The Trade Debacle with China (Richter)

Wednesday, December 14th, 2011

By Wolf Richter

The US trade deficit with China through October is $245 billion and will likely hit a record $300 billion for the year. It’s politically convenient to blame China, particularly its yuan policy. But the driver behind the trade deficit is a broad and enduring strategy by US corporations to shift an ever increasing range of economic activities from the US to China. And now a trade war is breaking out.

American companies have heavily invested in China. At first, they shifted basic, dirty, or dangerous jobs to China to benefit from cheap labor and loose regulations. It brought costs down for US consumers. Over the years, the trend spread to other areas of commerce, from auto components to pharmaceutical research. For example, Merck, one of the largest pharmaceutical companies in the world, announced from its headquarters in New Jersey last week that it would invest in a 500,000 sq. ft. facility in Beijing. Purpose: discover and test new drugs. Chinese jobs to be created: 600. The project is part of Merck’s $1.5 billion investment in China. An investment that will contribute to China’s growth at the expense of the US economy.

One of the jobs programs that Congress, the Obama administration, and states have trotted out with fanfare during the stimulus bonanza was green tech, and particularly solar energy. Taxpayers subsidized the sector through a mix of local, state, and federal incentives. On the federal level alone, there were investment tax credits, cash grants, depreciation bonuses, and loan guarantees. At the state level, bankrupt California has been at the forefront of subsidizing the industry.

And yet, much of solar panel manufacturing has drifted off to China. As subsidies worldwide were cut back, prices for solar panels have plummeted below US production costs and have taken down a number of manufacturers. Among the losers: US taxpayers (see the now defunct Solyndra).

The winners are at the other end of the solar industry—to the point where photovoltaic power generation is dreaming about “grid parity” again, the ever elusive concept where unsubsidized solar energy is competitive with fossil fuels. The booming (albeit tiny) industry is expected to reach 1.9GW by year end, double its capacity in 2010.

Of course, driving down the cost of solar panels to make them competitive with other sources of energy was one of the goals of the subsidies. The intent was to harness US cutting-edge technologies. Turns out, it was easier to achieve cost reductions by manufacturing in China.

Now, after years of subsidizing the US solar industry, a somewhat ironic shift in strategy: to protect US manufacturers, the US International Trade Commission jumped into the fray on December 2 with a preliminary determination that Chinese manufacturers received $30 billion in subsidies (DOE estimate) from the Chinese government and dumped solar panels on the US market, thus seriously harming US manufacturers.

Today, China struck back. This time with anti-subsidy and anti-dumping duties on cars and SUVs manufactured in the US (Reuters). China’s Commerce Ministry claimed that US automakers benefited from government subsidies—US taxpayers have moaned about this for years—and dumped their vehicles on the Chinese market. Combined, the anti-subsidy and anti-dumping duties would amount to 21.8% for GM, 15% for Chrysler, 21.5% for unidentified US automakers (Ford, Honda, and Toyota?), but only 2% for BMW.

All major automakers have heavily invested in production plants in China, by far the largest auto market in the world. Thus, most of the vehicles they sell in China are made in China. However, certain high-end US-made vehicles would be hit with these duties. It must have been hard for bureaucrats at the Commerce Ministry to find an industry to hit: so far this year, the US exported only $84 billion to China, a drop in the bucket compared to the $330 billion in imports from China.

The trade deficit and the damage it does to the US economy will only get worse as long as US corporations, in their fit of strategic short-termism, continue to invest in China instead of in the US. While it may make sense for each individual company on an investment by investment basis, if all companies adhere to the same strategy, the economic foundation of the US will continue to deteriorate. So, in addressing the trade deficit, politicians should have a chat with their corporate sponsors—instead of solely pointing their collective finger at China, though there certainly are many things to complain about, such as technology transfers, copyright violations, and trademark issues.

