China's Trade Surplus Vanished Into Thin Air: What's Going On?

-edited

China's currency reserves ought to be increasing given its persistent trade surplus. They aren't due to capital flight.

Question of the Day?

Brad Setser Explains

1.2 Trillion Disappears

Asian Review reports Quiet Capital Flight Dents China's Sway as $1.2 Trillion 'Disappears'

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.

I discussed that idea two days ago in "Made in China" Soon to be Replaced by "Made in Taiwan"

Tariffs Won't Work

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

Comments (22)
No. 1-13
KidHorn
KidHorn

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.

AWC
AWC

First we thought the apparatchiks in the Fed were smarter than all the worlds markets, and all the worlds market players.

Now we find out The Donald is even smarter than all the worlds markets and players AND all the worlds Central Bankers. So, grant full consensus to this Guru, and wait to see what you get.

Sechel
Sechel

Chinese buying Condos in NY and London is how I see it

magoomba
magoomba

They are buying real estate.

Snow_Dog
Snow_Dog

“Following Nixon's "temporary" move, fiscal deficits exploded globally and the US bore the brunt of trade deficits.”

Thank-you. How then is it that Trump “started a trade war”?

What Trump has done is acknowledged the war has already been under way and the US is getting beaten to a pulp.

Menaquinone
Menaquinone

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.

Mish
Mish

Editor

How then is it that Trump “started a trade war”?

Well - He did - by classic definition It's not winnable either - by his tactics

Realist
Realist

Trump does not care about the economy, the trade deficit, or reality in general. All he needs is an enemy to focus his supporters anger on. Any enemy will do. And any excuse to focus on that enemy will do.

China is taking advantage of the US. Pick a topic.

Europe is taking advantage. Canada is taking advantage. Mexico is. Migrants are. Muslims. Catholics. Jews. Blacks. Banksters. Etc.

It is simply the politics of hate. It’s not unique to Trump. He is just using what works for dictators and strongmen all over the world. Focus the people’s anger on any enemy. Then they don’t blame you for their problems.

Look at countries like Iran. They whip up anger at rallies where they burn American flags and scream “death to America”.

Trump is no different. And his supporters fall for it because they are too stupid to realize they are being duped.

Trump can put 10% Tariffs on countries. Or 25%, 50%, 100% or more. It won’t change the overall trade deficit. It will only change what country the deficit is with.

Yet morons on this site will hail Trump as the guy who is going to bring back manufacturing jobs to the US because of his tariffs. It’s hard to believe that there are people that gullible.

Mish
Mish

Editor

Realist made one of the best comments ever on this website.

And we do not always agree on things.

Realist
Realist

Thank you Mish. I also want to give you props for your call on gold which has become hot recently. I did not agree with your call. But so far you have been correct.

Realist
Realist

Apparently, China is buying up a lot of gold to use up some of its US reserves. Russia is still the biggest buyer of gold, but China may soon be buying even more gold than Russia!

SmokeyIX
SmokeyIX

Testing one, two.

mannfm11
mannfm11

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.