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Friday, June 03, 2005

The Changing Pattern of Chinese Trade

These charts come here by a rather circuitous route. They were originally published by Jake Van der Kamp in the South China Morning post, and arrived here thanks to the fact that they were posted by Simon World and that I was alerted to this fact by Ivan.

My interest in them is not quite the same as Simon's, which was to examine the veracity of EU claims about textiles. The part I want to draw attention to is the rapid rise of machinery and equipment exports within the whole profile. This follows a claim I read (and posted about) from Arthur Kroeber, of China Economic Quarterly to the effect that “Since 2003, China has gone from being a net importer of capital goods to being a net exporter”. You can read more about this story in the FT, and if you want to find out about China's plans for car exports you could go over to Afoe.

Anyway, while it would still be fascinating to get more details on this, Van der Kamp's graph seems to confirm the argument.

China's Silicon Valley?

"“Zhongguancun” doesn’t roll off the Western tongue easily, but it will soon be an address that technology investors must learn. For 25 years, locales from Singapore to the south of France have tried to create their own Silicon Valleys, but the original’s remarkable spirit has never been duplicated. China, however, is putting the finishing touches on its own Silicon Valley — and this time, they may have found the recipe."

This may be hype, or it may be for real, read the article yourself. Certainly something is moving.

And watch out for this bit:

It’s hard to spend much time among the enthusiastic entrepreneurs at Zhongguancun and Tsinghua without worrying about how the U.S. will measure up in years to come. While the number of U.S. science and engineering graduates declines, year after year, China’s numbers are surging. China already graduates more English-speaking electrical engineers than does the U.S. Last month the U.S. came in 17th in an annual international collegiate programming contest; a team from a Shanghai university came in first. And U.S. middle school math and science scores continue to lag behind those of other developed nations — even as school boards debate how to teach evolution.

Vietnam's China Trade

This piece from Asia times is interesting, it gives some indication of how China trade is a two-way process in SE Asia. China is obviously an exporter as well as an importer of FDI.

"Vietnam's trade deficit with the Chinese market could reach US$2 billion this year, and is expected to continue increasing for the next five years, the Ministry of Trade has warned. In recent years, the deficit has skyrocketed, reaching $1.7 billion last year despite being only $200 million in 2001.

According to statistics from the ministry's Asia and Pacific Region division, 32 Vietnamese import products, listed among the Vietnamese products with the highest import turnover, were from China. The import turnover of these products stood at $3.66 billion, comprising around 82.2 per cent of Vietnam's total import value. Petrol had the highest import turnover, at $740 million, followed by iron and steel, clothing materials and motorbike parts at $4.9.5 million, $290.2 million and $92.7 million respectively.

'Free' Markets

"Japanese exporters today sold the dollar around its early high of 108.28 yen, and losses accelerated once the U.S. currency fell through 108 yen, where some traders had pre-set orders to sell, said Luke Waddington, head of interbank currency sales in Tokyo at Royal Bank of Scotland Group Plc.

``Once the dollar got through 108, stop-loss orders kicked in,'' Waddington said.

Traders typically place automatic orders to buy or sell the currency to limit losses in the event bets go the wrong way.

Things Are Starting To Move

Given that everybody who's anybody (except me that is) has been arguing for a dollar fall, this is interesting news:

Goldman Sachs Group Inc. abandoned its call for a weaker dollar and raised both three- and six-month forecasts against the euro and yen after it this week climbed to an eight-month high versus Europe's common currency.

Goldman, the world's third-biggest securities firm by market value, expects the dollar to trade at $1.20 per euro and 108 yen in three months, and $1.25 per euro and 102 yen in six months, from previous estimates for a decline to $1.35 and 98 yen. The firm also raised its 12-month forecast to $1.30 per euro from $1.40, while leaving its yen forecast at 95.