International trademark issues can have delicious twists when a Japanese owner of a noodle shop in Taipei takes on a large Taiwanese corporation and…. Wins In Dispute Between Japan and Taiwan.

Tags: Auto Components, Cash Grants, Dangerous Jobs, Debacle, Economic Activities, Federal Incentives, Investment Tax Credits, Loan Guarantees, New Drugs, Panel Manufacturing, Pharmaceutical Companies, Pharmaceutical Research, Solar Industry, Solar Panel, Solar Panels, Sq Ft Facility, Trade Deficit With China, Trade War, Us Trade Deficit, Us Trade Deficit With China
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Currency/Trade Wars, They Have Begun …

Thursday, September 29th, 2011

We have written extensively over the course of the last few weeks on the increasing rhetoric from Asia over currency fluctuations and furthermore how China was playing the US and Europe off against one another in a quasi-trade-war gambit. A flurry of headlines today/tonight via Bloomberg reminded us to revisit what is also a very worrying trend in Chinese CDS (and more broadly Asian sovereigns), as perhaps sophisticated investors look for the cheapest low cost long vol trades on a non-decoupled world devolving to its lowest common denominator.

Between Carney’s ‘substantially undervalued Yuan’ comments, record slides in Dim Sum Bonds, growing concerns over growth longevity, Japanese retail sales, Aussie home prices, Sony’s troubles in currency-land, and Barclay’s warning of a restart to the Yuan peg in the case of global recession – contagion and transmission channels appear alive and well in global trade.

Via Bloomberg, this morning:

*CARNEY SAYS ADMINISTRATION `REVIEWING’ CHINA CURRENCY BILL

*CARNEY SAYS CHINA CURRENCY `SUBSTANTIALLY UNDERVALUED’

followed quickly by:

Yuan Drop Spurs Record Slide in Dim Sum Bonds: China Credit

Yuan-denominated (Dim-Sum) bonds in Hong Kong are headed for record monthly loss, erasing gains for the year, as worsening outlook for global economy fuels concern China will slow pace of its currency’s appreciation.

which was ‘helped’ by this evening’s comments:

*CHINA MAY RESTART YUAN PEG IN GLOBAL RECESSION, BARCLAYS SAYS

*STRONG CASE TO PEG YUAN TO BASKET OF CURRENCIES, BARCLAYS SAYS

And growing concensus that growth in China will slow significantly:

In the latest Bloomberg Global Poll of investors, most global investors and analysts, or 59 percent, foresee China will register economic gains of less than 5 percent annually by 2016.

that were around the same time as Sony’s headlines hit:

*SONY SAYS EURO WEAKNESS TO HAVE `HUGE IMPACT’ ON EARNINGS

*SONY SAYS IT HAS NO COUNTERMEASURES AGAINST WEAK EURO  :6758 JP

…noting that “Sony doesn’t buy many components from Europe, limiting its ability to benefit from euro weakness”

Which leaves Chinese CDS (denominated in USD remember) hitting their highest levels since early March 2009 as the spread between 5y and 10Y Chinese CDS rises to record wides of 74bps

While we suspect much of the steepening and widening of China sovereign CDS is speculative revaluation/global-recession bets, Chinese CDS still has a long way to go to meet up with the other global majors in terms of its risk relative to government bonds (since CDS have the implicit currency/devaluation premium and not just technical default).

Charts: Bloomberg

Tags: Barclays, Bill Carney, Bonds, China Currency, Chinese Cds, Contagion, Currency Fluctuations, Currency Trade, Dim Sum, Economic Gains, Gambit, Global Economy, Global Investors, Global Poll, Global Recession, Lowest Common Denominator, Outlook, Sophisticated Investors, Sovereigns, Trade War, Transmission Channels, Yuan
Posted in Bonds, Brazil, Markets, Outlook | Comments Off

Jim Rogers on China, Trade War, and the Loonie

Saturday, March 20th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

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In a Business News Network interview on Mar. 18, Jim Rogers, famous investor and creator of the Rogers International Commodities Index (RICI) speaks about the recent currency and trade confrontation between the US and China:

“If [you] slap somebody in the face, they are going to take a defensive attitude to save the face…I do not know why the United States is doing this in public, ..that never worked, especially with Asians.”

