A brave new world of dwindling trade

The global bubble false economic growth based on vendor financed exports has popped.

Hints of this major change started to arrive lately from various sources, but it seems there is little effort to put them in a clear context. Asia's exports are falling across the spectrum:
http://www.ft.com/cms/s/0/e54ad35e-c544-11dd-b516-000077b07658.html

Taiwan’s exports last month fell by almost a quarter compared to a year ago, the sharpest drop since September 2001 and an indication of the accelerating downturn hitting export-oriented Asian economies.

The severe contraction in the island’s exports comes after South Korea reported last week that its November shipments dropped 18 per cent from the previous year.

Smaller mercantilist economies are also feeling the drop:

http://old.thejakartapost.com/detailbusiness.asp?fileid=20081222.(10&irec=9

As expected, the global economic recession has started to hit Indonesian exports. Exports in October dropped by 11 percent from September, reaching the lowest level since April this year. The year-on-year growth of non-oil exports was still a healthy 22 percent, but this is well below the 28 percent recorded in September.

And all indications point to continuing weakening of our exports in the coming months as the world economy worsens.

Exports to the United States and China fell in October, but it is only a matter of time until exports to other countries fall as well. According to the World Bank, world trade will shrink by 2.5 percent in 2009, the first contraction of its kind since 1982.

Japan is getting hit hard too, and Toyota is expecting the first annual loss in .... 71 years... :

http://news.bbc.co.uk/2/hi/business/7794888.stm

Japan's biggest carmaker Toyota has forecast its first annual loss in 71 years due to plummeting sales and a surge in the value of the yen.

The firm said it expected a loss of 150bn yen (£1.1bn) in yearly operating profits - from its core operations. [...]

Japan posted a trade deficit in November of $2.5bn (£1.7bn) as exports fell at a record rate. The rising yen saw export levels down 26.7% from a year earlier, the ministry of finance said.[...]

Honda last week cut its annual profit forecast by 67% and outlined a list of counter-measures such as putting off non-urgent investments to prop up its profitability[...]

Japanese exports fell sharply to all areas but those to the US were worst-hit, plunging 33.8% - also a record drop.

Shipments to the European Union were down 30.8% while those to China fell 24.5%, the biggest fall since 1995, said Reuters news agency.

Exports to the rest of Asia declined 26.7%.

Imports were also down - 14.4% overall - due in part to lower oil prices.

An interesting comparison between China and Germany. with respect to their trade surpluses. comes for one of the latest entries in "China Financial Markets" blog:
http://mpettis.com/2008/12/germany-is-fighting-with-europe-can-china-be-far-behind/

In light of the latest news.concerning the investment practices of Bernie Madoff, I think it's useful to identify another wide practiced flavor of Ponzi scheme: the export growth engine based on currency manipulation.

Things are quite simple. A country decides to subsidize exports by artificially depressing wages (through an artificially lowered currency) and the subsidies are provided by Foreign Direct Investment (FDI) inflows.

In any Ponzi scheme, the new investment inflows have to be larger than the dividends payed to the current investors, otherwise the whole scheme collapses at the first wave of withdrawals. Exactly the same happens with a currency manipulation scheme: the net capital flows (mostly FDI) have to be larger than the sum of subsidies for the export sector and the net trade surplus that has to be sterilized in order to maintain a currency peg. A clear sign that such a currency manipulation Ponzi scheme is "profitable" and able to attract new investors, is the continuous increase in foreign reserves (denominated in the pegged currency) which happens at a higher rate of increase than the export surplus.

The currency manipulation scheme has abnormal unhealthy effects on a national economy:
-artificially depresses internal consumption
-creates domestic asset bubble
-generates an oversized and unprofitable economic sector dependent on exports.

As in any Ponzi scheme, the moment the new investment inflows (FDI inflows, or currency speculative "hot money" capital, in China's case) becomes smaller that the amount required to pay the dividends of existing investors (profit margins of Chinese companies are dwindling) the whole scheme unravels.

This is why I'm surprised about a piece of news receiving very little attention from the commentators of global economic trends:

http://uk.reuters.com/article/marketsNewsUS/idUKPEK29524820081222

BEIJING, Dec 22 (Reuters) - China's foreign exchange reserves, the world's largest stockpile, shrank in October to less than $1.89 trillion, their first monthly fall since December 2003, a source familiar with the situation said on Monday.
[...]
The reserves stood at $1.906 trillion at the end of September, the last date for which official figures have been reported, meaning they fell by at least $16 billion during October.
The source, who wished not to be identified, declined to say whether the reserves continued to fall in November. The only other month since the start of 2000 during which the reserves fell was Dec. 2003.
[...]
China's trade surplus hit consecutive record highs in October and November, of $35.2 billion and $40.1 billion respectively, as the slowdown in import growth outpaced that of exports.
[...]
A fall in the reserves would mark a drastic contrast to their rapid accumulation over the past few years, as the People's Bank of China, in an effort to keep the yuan stable, has bought up many of the dollars coming into the country through the large trade surplus and inflows of foreign investment. The reserves rose by $280.6 billion in the first half of 2008 to $1.809 trillion. For all of 2007, they rose by $461.9 billion, compared with increases of $247.3 billion in 2006, $209 billion in 2005 and $207 billion in 2004.
In the third quarter of this year, the last period for which figures are available, they increased by less than the sum of the country's trade surplus and foreign direct investment inflows during that period -- a very rough benchmark for gauging whether the country has witnessed capital inflows or outflows.

Suddenly, another piece of news that got little attention, starts making a lot of sense. Back in September, there was a small notice about People’s Bank of China, looking embarrassed for a modest IMF loan (Main Bank of China Is in Need of Capital)

Maybe China got already its Madoff moment in October...