It is hard to put lipstick on a pig (or even an ox)

The sharp fall in China’s exports (down 17.5% y/y) and imports (down 43% y/y) shouldn’t have been a complete surprise. Korean and Taiwanese exports are down far more than China’s exports, in large part because of sharp falls in their exports to China. And, given the intra-Asian supply chain, that has long augered bad news for China.


The Chinese New Year cut into China’s January exports and imports. After adjusting for this, China’s exports are down, but not quite as much as the headline figure suggests. But that, alas, likely implies further falls in the future. Even if — as Stephen Green highlights in his latest note — “processing” exports (i.e. exports with significant imported content) are falling far faster than non-processing exports, it is a little hard for me to see how Korean and Taiwanese exports to China could be down 40% if Chinese exports are only going to fall 5-10%.

Historically, the correlations between Japanese, Korean and Taiwanese exports to China and China’s exports to the world have been fairly tight. Of course, China’s exports now have more domestic content, so the correlation could change. But I am worried. Paul Swartz helped with the following chart:


The current downdraft is clearly far more than just an artifact of the seasonality in China’s trade. A rolling 3m sum of China’s exports and imports smooths out some of the volatility. Exports and imports usually do fall in the first quarter — but nothing like they are falling now. The trough — on a rolling 3m basis — usually comes in March, not January. Yet we already know the this year’s trough will be a lot lower than last year’s trough.


What worries me the most? The possibility that the sharp y/y fall in imports doesn’t just reflect a fall in imported components or a fall in commodity prices, but rather a major deceleration in China’s domestic economy.

In some sense, it is hard to imagine a worse combination. China’s export are falling, making China understandably reluctant to allow its currency to appreciate. But China’s trade surplus is also rising … certainly in nominal terms and quite possibly in real terms. That isn’t good for the world.


At a time when the world is short demand, China seems to be subtracting from global demand not adding to it. The best solution: an absolutely enormous domestic stimulus in China.

One last note: the PBoC’s other foreign assets were unchanged in December. That implies that China’s reserve growth — counting its hidden reserves — was somewhat larger than I initially estimated and that hot money outflows were somewhat smaller. The basic story though remains unchanged — for the first time in a long time, reserve growth lagged the trade surplus, implying significant capital outflows.

Originally published at the CFR blog and reproduced here with the author’s permission.

3 Responses to "It is hard to put lipstick on a pig (or even an ox)"

  1. r0tiNeK   February 11, 2009 at 11:48 pm

    First! : )

  2. r0tiNeK   February 11, 2009 at 11:58 pm

    Good Post Brad. I read it over on your blog: Setser does a Fantastic job analysing China’s economic data. I think his blog has been banned in China : )I highly recommend all you intellectuals bookmark it….after all – China is going to be the next SuperPower, whether you like it or not.Unfortunately America is Bankrupt & they cannot “Financial Engineer” their way out of it. The bullsh!t games have played out in full and there’s no more “magic” left to pull out of the hat. Unless America starts PRODUCING real goods & exporting to the world (who’s got the money to buy??) – they will not escape a replay of Japan’s Deflation. In fact America’s net worth is NEGATIVE. Even Japan had $1 Trillion Yen in the Postal Bank of Japan when their asset bubble burst. America’s financial situation is much worse. I Guarantee you we WILL replay Japan’s Deflation. Guarantee it.All the printing has NOT found it’s way into the REAL ECONOMY. It has simply propped up Banks which otherwise would have FAILED without said Capital injection. This money is being hoarded by the Banks because the DEFLATION which is ACTUALLY UNFOLDING is decimating the assets against which all of this MONOPOLY $$$ was extended.Excessive Credit Expansion is ultimately followed by Deflationary collapse.EVERY TIME.

  3. George Harter   February 12, 2009 at 3:03 am

    Economically, China might be the new superpower. However, social unrest will be a REAL consequence of the economy stumbling. The Chinese people are NOT actually robots. They love their children, just like we do.The masses of wage serfs will not be happy if the Communist social contract collapses. Migrant unemployment may actually be 40-50 million. There is no place at the old homesteads, declining employment in the cities where does the poor Chinese John Doe go and Do??Yes, he can live on meagre savings, get poisoned at the drugstore,have schools collapse miraculously (sichuan) begin a severe drought, AND, suffer the consequences of a depleted and nearly destroyed local environment. No, clean air, clean water.Grain prices turn around, being a net importer of food grain may not be an enviable position to be in.Haven’t any readers followed the last riot in ShenZhen??? The police sent down t quell it, vanished! No bodies reported, nothing. China has subsidied growth by plundering their resource base, the environment. Their steel industry is E. German ca 1959.The Upper class in China is JUST AS STUPID as the American upper class. They drink their own Kool-Aid. When big reckonings happen in China, the country turns upside down.And now, the outside world will be waiting. Don’t kid yourselves, when the Government truly loses control, China will be up for grabs, for a LONG time. India more likely will survive and just muddle thru the 21st Century.George HarterDen of Thieves, USA