Duncan’s Economic Blog

China’s Trade

Posted in Uncategorized by duncanseconomicblog on July 14, 2009

John Ross has an interesting article up on China’s trade surplus.

 As he says:

One of the areas where most media commentary is lagging behind events is regarding China’s trade surplus. Articles dealing with China’s surplus, one the key international trade trends, have been a regular feature of economic analysis ever since it first appeared in 2005-6. What has not received equal commentary are the signs of a very rapid drop in China’s surplus this year.

 He goes to say:

The trend is clear and striking. China’s trade surplus rose steadily from 2005 onwards and then temporarily rose even further under the impact of the onset of the international financial crisis in September 2008. The peak was reached in January 2009 with a monthly surplus of $42.1 billion. Since then China’s surplus has fallen steadily and rapidly. The surplus for June was $8.25 billion.

Expressed in terms of 3 monthly moving averages China’s monthly trade surplus was $22.5 in August 2008, immediately before the onset of the financial crisis and the collapse of Lehman brothers, rose to $38.1 billion January 2009, and has since dropped to $12.5 billion.

So the Chinese trade balance has been falling for six months. He goes on to note: 

The trends behind China’s shrinking trade surplus are clear. Under the impact of the financial crisis both China’s exports and imports have declined. But its imports have declined far less than its exports. Since the peak month of August 2008 China’s exports have fallen by 28.0% buts its imports have only declined by 18.5%. China’s net trade position is therefore acting as a locomotive for the rest of the world economy.

Indeed this change in China’s trade position, if the trend continues, is a significant stimulus. The monthly extra demand for the world economy created by China for the latest month, compared to August 2008, is $18.5 billion – its monthly trade surplus having shrunk from $26.7 to $8.3 billion. This would be equivalent to an annualised $220.9 billion. (My emphasis)

 ‘If this trend continues’ really is the key bit there. As John notes both exports and imports have fallen, although imports have fallen less. Why is this? This is the question we need to answer if we are to understand how sustainable this trend is.

Standard Chartered have noted that China has been buying a lot of commodities, especially copper. 

There has been a sharp drawdown in LME stocks in recent weeks, despite weak demand in a number of key consuming countries. A 75kt drop has taken place in April so far (see chart 2) – the most significant drop in over a year. While this reduction has taken place across a number of regions (with Rotterdam accounting for over half of the total), we understand that most of this copper is destined for China. This strong buying from China has been reflected in Shanghai prices (see chart 3), which have risen to a high premium over LME. On a three-month basis this rose to a six month high of USD 552/t in the middle of April, before falling to USD 143/t in the final week of the month.

 This might not reflect simple industrial usage:

So why is China buying all that copper? Well there has been restocking by fabricators but, according to Standard Chartered, a substantial part of total imports to China, some 350kt out of 748kt, is actually being bought by the State Reserve Bureau (SRB). This supports some theories out there that China is attempting to diversify its reserves in ever more original ways.

The theories referred are that China may be switching away from holding US debt towards holding hard commodities.

So why oh why is China buying all that copper? The industry answer is simply that China is building up its commodity reserves while copper prices are cheap. But it’s hard to rationalise given the state of the global economy. So is China simply awaiting a large pick-up in domestic demand once its own stimulus kicks in? Or does it really believe the US recession really won’t last past 2009?

Fear not,  for the Daily Telegraph’s Ambrose Evans-Pritchard has the answer: China, he says, may be preparing to redefine the entire way it manages and invests its dollar surpluses.

No even if we don’t accept this (and it may well be a step to far) we are left we the argument that China is stock piling copper in significant volumes as has been for several months.

What happens when the stock piling is concluded?

Imports fall and the trade surplus will begin to widen again.

The annualised £220bn ‘significant stimulus’ to the world economy, to which John alludes, would not materialise.

John is certainly right, the monthly Chinese trade numbers should be watched very closely over the next few months. It may the case that the narrowing of the surplus is a temporary trend.


