Say goodbye to China's "export economy" paradigm. In a stunning development for trade hawks, and pretty much anyone who follows the biggest liquidity bubble in history, China Daily has announced China is about to announce a record trade deficit (yes, not surplus, deficit) for March. This makes the whole CNY undervaluation debate pretty much moot, as even China now moves into the ranks of net importers. From China's official daily newspaper: "The country will probably see a "record
trade deficit" in March thanks to surging imports" and "will "fight
back" if Washington labels China a currency manipulator." Perhaps this finally explains where all the excess liquidity has gone: with China now not exporting to the US consumer, it has instead refocused on its own "middle" class. This means that Chinese administrators are much more focused on maintaining a stable economy, and will be much more concerned about economic overheating, which goes in line with the recent indications of material liquidity tightening out of Beijing. Market News reports that the actual deficit will come in at $8 billion for March, the first deficit since April 2004, when the gap was $2.26 billion. Maybe Albert Edwards will just have the last laugh with his iconoclastic prediction of a CNY devaluation.
More from the article:
After China's exports rebounded in
December, US legislators and economists have been demanding the Barack
Obama administration label China a currency manipulator in a US
Treasury report due out in mid-April, which will make it possible for
Washington to slap duties on Chinese imports.
"China's trade surplus with the US has been
turned into a key excuse by American economists to pressurize the
Chinese government to revalue the yuan," but, ironically, the calls
have been growing stronger even as the "surplus keeps falling", Chen
The ministry also said on Friday that Washington's method of evaluating trade figures magnifies the deficit with China.
In the three decades up to the 2008 global financial crisis, China's exports registered annual growth of 20 percent but the surplus with the US contributed a big chunk to China's total. Last year, China had a surplus of $143.38 billion with the US, accounting for a hefty 73 percent of the total.
"The impact of currency revaluation on trade is limited," said Chen.
From July 2005 to July 2008, the yuan gained a cumulative 21 percent against the dollar, but China's trade surplus with the US kept rising. When the yuan was steady against the dollar from 2009, the trade surplus dropped 34 percent.
"The deficit has been vastly overestimated based on American statistics," and according to the latest report prepared by both sides, the US deficit for 2006 is "26 percent higher than it should have been," Chen said.
The scariest implication: China is quickly running out of dollars which it can then recycle into US Treasuries. This is surely the biggest nightmare scenario for Tim Geithner. While this explains the decline in indirect bidding, it also may go to refute the whole premise of China being behind the direct UK-based bidders is flawed. And if so, is it merely just the Federal Reserve doing all the buying in a covert fashion (via BlackRock or othewise) as some of the more conspiratorially-minded market followers have speculated?
Here is the most recent prophetic insight from Edwards, as of March 2, pertaining to this critical shift:
Clearly to the extent that the rise in China?'s official reserves depended on the size of its trade deficit, there will be reduced purchases of US Treasuries. But China has, in part, merely been swapping official dollar purchases of US Treasuries with surging imports of dollar-denominated commodities on the trade account (see chart below).