China Research

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Kinas lätt stigande valutareserv saknar ekonomisk relevans

Sammanfattning på svenska / Summary in Swedish                                

Kinas i maj lätt stigande valutareserv fick nyligen överdriven uppmärksamhet i en del analyser. Bytesbalansen är viktigare.

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In the middle of June, one could read that China’s currency reserves “surprisingly” had risen from billion USD 3095 billion in April this year to USD 3101 billion one month later – compared to market expectations at 3090 billion.

What caught my attention was not so much this little rise as such but the used description of “surprisingly” – and also the still ongoing publication of market expectations. Hereby, a feeling may be given to readers and appliers of this statistical indicator that forex reserves can be predicted with good accuracy.

However, this is by no means continuously the case. First, USD 5 or 11 billion is a very small amount related to more than 3000 billion of total currency reserves. Second, most central banks easily have the opportunity to influence their forex reserves in the shorter run by so-called forward agreements – an instrument which the Swedish Riksbank applied, for example, quite ambitiously some thirty years ago when the Swedish crown was burdened by both high deficits in public budget deficits and in the current account.

Consequently, the recent limited rise of China’s currency reserves does not necessarily reflect free market developments. Markets are usually neither informed on this issue by a central bank nor on the composition of the currency reserve. More interesting, however, is the fact that China lost close to USD 1000 billion of its currency reserves in the past five years, partly reflecting the strongly shrinking or even more or less eliminated surplus in the current account.

Unfortunately, financial markets still neglect the analysis of China’s current account. This may even turn out to be a malign neglect at some point in the future (see also my article on this issue in: chinaresearch.se from May 15 this year).

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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Kina och USA: Handelskriget kräver också psykologisk analys

Sammanfattning på svenska

Som det skrivits tidigare på denna bloggsida, leder traditionell västerländsk analysteknik mestadels ej till riktiga slutsatser avseende det pågående handelskriget – speciellt inte för finansmarknader. Väldigt mycket i den växande protektionismen handlar om psykologi, både på USA:s och på Kinas sida.

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The ongoing trade war between the United States and China has been widened further only recently. Also Mexico was included in American trade protectionism only a few days ago.

Protectionism is not a new phenomenon. It showed up historically in politically and/or bad economic times. The main objective of protectionist measures used to be the support to less competitive industries at home.

The American president still uses this historical explanation of protectionism. But he has also widened this historical application by adding political and immigration issues to the list. China and Mexico are hit in this specific case.

In recent months, I was persistently doubtful about president Trump’s suggested progress during negotiations with China and North Korea – particularly due to his frequently exaggerating and changing attitudes. Trump functions  simply this way and will most probably do so in the future.

Economists are no psychologists and have, of course, no professional skills to analyze people’s behavior more deeply. But we should understand that neither Trump nor the Chinese apply traditional Western ways of thinking. This fact make them different in analytical terms.

Trump lives in a world with five foreign main opponents: China, Iran, Mexican immigrants, German/EU non-American car buyers and mostly – but not always – North Korea. Fundamentally, the current American president regards China and Mexico as the outstanding challenges: China because it may threaten the American global supremacy and Mexico because of its refugees and emigrants still coming to the U.S. Also in this latter context, Trump shows no empathy.

The currently relevant psychology of the Chinese is different from the American. The Chinese do not want to be treated as second after “America first”. The Chinese want to be respected and be regarded as equal partners – partners who also would compromise themselves quite a bit in difficult trade issues. The key words for the Chinese are doubtless “respect by the Americans”. This has indeed a lot to do with psychology.

The French economist Frederik Bastiat wrote roughly 200 years ago: “When goods do not pass borders, soldiers will”.

Nowadays soldiers are not relevant in this context anymore – but certainly trade barriers. Four months ago, previous Fed chairwoman Janet Yellen seriously questioned Trump’s skills in macroeconomics and economic policy. We are still waiting for Trump to prove the opposite.

Altogether: This shortcoming and peculiar psychological conditions will make it extremely difficult also in the future to comment on potential negotiation progress between the U.S. and China.

President Trump is certainly by action  neglecting all harmonizing research in foreign trade. Professor Greg Mankiw, for example, writes on this issue: “Economists are famous for disagreeing with one another…But economists reach near unanimity on some topics, including international trade…”

We learn from this analysis that the U.S. currently applies trade policy in a non-conventional way. Therefore, psychological aspects gain currently momentum in Trump’s trade protectionism.

Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University Editorial board   Back to Start Page