Thursday, June 02, 2005

Bonding Together

Stephen Roach has been having a rethink on bonds:

"When I first wrote of an interest rate conundrum in January, little did I know how deeply this concept was about to become ingrained in the heart and soul of central banks and financial markets......But conundrum it is, as real rates remain at unbelievably low levels at the short and long end alike -- in the US, Europe, Japan, and even emerging markets. Given my concerns over the US current account deficit, I have long in the bearish camp with respect to the US bond market outlook. A rethinking is now in order. The likelihood of a China-led slowing of Asia has prompted me to change my view. I now suspect bond yields will stay low for the foreseeable future, and I wouldn’t rule out the possibility that they might even drift lower".

This was written on Monday. Short term confirmation of what he 'wouldn't rule out' wasn't long in coming: on Tuesday the 3 1/4 percent German bund due in July 2015 fell to an all time record low yield of 3.22%. This left a gap of 1.22% with the ECB base rate, the narrowest gap since the last time the Frankfurt-based central bank cut interest rates in June 2003. This may indicate that Trichet's room to *not* cut rates is reducing.

Meanwhile yesterday in the US ten-year yields closed below 4 percent on consecutive days for the first time since October.

Also it is significant to note that eurozone government bond yields no longer automatically move in the same direction: whilst the yield on the Germnan 10 year bund rose 1 base point to 3.24 percent, the yield on France's 3 1/2 percent bond due April 2015 was little changed at 3.25 percent, and the yield on the Italian 10-year bond rose 1 base point to 3.45 percent.

The impact all these low yields and the economic uncertainty are having in the US? Well, as I suggested here at Bonobo recently, they are really reducing Greenspans 'room to manoeuvre' down at the Fed. This reality was floated yesterday in a speech from Dallas Fed President Richard Fisher (in a move where he is widely interpreted as acting as Greenspan's emmisary), suggesing that the 'tightening' process may be nearing its end. Which brings us back to Stephen Roach: interest rates may be in the process of stabilising on the downside, and we are maybe near the peak of the tightening process.

With the ECB stuck at 2%, the BoJ at 0%, and the Fed at 3.5%, that speaks volumes for the depth of the global liquidity markets these days.

Wednesday, June 01, 2005

ECB in Hot Water

As the euro continues to slide, there is another cause celebre in the European press today:

"It was reported by a German newspaper on Wednesday that senior German policymakers, including Hans Eichel, finance minister, and Axel Weber, Bundesbank president, had been present at a meeting where the possible “collapse of the euro” had been discussed. It was stated however, that neither commented on the possibility."

The magazine was Stern, one of the speakers was MS's Joaquim Fels, and I'm blogging about it at Afoe. The issue isn't whether or not the euro is going to break up - it clearly isn't - but the fact that people are even hypothetically considering the topic. The current crisis in Europe is deep indeed.

Tuesday, May 31, 2005

China's Responsibility For The Global Imbalances

Brad Setser has a post about a Nick Kristoff article in the NYT accusing democrats in congress of scapegoating China for the US economic problems. The more I think about it, the more I tend to agree with Kristoff. (Perhaps this sis the part I disagree with most: "the U.S. American fiscal recklessness is a genuine international problem". I would rather put this: the US fiscal deficit has been run up to pay for a war in Iraq, when it should have been spent as 'adjustment costs' to help the US economy adapt to the Chinese impact.)

Anyway here are some of my reasons:

"China has some responsibility for global imbalances too"

Could we try and quantify this: say China 10%, Europe and Japan 40%, USA 50%: is this what we mean? This would more or less put things in perspective.

This imbalance didn't come from nowhere: during the second half of the 20th century we steadily watched China's population push up past the 1,000 million mark. Here's the first imbalance. But whilst this was happening, and they were poor, we didn't seem to be too interested, if some third world economist or other gave advice to the first world, they were at best quietly ignored.

Now comes the backdraft. China isn't poor any more. At least it isn't as poor as it was. Still there are hundreds of millions of poor people in China. They have to be the Chinese government's first priority.