Rogers – Float to Grow

Rogers thinks the U.S. should try to explain to the Chinese that it is to their benefits to allow some flexibility in their currency. For instance, yuan’s appreciation will in turn lower the cost of China’s imports and its supply chain.

He acknowledges that the Chinese understand that their currency policy will need to change eventually in order to become a major player on the world stage.  Although the yuan has appreciated some in the past few years, but it is just not up to the expectation of the U.S.

Rogers estimates Chinese renminbi (yuan) could replace the dollar as the next reserve currency of the world in the next 10 to 20 years.

My Take – Yuan Appreciation Could Increase U.S. Deficit

It is consensus that the United States has strong economic fundamentals attracting high rates of capital investment. On the other hand, the U.S. has a chronically low household saving rate, and recently a negative government saving rate as a result of the budget deficit.

As long as Americans save relatively little, foreigners will use their savings to finance profitable investment opportunities in the United States; the trade deficit is the inevitable end result.

As pointed out in my previous article, renminbi appreciation will unlikely achieve the intended effect of reducing the bilateral trade deficit, and could instead have a negative impact.  Unless there is a significant shift in the domestic consumption/demand levels, the U.S. will need to procure either still from China, or from some other sources, but now at higher prices due to the yuan revaluation.

Rogers – A Non-American Style China Real Estate Bubble

Currently, the excessive liquidity trapped in the reserves is essentially causing various bubbles developing in many Chinese coastal and urban real estate sectors. Rogers sees the real restate bubble in China is one of price instead of credit. As such, a bubble burst will likely have a much more muted effect in China than the housing crisis in the U.S.

Rogers – Long Loonie, Short U.S. Bond

Rogers believes the Canadian dollar (loonie) is “one of the soundest currencies in the world on a fundamental basis.” He has owned the Canadian loonie “for years” as a long-term play, with his recent dollar positions as a short-term momentum play.

He also says the only other bubble in the world he sees right now is in the U.S. long bond market, and he expects to short that market in the “foreseeable future.”

“The concept of how anybody would lend money to the United States government for 30 years, in U.S dollars, is just incomprehensible to me…even at 6%, it’s just staggering.”

My Take – Many Bubble Candidates Ahead of China

I’ve dismissed the so-called “Chinese real estate bubble crash” catastrophic scenario in several of my articles.  Admittedly, China’s real estate sector is currently in the overheating zone; however, a U.S.-style bubble is less likely primarily due to a much lower buyer leverage as compared with the U.S. and a market structure null of debt securitization.

As for a bubble burst, there is currently no shortage of highly qualified candidates in the Western Hemisphere, with more up-and-comers waiting in the wing.  For instance, Europe’s PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), the U.S. and the Great Britain, based on recent rating agencies’ warnings, just to name a few.

Rogers – Protectionism = End Game

“Nobody has ever wanted a trade war, as it is the end of the whole game and disastrous for everybody’s concerns.”

Rogers thinks current protectionism originated in the U.S. has a contagion effect, which will likely exacerbate global geopolitical and trade tensions. He cautions that just as the U.S. protectionism in the 30′s did not help with the Great Depression, the current protectionist measures will unlikely have that much positive effect on the economy.

My Take – Serious Trade War Brewing

A synchronized recovery in China and the U.S., as we are presently witnessing, will undoubtedly heighten the competitive currency devaluation. It appears Washington will argue in perpetuity that the renminbi is undervalued as long as U.S. imports from China exceed our exports to China.

Meanwhile, Paul Krugman’s call of labeling China as a “currency manipulator” is being increasingly speculated to be included in the Treasury Department’s semi-annual report on foreign-exchange-rate practices, due to be released in April.

