consumption. After tariffs achieve revenue of $1Trillion per year President Trump can cut taxes again to stimulate manufacturing investment in the USA.
magoomba
4 years ago
They are buying real estate.
KidHorn
4 years ago
China’s primary way of trading unfairly was to exchange Yuan for USD in forex and buy US treasury debt. They don’t do this any more as they have no need to do so since their current account surplus is gone. Tariffs were needed a decade ago. Not now.
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Mish has one thing right. If we had to use gold, this would have never happened. Credit has allowed Americans to hock their houses and live it up. That won’t work much longer. The problem here is the money leaves the economy. $200 billion paid to American workers gets spent in the community again and again. Taxes on American goods are likely 35%, when all tax is considered. All is because of the excess credit.
2 things were primary causes of the Great Depression. One was a new thing, called consumer finance. The other was the US building large trade surpluses through lending to bankrupts around the world. Trade was settled in gold, not bonds. Americans lost their jobs, because their customers were broke, leading to more broke customers. The same is coming to a Chinese state near you.
Testing one, two.
Realist made one of the best comments ever on this website.
And we do not always agree on things.
If tariffs can change what country holds our deficit, then an ideal tariff would be country neutral, and penalize the worst offenders the worst (whatever measure you are using), and the least offenders the least.
Thus, you would use competition to drive better behavior.
How then is it that Trump “started a trade war”?
Well – He did – by classic definition
It’s not winnable either – by his tactics
“What Trump has done is acknowledged the war has already been under way [for fifty years] and the US is getting beaten to a pulp.”
Chinese economic reports are unreliable to say the least. Distorted is closer to the truth. All bad news is hidden or suppressed. If the data show stagnation then a good bet is collapse. Tariffs only began months ago. China demands compromise. China has no leverage. The US economy is prospering in contradiction of main stream propaganda “news”. President Trump knows the rules of war. When the enemy is in retreat one must commit all reserves and pursue with maximum aggression. Tariffs are going to 50% as soon as China makes the slightest resistance as an excuse.
The purpose of tariffs is to replace the income tax on wealth creation and savings with a tax on consumption. After tariffs achieve revenue of $1Trillion per year President Trump can cut taxes again to stimulate manufacturing investment in the USA.
They are buying real estate.
China’s primary way of trading unfairly was to exchange Yuan for USD in forex and buy US treasury debt. They don’t do this any more as they have no need to do so since their current account surplus is gone. Tariffs were needed a decade ago. Not now.