TRADE AND CHINA'S BALANCE OF PAYMENTS      

    

"If the U.S. decided we wanted to have the same bilateral deficit as Europe [has with China], and sliced another $150 billion off the Chinese balance of payments income, they'd have a problem."  

 

April 23, 2019

The last thing I want to talk about is trade.  Again, I can't use the Chinese numbers.  Here we do have Eurostat numbers, which is good.  In 2018, the Eurostat reports that $240 billion of exports, $450 billion of imports, so a sizeable trade deficit.   A small chunk of that is offset by services.   And it rose moderately.  So what we've got is a very large, fairly steady Euro-China relationship.  It has a deficit that's pretty big, but Europe seems to have shrugged that off as not that important.  It's important, but it's not, it doesn't seem to be as paralyzing as it is currently in the United States.   

On the other hand, the U.S. bilateral deficit is $150 billion larger with China last year than Europe's was.   And here's the point I want to make on balance of payments.  It's an important point, it applies to BRI, it applies to a lot of Chinese behavior, and people don't understand it.  Applies in Europe, applies to the U.S., and so on.   Six years ago, the Chinese were running enormous balance of payments surpluses.  No matter what they did, they couldn't spend as much money as they were bringing in, and the reserves just kept piling up and piling up and piling up.  Official reserves were close to four trillion; you throw in money in the state banking system, it's close to five trillion.   The state banking system money has now dropped by 1.2 trillion, official reserves have dropped by about a trillion; the Chinese ran about a 70 billion dollar balance of payments deficit last year.  Seventy billion dollars is not a big deal.  If the U.S. decided we wanted to have the same bilateral deficit as Europe, and sliced another $150 billion off of the Chinese balance of payments income, they'd have a problem.  And what you get out of that problem is import restrictions one way or another.  The Chinese cannot afford repeated we cut a hundred fifty billion dollars off, add to that 70 billion, the Chinese cannot afford repeated 200 billion balance of payments deficits.  They can't.  

So Europe's ability to export and invest in China is reliant, as everything else is, seemingly in the global system, on Americans buying way more Chinese goods than we sell.  And that wasn't true six years ago.  Six years ago, there was a diverse set of sources of Chinese balance of payments surpluses. Europe still contributes to that, tries to contribute.  But now the Chinese are much more financially dependent on the United States than they were.  And when we talk about people saying there are opportunities in China, there are opportunities in China because the Chinese need money, because they're willing to buy goods because they have enough money.  That is contingent on the merchandise trade surplus with the United States, which was $410 billion last year.   

So if you had a U.S.-China blow up, whether justified or unjustified, say goodbye to the China that you know.   It can't support that behavior.  It can't support the BRI.   BRI dies.  They won't admit it; dies on contact with the U.S. saying, "we're cutting into this deficit," because they don't have the money.  Restrictions on European exports, probably not investments, because they still want the cash, but restrictions on European exports would follow.       

So I think the thing I want to tell you, a little survey:  construction isn't important; investment is sizeable, but probably dropping, definitely dropping now, and there's a risk of further dropping because of the absence of state-owned enterprises.  Yet that absence of state-owned enterprises is tied to balance of payments fears.  You have to hope for U.S.-China to have a very nice stable relationship, because the -balance of payments fears are not going to go away just because President Trump says, "everything will be fine, trust me."  And that balance of payments drives SOE globalization.  It drives Chinese outward investment.  It drives their willingness to import.  I'll stop there.

We have shared a large, larger than usual, excerpt from Mr. Scissors' presentation at GBD last month.  We have done so because we think Mr. Scissors has highlighted a critical factor in the enormous and enormously important U.S.-China commercial relationship.  Whatever comes of this week's talks, that relationship is changing.  As for how, there will be plenty say on that score next week and in many weeks thereafter.