Trade Balance

The week begins with the China – US Strategic and Economic Dialogue (Monday and Tuesday), which will be held in Washington, DC, and will no doubt once again include discussion of the pace of appreciation of CNY against US$. The week also brings a slew of China data, including the trade balance, where consensus expects a small surplus (far below the historical average surplus), and CPI inflation for April, which we see at 5.1% yoy, slightly below consensus. The week ends with the US CPI, where we expect another unfriendly CPI report, with headline CPI rising by 0.39% mom in April, essentially in line with consensus.

So much for a surge in the deficit. In December the US imported more than it exported by $40.6 billion, in line with expectations of $40.5 and slightly more than last month's 38.3 billion. From the release: "For December, the trade deficit increased to $40.6 billion from $38.3 billion (revised) in November. Exports increased $2.8 billion from November to $163.0 billion in December. Goods were $116.6 billion in December, up from $113.7 billion in November, and services were $46.4 billion in December, virtually unchanged from November. Imports increased $5.1 billion from November to $203.5 billion in December. Goods were $170.1 billion in December, up from $165.0 billion in November, and services were $33.4 billion in December, virtually unchanged from November." Curiously, ex-oil, the trade gap dropped to $15.3 billion, the lowest since March.

The trade balance, jobless claims, and the Fed’s balance sheet….

As every kitchen sink appears to have a definitive opinion on the impact on the CNY rebalance, we would like to step back for a second and present a historical chart of the country's trade balances not only in total, but by individual country. As the chart shows, and as David Rosenberg also highlights, providing a blanket summary as to the impact of a CNY revaluation is a rather foolhardy thing: while China may enjoy a positive trade surplus with the US and EU, it certainly has a trade deficit with some other key producer countries, namely Korea ($61 billion LTM), Japan ($47 billion), Taiwan ($79 billion), and Australia ($27 billion). So while it could be argued that the US and EU's manufacturing sectors benefit from a stronger Yuan, what happens to the exports of the traditional Chinese partners? Absent the PBoC going full tilt and scaling up its imports across the board, there will be some very unhappy traditional Chinese trade counterparts. Although in this age, when even presumably smart economists beckon to "Spend now, save tomorrow", why bother with something as simple as the Capital to Current account equality. China should buy up everything, and use reverse money or something to then reinvest the reverse proceeds from all the exports into sovereign bonds... or something.

Today Bloomberg picks up where we left off yesterday, and in its "chart of the day" analyzes the underpinnings of Albert Edwards' assumption that not only will the Renminbi not increase in value, as so many battered manufacturers in the US hope and pray (and complain to Congress every day), but will in fact be further devalued once China realizes the only way to avoid America's fate down the financial rabbit hole is to unpeg, but in the opposite direction from where Geithner would like. The causal factor: a collapsing trade balance which drags China's forex reserves, resulting in a major shift in international capital flows.

Too bad America can't be more like China and just determine what the GDP for any given period should be. Of course, it merely needs to become a fully vetted and Comintern recognized communist country (no more of this half-asses sutff) and then it could easily proceed to fully manipulate any and all data releases (even more effectively than it does now). Until then, things are tricky. Like today for example, with the trade numbers coming out and painting an ugly picture for not just import prices but for the "blockbuster" Q3 GDP. Maybe Goldman was wrong in their first GDP estimate. Something tells us Jan Hatzius will be much more correct in his downward GDP revision this time (to 3% from 3.5%), when the next estimate of Q3 GDP comes out, substantially lower than previously thought.

In essence what is going on, is that the brief pick up in German and US GDPs on the trade balance side, are being facilitated exclusively by the credit bubble in China. By dint of China being able to recognize GDP at production instead of expenditures (like normal Western countries), China is now trying to back fill into the trade void left from the collapse of Western economies by promoting the same kind of irresponsible lending (and borrowing) that lead the US economy to its current sorry state. This will eventually end very, very badly.