14 Responses

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  1. CharlieMcmenamin said, on July 14, 2009 at 12:25 pm

    Thanks for drawing attention to this. I always read John Ross with interest as he has a gift for explaining quite complex economic phenomena in readily digestible language. Your further commentary does provoke further questions in my mind, though:

    1. Even if the shift in the balance of China’s balance of trade continues at current levels it seems predicated on a general lowering of the overall volume of trade, certainly compared to the ‘pre-Crash’ period. Does this translates into less cheap goods for the North American and European markets?To what extend do you imagine this might act as a counter tendency to the rosy ‘engine of recovery/growth’ picture painted by Ross?
    2. Assuming that there is some validity in the hypothesis (that’s all it can possibly be at this point, surely?) that China is rebalancing the asset form of its trade surpluses from from dollars to commodities as a medium-long term strategy, what does that do to the long term prospects for the value of the dollar – or, perhaps more to the point, the pound?

    As ever, can I get my apologies in first for not being an economist and perhaps asking daft questions….

  2. duncanseconomicblog said, on July 14, 2009 at 12:40 pm

    Very good questions!

    1. You’re right. A lesser supply of cheap Chinese imports may well counter the stimulus Ross refers to. Although, in the medium term, it might help the world replace. China imports more (we can export more) and we import less.

    2. I’m not sure that the hypothesis holds but… It’s surelty dollar (and pound) bearish. Not to mention bullish for commodity prices. Again, not necessarily great for the West.

    In general though, Ross makes a lot of sense. The impact of China’s rise will be huge.
    Micheal Pettis is well worth reading on things China.


  3. Paul said, on July 14, 2009 at 1:01 pm

    Goodt stuff, Duncan and Charlie.

    Am I missing something, or might hard commodity purchase be because China understands that the dollar has to fall at some point and they need to find other sources of reserve for the event that their US holdings fall hugely in value (thus getting in the way of medium term purchases for further infrastructural investment.

    And if China is doing this, shouldn’t the Uk be doing it too (indeed, a little flippantly we should try to buy the copper from China!) given the Uk’s exposure to US holdings (fourth biggest in the world, according to the Prof Danny on saturday).

    • duncanseconomicblog said, on July 14, 2009 at 1:14 pm

      True – it may be China trying a macroeconomic trade of giant proportions…

      It will be interesting to see how long the buying spree lasts.

      The UK’s exposure, as I understand, is not at the government level in the way it is in China. Shell & BP, not to mention the banks, the defence industry, etc – have massive dollar exposure.

  4. CharlieMcmenamin said, on July 14, 2009 at 1:21 pm

    This time without typos:
    Er, Paul, isn’t there something of a chequered history of Western nations getting into competitions to secure supplies of key raw materials ? Wasn’t this a driver of classic imperialism? Or, indeed, of contemporary Middle Eastern policy….

    On the other hand, that Alphavile piece Dunc linked to did mention the interesting fact that Keynes originally went to Bretton Woods wanting a international reserve currency based on the price of a basket of commodities. The bancor I think was his provisional name for it.

    • duncanseconomicblog said, on July 14, 2009 at 1:43 pm

      And how different world economic history would have been with the Bancor… Certainly if the dollar wasn’t a reserve currency, it’s arguable that Reagan-ism would have failed – no ability to run that sort of federal and trade deficit for so long.

      Delted your typo comment.

  5. Paul said, on July 14, 2009 at 1:26 pm

    And such a direction – buying up hard commodities and reducing suplus as necessary – might support the ‘decoupling’ thesis dismissed somewhat the other day?

    • duncanseconomicblog said, on July 14, 2009 at 1:50 pm

      Problem with decoupling is it’s such a vague term.

      When financial market guys banged on about it in 2007 they basically meant – ‘maybe Asian stock markets will keep rising’. Which didn’t happen.

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  10. Alex said, on July 14, 2009 at 11:34 pm

    I wonder if this is reflected in bulk carrier rates, especially Port Hedland->China?

    Relatedly, the world is full of ships awaiting orders now; how many are they using for storage?

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