I will be interested in seeing how the trade negotations with China work out. If they’re successful they will place China in the odd position of needing both more and fewer dollars, as this post at Bloomberg makes clear:
China’s trade surplus with the U.S. expanded 10.5% (in yuan terms) in the first four months from the same period in 2018 – but for all the wrong reasons, as imports slumped by more than exports. Additional Trump administration tariffs would significantly curtail the trade balance, putting enormous strain on China to cope with U.S. dollar debts that need to be rolled over within the next 18 months.
Large swathes of the Chinese economy remain stagnant. Rapid growth in new total social financing and stalwart industries such as steel and real estate have ensured the headlines remain relatively upbeat. But trade is falling and consumer demand is weakening, with products from automobiles to appliances struggling. Official nominal GDP growth was 2.6 percentage points lower in the first quarter compared with a year earlier; unofficial data show even greater declines.
As long as Beijing refuses to make the yuan a freely traded currency, it will need to generate dollars. Beijing may not want to make a deal with Trump under these circumstances; it may have little choice.
Over the past nine years China’s foreign debt has increased four-fold and that debt is denominated in dollars. Yes, China’s GDP has increased, buoyed on the wings of debt, mostly corporate and local government debt. I’m genuinely not sure how it will all play out.
The fundamental relationship between China and America is that China has skilled workers and modern factories and we have store shelves. It is true that China needs markets and dollars, but many US corporations, like Apple and Walmart, would go bankrupt without Chinese products to sell. If push came to shove, I’d rather have the manufacturing base and have to look for new customers than have empty shelves.
If Apple and Walmart haven’t prepared second sources at this point, they deserve to go bankrupt.
Bob
No, you’d rather have channel. Much more difficult to develop.
Dave
Correct. As a general proposition, and, as someone who had businesses selling to Walmart for 20+ years, they will have at least two and probably three major ones. While thinking just about every single day about developing others.
I have no insider knowledge of Apple’s operations but I wouldn’t be a bit surprised if they aren’t a lot punier than they appear. A lot of today’s companies are. Virtual companies aren’t just for one man operations any more.
“Yes, China’s GDP has increased, buoyed on the wings of debt,”
“Sell the sizzle, not the steak”. The GDP is the sizzle, the balance sheet the steak. Too much sizzle and you’re on the road from rib eye to chuck.
““Yes, China’s GDP has increased, buoyed on the wings of debt,â€
One reason why in the medium to long term i have not been that worried about China on the economic front. I assume most of their numbers are fudged anyway, but what growth they have had has been catch up growth and/or debt driven. Not going to last.
Steve
Ben Wolf and I have many points of agreement but one issue on which he and I disagree is that I think that the empirical evidence supports the hypothesis that debt retards economic growth. The paper that allegedly refuted that received so much hooplah a couple of years ago didn’t refute it at all. It refuted the conclusion that there was a cliff at around 80% of GDP. There is no such cliff.
But the basic conclusion remained intact: debt slows growth. As Guarneri might put it there is a carrying capacity for debt which varies from country to country.
China has other issues as well. To some extent it has followed the path the Soviet Union did—moving relatively unproductive labor assets from agriculture to manufacturing. Unlike the Soviet Union it has done that without reducing agricultural output. Its agricultural output has pretty clearly peaked at this point. That suggests they’ll need to keep those workers down on the farm at this point.
Glad to see no comment that America is an imperialist nation founded on genocide and slavery and deserves to be eclipsed by the noble Chinese.
About those jobs though, anything produced at scale and retailed through companies of scale such as Walmart will be forced to meet their cost demands or forced off the shelf. Sometimes you have to go overseas and turn a blind eye to forced labor or child labor or environmental damage. But there are many places to do that other than China.
There’s never a cliff, because the economic realities and decisions facing each market participant in an economy vary widely. There is a ragged transition zone. Further, because a country’s economy is simply the aggregate of the realities of its company and industry components, and its government, debt capacity varies by country.
I find myself left slack jawed at the notion that we don’t have to worry about China, both as an existential threat over the long haul, and the quality of life of certain US citizens as China pursues it’s mercantilist, beggar thy neighbor in the shorter term. Over at OTB they’ve gone all free trader (I remember when they used to argue the opposite – the angelic worker, you know. No doubt TDR) and robotically cite the benefits to consumers. One dimensional analysis.