The bull in China’s shop may just be trade

Observers attribute the recent sea changes in international investment by the Chinese to politics. Thus Beijing pursues the Belt and Road initiative in Central Asia to supplant Moscow as the region’s prime influence. And it finances fewer factories in the United States than before because of the hostility towards it of Donald Trump’s administration. The New York Times writes, “Growing distrust between the United States and China has slowed the once steady flow of Chinese cash into America, with Chinese investment plummeting by nearly 90 percent since President Trump took office.”

In reality, the new patterns in investment may simply result in part from trade. If the Chinese accumulate tenge because they sell more goods to Kazakhstan than they buy from it, then they’ll invest them here, since tenge have no value elsewhere. The Belt and Road initiative may stem partly from China’s trade surplus with Central Asia, when it is widening. (Direct investment by China in Kazakhstan, net of investment bv Kazakhstan in China, rose $157 million in the first quarter of this year, according to the National Bank of Kazakhstan.) And the decline in its investment in America (relative to United States investment in China) may come about because Beijing’s trade surplus with the US is narrowed by Trump’s tariffs. For January through May 2019, China’s surplus in trading goods with the US had fallen to $137 billion, a tenth below the $152 billion for the same period in 2018, according to the US Census Bureau.

Macro matb

A bit of math may clear matters up. Consider two simple verities. First, we can do one of three things with our income: Spend it, save it, or pay taxes with it:

Y = C + S +T

where Y is income, C is consumption, S is savings, and T is taxes.

Second, we earn our income by selling to one of four sources:  Households (which buy consumer goods), firms (which buy investment goods like lathing machines), the government, or foreigners:

Y = C + I + G + X – M

where I is real investment (that is, investment in physical capital, not in financial capital like stocks), G is government spending on goods and services like jet fighters, X is exports, and M is imports. The trade surplus―the amount that we sell to foreigners, minus the amount that we buy from them―is exports minus imports, or X – M.

We have two expressions for Y, so equate them:

C + S + T = C + I + G + X - M.

Eliminate the common factor C and rearrange:

S – I = (G – T) + (X – M).

Finally, for simplicity, suppose that the government balances its budget. That is, the amount that it spends (G) just equals the amount that it collects (T). Then G - T = 0, and we get

S – I = X – M.

The left-hand side is the savings surplus―the amount that we save but don’t lend out to firms at home. The right-hand side is the trade surplus. The equation implies that the amount of money that we net in trade (exports minus imports) must be lent to foreigners because domestic firms don’t want it (domestic savings alone already exceed domestic investment).

Now consider this equation from China’s point of view. It long racked up a trade surplus with the US, piling up dollars that it could invest only in America. Suddenly, the Trumpists tax exports from China. Beijing’s trade surplus with the US, X – M, falls. That implies a shrinkage in the trade “profit” that China can invest in the US. In other words, the fall in Chinese investment in the US is not necessarily political retaliation. It may partly result from the fact that the Chinese have fewer dollars now to invest in the Rust Belt of the American Midwest.

By the same token, when China’s trade surplus with Kazakhstan expands, it accumulates tenge that it can invest only here―say, by building an east-west highway. This investment is not necessarily an attempt to dominate Kazakhstan politically.

One last point. The New York Times writes that “Mr. Trump’s penchant for imposing punishing tariffs on Chinese goods...(has) scared businesses in both countries.” Were potential tariffs the problem, Chinese investors could avoid them by constructing plants in the US to sell to Americans directly. Chinese foreign direct investment in the US would rise. The more likely problem is that the tariffs already in effect have cut the number of dollars that the Chinese can earn and subsequently invest in America.―Leon Taylor tayloralmaty@gmail.com

References

Alan Rappeport. Chinese money in the U.S. dries up as trade war drags on. The New York Times. July 21, 2019.