The trade statistics for China in 2005 are out, and they are pretty spectacular:
. Exports Imports Total Growth Surplus
Total 762 660 1442 +24% 102
Europe 140 77 217 +23% 63
USA 156 51 211 +25% 101
Japan na na 184 +10% na
Korea 23 77 100 na -54
ASEAN na 75 na na na
Sorry for the incomplete data, I have not been able to find the original source (website in Chinese and press reports have only a fraction of the numbers).
- oil imports reached 2.6 mb/d, or close to 40% of consumption, but grew only by 3.3% from 2004
- Nhu-Nguyen Ngo, with BNP Paribas states that foreign companies set up since 2001 account for more than 50% of exports.
From the numbers above, the way world trade is setting itself up becomes clearer: Western companies invest in China, using Chinese labor and Asian parts (and Australian raw materials), and sell on their home markets. From various accounts, Chinese consumptions remains small, relatively speaking, which means that a lot of the revenues from these exports are not recycled in the Chinese economy.
Western jobs are threatened in many sectors, but Western profits are boosted. Nice if your income comes from capital, and not from labor: profit are at record levels:
This whole cycle is obviously unbalanced, as it needs demand to feed it, and demand in the face of higher unemployment (btower) and lower wages (bonddad) is hard to sustain.
Thus comes the other half of the Bush/Greenspan miracle: debt. Thanks to record low interest rates, which has inflated asset values, starting with real estate, debt has become cheap and easy to obtain (back by home equity) and has sustained demand:
And the Chinese, to keep their exports going, want the dollar stable and buy dollars and dollar assets, thus ensuring that the debt is financed.
The circle is closed, everybody is happy?
Well, not really, of course. Debt is piling up and accumulating, from the imbalances in trade (deficit of $668bn in 2004 and an annual rate of $790bn in the first three quarters of 2005, or 6.4% of GDP) and the federal budget deficit, and everybody grasps that this should not last, even if noone wants to trigger the stampede out.
Greenspan has finally started increasing interest rates last year, but he has failed to get long term rates to increase in the face of foreing buying, triggering a worrying inversion of the yield curve:
In fact, the whole cycle is becoming unstable. China, despite its growing trade surplus, is buying less and less US debt, and was actually replaced in 2005 by oil exporting countries, which have accumulated this year a massive bonanza thanks to higher prices.
Every now and then, like yesterday, there are hints that China wants out of the dollar - and out of that cycle. With current oil prices, oil exporters cann take up the slack, but buying more expensive gas does not provide the same consuming pleasure as cheap Chinese goods.
And note that oil prices rose this year despite a very weak increase in Chinese oil imports. This was linked to the artificially high growth in late 2004 when electricity was getting scarce and diesel generators were used massively, but Chinese demand for oil is likely to grow at least as fast as GDP growth (i.e. around 10%), which means, with stagnant domestic production 15-20% growth rates for imports.
So I am still betting on higher oil prices, with an impact on US consumption, and slow diversification of China from dollar assets to others. Expect fireworks this year:
- the bilateral trade surplus will be a hot political issue again, as pressure on jobs and wages increases;
- any "feelgood" feeling in the economy will be eaten by higher energy prices and stagnant house values with the new, higher interest rates;
- the dollar will be supported more and more by the oil bill and nothing else.
This brings me to explain the title of my diary: my bearish predictions in the past year have no come to fruition so, as the joke goes, I am doing the economists' favorite activity: reinterpreting the past to explain why they were wrong - and thus actually almost right... and eventually, I'll be proven right!