1/10 SCMP: "Kenya has reached a preliminary trade deal with China for duty-free exports of key products including coffee, tea and cut flowers – a major step towards narrowing the East African nation’s long-standing trade gap with Beijing." via @scmpnewssc.mp/gg0zg?utm_sour… **

2/10 This kind of incrementalist thinking is one of the reasons why global trade is so unbalanced and so poorly understood. China does not run a trade surplus with Kenya because of tariffs on coffee, tea and cut flowers. **

3/10 It runs a massive trade surplus with the world because of equally-massive domestic imbalances. Reducing tariffs on Kenyan coffee, tea and cut flowers will have almost no effect at all on China’s domestic imbalances, and so no affect on China’s need for a trade surplus. **

4/10 So how will this affect Kenya’s historic trade deficit?

It won’t. The deficit will be the same as always. Trade does not adjust incrementally. It can only adjust systemically. This trade agreement might shift exports and imports around a bit, but it won’t do more than that. **

5/10 But does it matter if Kenya runs a deficit?

Not at all. What matters is whether that deficit is balanced by higher Kenyan investment or by higher Kenyan consumption. This, in turn, is likely to depend on Kenya’s openness to capital flows and on the nature of these flows. **

6/10 If it is the former, Kenya’s deficit will generate the growth needed to service the foreign investment that is financing the deficit. If the latter, Kenya will only be able to service foreign investment by squeezing future consumption, i.e. squeezing the workers. **

7/10 If I were advising the Kenyan government, I’d argue that the issue isn’t whether deficits, or trade with China, are good or bad. The issue is what kind of economy do Kenyans want to have. **

8/10 Because Kenya has a relatively open capital account, the risk is that foreign trade, especially trade with countries that exert control over their external accounts, will drive Kenya’s external imbalances which, in turn, will determine Kenya’s internal imbalances. **

9/10 In a world in which many major economies exert significant control over their external accounts, those that don’t must end up adjusting in ways that are needed to accommodate the trade and industrial policies of those that do. **

10/10 Free trade (which requires free capital flows) only enhances growth across the board when all major economies practice it. If many major economies don’t, it is in Kenya’s best interests not to allow its economy to become part of their adjustment process. **

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More from @michaelxpettis

Jan 15

1/4 Aggregate financing in China, the most widely-used proxy for total debt, ended 2025 at RMB 442.12 trillion, an 8.3% increase over last year’s outstanding amount. This is a relatively small increase in total debt compared to earlier years. english.news.cn/20260115/3e5af…

2/4 But of course nominal GDP growth is also much lower, so the RMB 35.6 trillion increase in aggregate financing in 2025 represents a 12 percentage-point increase in China’s debt-to-GDP ratio. This is higher than the 11 percentage-point increases in 2024 and 2023.

3/4 China’s debt data isn’t always comparable over time, but I think only the COVID year of 2020 saw a higher increase in China’s debt-to-GDP ratio, and because this was partially reversed in 2021, the average annual increase over the two years was only ten percentage points.

Read 4 tweets

Jan 9

1/5 NYT: "The U.S. trade deficit in goods and services shrank to $29.4 billion in October, down from $48.1 billion the prior month. The figure was the lowest monthly trade deficit recorded since June 2009." nytimes.com/2026/01/08/bus…

2/5 If this persists, it may be the most important factor for those thinking about what is likely to happen in 2026. In a three-month period during which the Chinese trade surplus has surged, the US trade deficit has declined.

3/5 Simple arithmetic tells us that the difference must be reflected in the trade balances of other countries. Some of this will have showed up initially as rising trade deficits among developing countries, but this will ultimately be limited by their abilities to finance them.

Read 5 tweets

Jan 9

1/8 Very interesting CNA article on Beijing’s strategic pivot towards upgrading the quality of China’s existing housing stock. It turns out that much of its housing stock, including much that was built in recent years, is of unacceptable quality. channelnewsasia.com/east-asia/chin…

2/8 CNA: "“This strategic pivot to ‘good housing’ is fundamentally about rebalancing the economy – shifting from speculative inventory to quality living,” Lin Han-Shen, China country director at The Asia Group, told CNA. “Restoring household confidence is central".

3/8 The article also cites the Conference Board’s Zhang Yuhan who warned that "the shift towards higher-quality housing is “likely to support confidence gradually”, but cautioned it does not resolve oversupply or developer liquidity pressures on its own."

Read 8 tweets

Jan 7

1/6 People often say that the problem with the global trading system is mainland China, but that’s not true. Taiwan, Germany, Japan, South Korea, Switzerland, Singapore and many others have run similar positions. The problem is with the global trading system itself.

https://twitter.com/Brad_Setser/status/2008604975992283284

2/6 As long as countries like the US (and the EU soon?) continue to accommodate global saving imbalances, our current trading system allows for a kind of Kalecki paradox in which individual economies can be rewarded for behavior that undermines growth in the system as a whole.

3/6 Keynes explained this in 1944: economies that repress domestic demand in order to subsidize their manufacturing reduce overall global demand, but are able nonetheless to grow more quickly by taking a larger share of other countries’ demand.

Read 6 tweets

Jan 6

1/14 Unfortunately I don’t subscribe to Krugman’s substack, so I cannot comment on the whole article, but I can say that the first few paragraphs lay out the issue very accurately and with commendable simplicity. He certainly understands the main issues. open.substack.com/pub/paulkrugma…

2/14 He notes: "In the past, China achieved stunning economic growth in part through a combination of very high savings and very high investment. Its savings remain very high, but investment in China is running into diminishing returns in the face of slowing technological...

3/14 progress and a shrinking working-age population. Yet the Chinese government keeps failing to take effective steps to reduce savings and increase consumer demand. Instead, China is in effect exporting its excess savings via its massive trade surplus. It is using consumer...

Read 13 tweets

Jan 3

1/11 Philip Coggan: "It is a mug’s game trying to predict the end of a boom with any precision. They last much longer than anyone might reasonably expect. That is true of bull markets, as well as economic advances. The reason is that markets and... ft.com/content/2ae4ac…

2/11 economies find ways to support themselves. George Soros, the well-known investor and philanthropist, has a term for it: reflexivity."

Coggan then explains that reflexivity is Soros’ name for positive feedback loops embedded in economies and financial systems.

3/11 This is a very important concept that too few economists recognize and embed in their analyses, although most traders and investors understand it intuitively.

The point that Hyman Minsky would have added is that positive feedback loops are nothing mysterious.

Read 11 tweets