Adam Wolfe

China corporate profits set for third year of declines Oversupply drives intense competition that is undermining prices and profitability

Probably would have been worth mentioning somewhere in this article that the "corporate profits" series that they're talking about only covers the industrial sector, not the whole economy .... www.ft.com/content/58a3...

China’s economy is in for another rough year Bold action is needed to turn things around

China is in for a rough year, but its fiscal policy has already become more stimulative than most seem to think. As I note in this Economist article, moving the restructuring of local debts outside of the fiscal perimeter has freed up CNY1.2tn for supporting domestic demand next year,

Trump China Tariff Plan Has $64 Billion Hole in Missing Imports President-elect Donald Trump has promised to impose 10% tariffs on all imports from China as soon as he takes office next month.

Thanks, @jdmayger.bsky.social, for the quote in this Bloomberg article on tariff avoidance in the US. I estimate US Customs missed upwards of $160 billion of imports from China last year in their trade data... www.bloomberg.com/news/article...

Regardless of how the tariffs are being avoided, the main point is that higher tariffs did not result in the US de-coupling from China in any significant way. Another round of higher tariffs is likely to lead to more tariff avoidance, not de-coupling.

How might US importers be avoiding tariffs? The de minimis exemption for imports valued at less than $800 is often flagged as the main loophole. But China’s Customs says the total value of those exports to the US was $18 billion in 2023.

For 2023, that would mean that around $160 billion of imports from China did not get recorded by US Customs.

That suggests the US’s imports from China are understated by 20-25% due to tariff avoidance. If so, China’s share of US imports only fell from 21% in 2017 to about 17% over the past year, not the 14% share officially recorded.

To see where that error lies, I mapped the US and Chinese data to the US’s Section 301 tariffs by HS code. Both countries reported a rise in US demand for Chinese goods not subject to the tariffs. But the US recorded fewer imports of the tariffed goods, while China said its exports were flat.

Bilateral trade data are tricky buggers, and China's VAT rebate rate also increased during the trade war. But China’s exports to the rest of the world (ex-US) still match pretty closely with what the rest of the world reports receiving from China. The error term seems to be on the US side.

Before 2018, the US recorded imports from China worth 15-20% more than China reported sending to the US. Starting in 2018, the gap reversed.

Did higher US tariffs cause upwards of $160 billion of Chinese imports to go missing from the US Customs data last year?

Probably, yes.

www.linkedin.com/pulse/how-us...

How China Became the World’s Largest Car Exporter Tariffs from the United States and other countries are unlikely to stop China’s auto export dominance.

It's good to see a major news organisation highlighting that China became the leading exporter of cars not by selling EVs but rather by reorienting a small portion of its now unneeded ICE production capacity to foreign markets. I've been banging on about this for years, to little effect.

So while China may have some of the symptoms of “Japanification” its economic disease could cured on a sustainable basis through measures to bolster household confidence.

The government’s power to achieve that was limited. The best it could do was to increase its borrowing to soak up the household financial balance. But it waited too long to do that.

In contrast, Japan’s corporate sector couldn’t stop deleveraging until they restored solvency. That would have required the asset bubble re-inflating or a huge increase in sales/profitability.

But a more optimal solution would see some combination of household gross savings rates declining, housing sales rebounding, and government borrowing increasing. This all seems do-able and arguably has been under way since September.

And with less money chasing more goods/services, prices are declining. That’s starting to hit household incomes, too. Which would be one way to resolve the problem – higher unemployment would mean less savings.

So a large share of the household financial surplus is getting stuck in the domestic financial system. Which means that money is not circulating through the economy in the same way it used to.

The government has been unwilling to increase its net borrowing to absorb the rise in the household sector’s financial balance. And the rest of the world is pushing back too, since absorbing more savings from China would mean ever larger trade deficits.

There has been a large increase in borrowing from the manufacturing sector (the flipside of the government’s plan to shrink the real estate sector) but even that has started slow as returns on assets start to fall.

But the corporate sector isn’t able to absorb that level of savings. Property developers have been deleveraging since 2021. Local government financing vehicles started deleveraging last year.

However, the decline in housing sales means that more than 2/3 of household gross savings now has to be intermediated by the financial system into another sector’s investment or consumption.

The money saved and borrowed by households is converted into a demand deposit for the developer, which then gets paid to a contractor or employee, and it circulates through the economy through the normal channels.

Nearly all household investment is really real estate purchases. So mortgages to fund those purchases absorb some savings from other households, and then those savings are used for an economic transaction.

The flow of funds data can explain this, too. China’s gross household savings rate has held fairly steady as a percent of GDP. But household investment used to absorb 2/3 of the savings, and now it’s soaking less than 1/3.

But that’s not what’s happening in China. Corporate deleveraging kicked off Japan’s deflationary slump. Instead, in China, the problem has been a rise in the net financial surplus of households, as seen in the flow of funds here.

This was the classic “balance-sheet recession,” as explained by Richard Koo, which we can see in the net financial balances of the main economic sectors. When companies starting paying back debt, there was nobody left to absorb household financial savings.

Companies began to prioritise paying down their debts, and the corporate sector moved into financial surplus. With no borrowers available to absorb the excess savings of households and businesses, aggregate demand began to decline.

But much of that corporate borrowing went toward bidding up the value of existing assets. So when the Bank of Japan hiked interest rates in 1989, asset prices declined, and corporate balance sheets slipped underwater.

This was done in a pass-the-parcel manner, with the borrowing burden passing first from the government to the external sector and then to the corporate sector near the end of the decade.