Friday, October 15, 2004

In constant 2000 dollars, the US trade balance (goods only) with China in 1998 stood at -$59.0bn. In 2003 it stood at nearly double that figure: -$117.0bn. In 2004 we're on track to easily surpass -$140bn in constant dollars (over $150bn in current dollars).

The essence of any such story is obviously that import growth is far exceeding export growth. Yet in 2004 it's not even that good. Since March 2004 US exports to China are actually falling ($9.0bn in the first quarter; $8.1bn over June-August) while imports streak ever skyward ($39.2bn in 2004:I; $52.6bn over June-August).

And anybody counting on the upwards revaluation of the Chinese renminbi to start solving this problem has Andy Xie to tell them that hope is not a plan.
Every couple of weeks the market becomes excited over the prospect of an imminent revaluation of China�s currency, the renminbi (Rmb). The prospect for such a scenario is extremely slim, in my view. Any change to China�s currency peg to the dollar could be the trigger that bursts China�s property bubble. The Chinese government has been extremely reluctant to take actions that might pop the bubble.
There are so many bubbles in this economy it's like a revival of the Lawrence Welk Show. In Xie's opinion, however, the Chinese bubble isn't material to the solution to the ballooning US current account deficit, because dollar devaluation isn't going to make much difference anyway.
The US deficit and strong dollar have been caused by the push factor; i.e., weak demand in the rest of the world is causing the US deficit. Devaluing the dollar may not work and is hard to do this time, in my view. . . .

When external factors are more important to the US deficit, dollar devaluation is hard to achieve and does not work. Even though the dollar has come down by 10% in the past two years, the US deficit has increased to 5.8% from 4.5% of GDP, because the weak dollar stimulated the US economy and increased oil prices. . . .

The US is trying to solve its deficit without going through a recession. Dollar devaluation is considered a painless way out; i.e., a free lunch.
Hope that consumer demand in East Asia and Europe dramatically (and quickly) explodes is not a plan, and hoping for USD devaluation isn't a plan either. Pressing the Chinese to revalue is a plan (with little apparent chance of success -- but I'm happy to be surprised) but might not make much difference in the end anyway.

History suggests that the only sure-fire solution to a massive CA deficit is recession. Xie recommends raising taxes as the only possible proactive strategy for the US, which will cut consumption, reduce the federal deficit and reduce capital export from Japan, China and the rest. Sounds like inducing a recession to me. Are the chances of such a scenario -- particularly under another four years of Bush -- any larger than a snowball's chance in hell?

The most likely outcome is muddling through for another 2-3 years, if possible. CA deficit at 7% of GDP, here we come!


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