Legal Realism Meets Its Limits...
Apple Blew Out iPhone Estimates

China's Growing Export Surplus

Brad Setser:

RGE - The World Banks shows just how a large a policy shift Martin Wolf (and Nick Lardy) are proposing for China: The World Bank estimates that net exports contributed 3.3 percentage points to China’s growth in q1, “broadly the same as in the second half of 2006 and higher than expected.”  And from the accompanying figure (Figure 1), it sure seems like net exports contribution to growth is going up over time – not down.    

I don’t know, but just maybe the RMB is undervalued in real terms?  Big current account surplus.   Large and growing contribution from net exports to growth.  Merchandise exports up 30% y/y in the first four months of the year.  Strong growth in Chinese exports to Europe (I don't need to mention that the RMB hasn't been stable against the euro over time), very rapid reserve growth.... That is why Martin Wolf’s eminently reasonable policy suggestions imply a very large change in Chinese policy.   Right now, Chinese policy tends to restrain domestic demand growth to keep the economy from overheating while net exports contribute heavily to growth.   

Wolf – echoing Nick Lardy – thinks China should stimulate domestic demand to offset the potential drag on growth from a stronger RMB. Wolf’s policy course makes sense to me. I increasingly suspect that China’s ability to hide the long-term costs associated with using the balance sheet of its central bank to provide a de facto subsidy to its export sector contributes to China’s ability to sustain its current policy regime.  The benefits are visible (strong contributions from exports to growth, strong export growth, limited pressure on the least efficient tradables sectors because of the protection offered by an undervalued exchange-rate) and front-loaded, the costs are hidden and back-loaded. But I still suspect that China is likely to respond to signs that the economy is over-heating – whether rising share prices or rising food prices – by taking administrative steps to try to curb lending, not by allowing much more RMB appreciation. That effectively means more of the same, not something new...