Record Trade Balance

Bloomberg notes China’s Record Trade Balance.

Key Trade Points

• The surplus was an unprecedented $992 billion in 2024. That was 21% higher than the previous year and was driven by record exports and weak imports.
• Exports rose almost 11% to $336 billion in December, the second-highest month on record and behind only December 2021, when Chinese firms saw a surge of pandemic-led demand. Outbound shipments for the whole of last year were worth $3.6 trillion.
• Imports rose 1% last month and 1.1% for the whole year.
• Despite shipping record amounts of goods, Chinese exporters have been getting less money for their products, with export prices falling for more than a year as deflation inside China worsens and pushes down the cost of goods.

China’s Not “Dumping” Treasuries

Nearly every month someone on X writes how China is dumping US treasuries and how that will punish the dollar.

The irony is that when China sells Treasuries it is specifically to prop up the yuan, not to punish the US.

I have commented on this numerous times. Here’s an article from Bloomberg stating the same thing.

China Boosts Yuan Support With Warning

Bloomberg reports China Boosts Yuan Support With Warning, Capital Control Tweaks

China has ramped up its support for the yuan with tweaks to its capital controls and a vow to crack down on market disruption, after the currency dropped close to a record low against the dollar in offshore trading.

The People’s Bank of China and other regulators pledged to strengthen their management of the foreign-exchange market, deal with any behavior that may disrupt the market and prevent the risk of a large move in the yuan. Beijing will make sure the currency is basically stable at reasonable levels, the central bank said in a statement.

Tight Grip

The escalation of the PBOC’s battle against yuan bears suggests China is not yet ready to let go of its tight grip on the currency, despite pressure from a yawning interest-rate discount to the US, looming tariff threats and a sluggish local economy.

PBOC governor Pan Gongsheng reiterated the goal of keeping the yuan at reasonable equilibrium levels in a speech at the Asian Financial Forum in Hong Kong.

“The yuan is fully capable of maintaining basic stability as fundamentals of an economic recovery in China will not change, while balance of international payments will remain overall balanced,” Pan said.

Basic Stability Nonsense Three Ways

• If the yuan was fully capable of basic stability then China would float the yuan.
• China would not have capital controls if he yuan could stand on its own.
• And China would not have to resort to selling US treasuries to stabilize the yuan.

Countless times every year we hear nonsense about a “nuclear threat” of China dumping treasuries.

And reports of huge drops in China’s treasury holding are also nonsense despite episodes of selling to stabilize the yuan.

China masks its holding of US Treasuries in State Owned Enterprises (SOEs) and other disguised overseas holdings. Official reports of China’s holdings are grossly inaccurate.

Tools to Manage the Yuan

Also consider Here Are the Tools That China Uses to Manage the Yuan

State-owned banks selling the dollar versus the yuan in spot trading is seen by market a type of shadow intervention, which occurs from time to time.

Since 2023, traders also observed large transactions from the lenders in the foreign-exchange swap market, another method which could prop up the yuan. The banks borrowed dollars via swap contracts which can be sold in the spot market to support the yuan.

Driving up the cost of betting against the yuan offshore was favored as a tactic when China wanted to curb declines during years including 2016, 2018, 2023 and possibly early this year. The key is to mop up liquidity so traders have to pay higher interest rates to borrow the yuan. That can be achieved by having agent banks buy the currency or decline to lend their supply to other banks.

Controlling the flow of funds in and out of the country is one of the bluntest instruments. China moved to limit outflows in the wake of the yuan’s devaluation in 2015 — imposing restrictions on everything from overseas takeovers by Chinese companies to consumers buying insurance policies in Hong Kong — and there has been little sign of a let-up. As the US Federal Reserve began to tighten monetary policy in 2022, Chinese state-owned companies were asked to exercise greater caution in new overseas spending and investment plans.

China’s foreign reserves are among the world’s largest at more than $3 trillion. Policy makers sold billions of dollars in the aftermath of the 2015 devaluation to support the yuan. While this can be a useful indicator, it is also influenced by broad gains in the dollar, which can lead to a drop in China’s reported reserves.

These declines aren’t necessarily a result of intervention, but rather because non-dollar assets in China’s stockpile will have depreciated against the dollar.

China Is Destroying Itself

By pursuing exports at all costs, China is destroying itself.

It only makes sense to add capacity only if the debt is productive and can be serviced. That is not the case now.

To the extent that China is subsidizing exports, it is at the expense of Chinese consumers and to the benefit of US consumers.

Very few people understand this.

For discussion, please see Years of Repeat Central Planning Mistakes Have Doomed China’s Economy

What I Said in 2011

All this talk about how undervalued the Yuan is, how China will rule the world, and why the Yuan will be the next global reserve currency is pure silliness.

China’s growth is nothing more than a credit bubble on steroids. Cities are vacant, yet China keeps building, and building and building.

China is in a debt deflation trap of its own making. Other than exports, no country wants to be like China.

For details, click on the above link.

So, What Country Wants to Be Like Germany Now?

Also consider my December 2024 blast at Germany So, What Country Wants to Be Like Germany Now?

The collapse of Germany shocks many. But I have been discussing why this was inevitable for over a decade.

Export mercantilism eventually blows up.

Germany and China are finding that out now. Yet, both want to double down on policies that caused the stress.

For what to do about this, please consider Trump’s New Tariff Advisor and Advice for Advisors

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