I guess if we want the Chinese government to take a more responsible attitude to *our* global problems, then the first thing is that they should be in the G6, at least they should be swapped for Italy. They should then be treated as a partner on equal terms. This advice cannot be a one way street. Pragmatically because it won't work that way, and anyway II don't think it is right.

Of course there is a lot that we can do to help China, and disinterested advice would be one of these ways. But normally, sound advice starts at home, so I think what we should do is focus not on China's problem, but on the US one. And solving this problem has to be in the hands of the US itself. Of course the Chinese, the British, we can all advise, but the US elected administration and its central bank are the ones who need to act.

Now, what can be done? Reluctantly, since really Brad has convinced me that this deficit cannot continue like this for too much longer, the US may in fact have to face the full China impact: deflation, and the application of unconventional monetary policy.

The first step would appear to be to squeeze consumer credit inside the US. That should cut the rate of sucking in imports. The dollar would of course rise, and that is when you would hit the deflation bit, but at least you wouldn't have the deficit.

Of course, and this is the part I think he isn't explaining, Bernake is accepting the trade deficit because he prefers it to deflation, not because he things it is a good thing in itself. It is, the lesser evil. But if you prefer deflation, well, lets give it a whirl.......

I mean this science is anything except dismal :).

Chaos in The EU

On Friday afternoon I said this at Afoe:

"So on May 30th we may have an EU where in one of the main countries the electorate have just passed an effective motion of ’no confidence’ in their government, whilst in another of the ’key states’ the existing government already has a ’sell-by’ date. Add to this the uncertainty over deficits and the SGP, the absence of growth, and the growing unease about what exactly is happening at the ECB and, if you ask me, you have all the ingredients of a major currency crisis. Well, next week we’ll know."

Well now we do know, although it isn't clear yet how far things will run. My feeling is that we could be in for some surprises on the downside. Meantime the Netherlands are about to vote, and France has a new prime minister, and lots of other interesting things are happening over at Afoe.

NB: Jelena has a reflective post on the debate.

Japanese Employment

Working your way through the Japanese employment numers is like walking blind through a mine field, it is never clear what any of the numbers really mean. The basic classification is all those over 15. Then you have the number of those over 15 (including those over 65 and onwards) who are in work. Then you have a participation rate. But the particpate rate is over the entire over 15 population (including the most elderly elderly). The only safe number is the number of people actually employed, but even that isn't clear since it includes those in part-time and temporary employment. Now what is for sure is that the number of those employed rose last month, and sharply: from 62.6 million in March to 63.52 million in April. That seems to be a lot of jobs, almost a million in a month (unless, of course, the numbers are seasonally adjusted!!). To put this in perspective: that brings us up to the level of October last year. Before last October the numbers had been falling since the 64.53 million recorded in 1994 when the time series starts.

What to make of all this? Well it's hard to say. Last month seems to have been an incredibly good month, but I think we need more data to see what is going on. In general the number of those employed is falling, as the population ages.

Here's the link if you want to look for yourself.

Japan's unemployment rate fell to the lowest in more than six years in April and household spending rose for the first month in three, bolstering a recovery in the world's second-largest economy.

The jobless rate declined to 4.4 percent from 4.5 percent, the statistics bureau said today in Tokyo. Spending by households headed by a salaried worker climbed 3.6 percent from March, seasonally adjusted.

Job seekers in Japan now have the richest choice of offers since 1992, boosting consumer confidence and stoking sales at companies including Citizen Watch Co. Consumer spending accounted for more than half of Japan's annual 5.3 percent growth in the first quarter, fueling a recovery from a fourth recession since 1991.

Source: Bloomberg

Monday, May 30, 2005

Canute Rallies His Troops

I couldn't resist this photo of the regal Chirac, with his principle political supporters in attendance. I also think that any attempt to carry forward this version of the EU constitution in France, against the will of the French electorate, would be absolutely irresponsible, as is any attempt to carry on as if nothing had happened a bit like Canute sitting before the ocean, ordering the waves to retreat.

I am blogging plenty about all this at A Fistful of Euros.