Friday, March 1, 2013

Dinner conversation and Ignorance

Last night when to a birthday party, sitting across the table from me was this youngish Chinese women.  Smart and well spoken, she speaks English, French, Mandarin and Cantonese!  slightly better than most Quebecers!

Anyway, this women was making the point, loudly in fact, that China's policy was the right one, to promote exports and restrict imports, the only problem in here mind was that China was accumulating too many dollars.

As an economist, and a dinner guest, how to do you reply to this idiotic statement.  Well, turns out it rather easy (hint:  after our conversation she gave e dirty looks and stopped talking to me -- which was actually a blessing).  Anyway, I told here that the accumulation of dollars (or US government debt -- the same thing) was a direct consequence of this policy of supporting exports surplus -- that by definition if your exports are greater than your imports you will accumulate dollars (that's what probably pissed here off the most).  She had not made the link between the two.

She came back with the statement that today China was importing more than it was exporter -- which is almost true.  China's overall export surplus has shrunk dramatically (even with the US), but that is less a result of a change in China -- Chinese can no longer compete on some manufacturing because of high transport costs -- but also because the Chinese are trying (on an individual basis) not to hold currency.  They buy raw material, for a number of reason (Store of wealth) but also as a borrowing device (its complicated), which makes Chinese look like bigger importers.  As an example the current stock of Copper in China is equal to several years of consumption: it is a store of wealth.

Anyway, she then asked me why then were export so important, and I then explained that it was a wonderful development tool for an emerging economy, and gave Japan as the perfect example (Korea would work too), but (and this is important), neither of these countries persisted with this strategy in such an aggressive way as China has, where consumption now is less then 30% of the economy, Vs investment which is 70% (the peak for Japan was around 45% to 50%).

The impact of all this, well she found me to be a jerk and a know-it-all!

Finally, and as an aside, Europe is nearly autarkic in terms of trade; virtually all trade is intra-european.  Today's Germany PMI was up (while France was down -- car sales are off more than 20% YoY), now Germany is feeling confident, but where are all its exports going -- to the rest of Europe that is! One morning Germany will wake up with problems -- if Europe's economy continues to crater


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