Tensions and trade feuds are bound to persist since the U.S. places more emphasis on the short-term “fixes” through price and the yuan exchange rate; whereas the Chinese put more emphasis on medium and long-term structural and institutional change.

眼中有敵，天下皆敵；眼中無敵，天下無敵 (One’s attitude determines how one sees things) ~ Chinese proverb

Video Source: You Tube

Tags: Bilateral Trade Deficit, Budget Deficit, China, China Trade, Chinese Currency, Chinese Renminbi, Commodities, Consumpt, Consumption Demand, Currency Policy, Defensive Attitude, Domestic Consumption, Economic Forecasts, Economic Fundamentals, Emerging Markets, International Commodities Index, Jim Rogers, Loonie, Network Interview, Profitable Investment Opportunities, Renminbi Yuan, Reserve Currency, Rici, Rogers International Commodities Index, S Rogers, Trade War
Posted in Canadian Market, China, Commodities, Markets | 1 Comment »

Albert Edwards: Back in the bear camp

Wednesday, January 28th, 2009

Albert Edwards, London-based strategist of Société Générale, has always been a firm favourite among Investment Postcards’ readers. His latest research report appeared a few days ago and saw him firmly back in the bear camp after turning short-term bullish at the end of October. (See the previous posts “Albert Edwards: Turning More Bullish” [October 24] and “Market Fundamentals are Appalling” [July 5]).

Edwards’s “Global Strategy” report is sub-titled “Technicals say it is time to bail out. Cut exposure and prepare for rout. US depression looking likely. China’s 2009 implosion could get ugly.” The executive summary below provides the gist of his thinking.

“After increasing our equity exposure at the end of October we believe that the market is set to quickly slide sharply towards our 500 target for the S&P. While economic data in developed economies increasingly reflects depression rather than a deep recession, the real surprise in 2009 may lie elsewhere. It is becoming clear that the Chinese economy is imploding and this raises the possibility of regime change. To prevent this, the authorities would likely devalue the Yuan. A subsequent trade war could see a re-run of the Great Depression.

- Economic data has been truly dreadful through the fourth quarter. Over a year ago we forecast deep US recession. As it had not suffered one since the early 1980s, we thought this outturn would shock. Yet recent data has been consistent with something far worse than deep recession. There is no agreed definition of a “depression” as opposed to a deep recession. But The Economist magazine is probably more qualified than many to take a view. They consider a peak-to-trough decline in GDP in excess of 10% a reasonable definition. We had been thinking of deep GDP declines of the order of 5% peak to trough but we are now thinking that this view might be too optimistic.

- But, until yesterday, equity markets had been paddling quite happily sideways for most of the last few months. They have been broadly flat since we increased our equity weighting sharply on 23 October. Within that time the intra-day peak-to-trough rally in the S&P was a creditable 28% from 740 low of November 21, but we do not claim to have captured that. Nevertheless we feel very comfortable that the technicals at the end of October cried out to close our extreme underweight equity exposure. They now tell us to cut exposure again.

- 2008 was a shock for investors. But 2009 could be an even bigger shock. There is evidence that the Chinese economy is imploding. Investors should consider what would happen if China descends into social chaos. Yuan devaluation could spark a 1930’s style trade war. Do you really trust the politicians to ‘do the right thing’?”

Source: Albert Edwards, Global Strategy Weekly, Société Générale, January 15, 2009 (hat tip: David Fuller, Fullermoney).

Tags: Albert Edwards, Bear Camp, China, Chinese Economy, David Fuller, Economic Data, Economist, Economist Magazine, Equity Exposure, Gist, Global Strategy, Global Strategy Weekly, Great Depression, Implosion, London, Market Fundamentals, October 24, Recession, Regime Change, Rout, S&P, Societe Generale, Strategist, Strategy Report, Target, The Economist, Trade War, Trough, United States
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