Nobody forced china to hold its currency down.i dont think
anybody can force china to revalue its currency. But given
the size of chinese economy having moved into a middle income
country it is in the best interest of china to revalue the
currency. all the productive capacity is moving to china.this
is creating misallocation of capital creating overinvestment
leading to lack of demand in the future( eg. china produces
half of 2 billion phones, most mp3 players etc,sooner car
capacity). this will lead to unemployment of differnt sort
contrary to the objectives of CPC. Hope china revalue now or
enter a severe deflationary depression

the yen certainly stands out doesn’t it…

What I find somewhat amusing is that when the RMB depegged from the dollar the PBC said that they were pegging against a currency basket. It looks like that there really *is* a currency basket.

Well Paulson gave China an ultimatum to appreciate NOW, just a few days ago. How soon do you think they will follow his “orders”?

PS Does Paulson have any credibility left?

i have done us and chinese exports to the EU v Euro/$ and rmb/ euro … as the $ fell, us exports (in $ terms) to europe rose significantly. overall us export growth also picked up when $ fell v euro, consistent with the idea that us and european producers compete in many third party markets.

and yes, the yen does stand out. though I would argue the yuan stands out more once you take into account the extent of China’s growth — whether in productive capacity, productivity or real GDP. Japan lags the world in cumulative real GDP growth since 2000, china leads.

i think the data basically shows that the weak $/ rmb is boosting both us and chinese exports, but boosting chinese exports more than us exports. the result is a stable us current account deficit (for now, with a sluggish us leading to a slowdown in import growth) and a rising chinese surplus, so a falling chiamerican overall deficit ..

i still think not everyone has adjusted to the size of china. consider this -

henry ford tried to make a car, the model T, that was cheap enough for the workers who built it to afford one. that is a very good principle. you can only enlarge profits for investors at the expense of the wage earners up to a certain point. after that sales of the motor car start to dry up.

the chinese could become the world’s largest economy but still be only less than a quarter of the way to being the world’s richest people per capita.

china is on course, using the hypothetical example above, for a never never land where collectively the chinese can buy out henry ford, (if allowed), but individually cannot afford the model T. meanwhile the ford workers in america would be unemployed and unable to afford to trade in the car this year, either.

intuitively, i don’t think it makes sense. dave chiang, henry liu, and bernanke can print and helicopter all the greenbacks they like – but the real world will assert itself at some point. a weakening minority of western consumers cannot support a strengthening majority of asian producers, even low cost producers. i think the whole game tends towards a crisis of overproduction, and a decline of consumption, leading to deflation.

the sino-american dance is a little like the struggle of the west german economy to digest the east german economy after reunification. the brilliant investment opportunities for the stronger party, the west germans, came with side effects. it took years to get back to normal. severe indigestion . . .

compare the sizes and economic disparities of e and w germany. now compare the size and the disparity of china. you think that the global economy can admit china without massive distortion ? i do not pretend to know. but intuitively i feel that the deal – ‘we print the dollars, you make stuff to earn them and we keep the profits’ has a downside. the downside is not the danger of china suddenly collapsing the dollar, but bit by bit coming to own chunks of the very economies and companies that make the profits. the fiat boomerang catch 22.

i may sound critical of united states policy, but if the euro were to succeed as a globally preferred reserve currency – while remaining a fiat currency – i don’t think the position would be any different. the power to issue fiat reserve currency is some kind of ‘moral hazard.’

meanwhile iran tries to upset the applecart by selling oil for yen. that would put the skids under the carry trade. o k forget ‘applecart’ let’s say ‘currencybaskets.’

Brad — I understand you. But as I understood, your main point in this post was that the yuan is not appreciating against currencies other than the USD. If the USD appreciated against the other currencies, then so did the yuan. And we will have something like 5%/year yuan appreciation against the USD for years to come, I think. So, an USD appreciation would lead to a yuan, which is appreciating against everything. This could happen if the US could put its economy and financials in order. Do you think that the only way to achieve that is a yuan appreciation? If that is so, then the US is in a really big trouble, since its fate is in someone else’s hands.

“bottom line — with its big current account surplus, china shouldn’t be managing its exchange rate against the currency of a country with a big deficit.”

Based on your post, is 40%EUR/40%USD/20%JPY a good basket to peg to? If not, what would you change?

“ The downside is not the danger of china suddenly collapsing the dollar, but bit by bit coming to own chunks of the very economies and companies that make the profits “

That’s exactly what’s happening – methodical diversification into other currencies, methodical diversification of US assets from debt to equity, and steady flow of wealth (assets) from US ownership to China ownership.

“Can you explain to me what you meant by that? How does pollution, lead paint, and contamination have to do with return on capital investment?”

if the concept of ‘negative externality’ needs to be explained to the chinese gov’t, we’re all doomed…

Guest on 2007-08-03 17:32:44:

“if the concept of ‘negative externality’ needs to be explained to the chinese gov’t, we’re all doomed…”

How would you suggest Chinese government deal with the negative externalities of pollution, lead paint and contaminated products?

i generally like the chinn et al paper, and much prefer how they framed their findings on the rmb (substantially undervalued, but doesn’t quite meet the test for statistical significance) this time around compared to the way they framed the issue the last time around (when their title suggested that the rmb was not undervalued, even tho the data points showed it well below where one would expect). their finding that exports respond to real moves in the rmb makes sense to me — and seems consistent with my read of the recent data (i.e. RMB real depreciation from 02 on leads to an acceleration in chinese export growth)

Bottom line, any revaluation of the yuan will never be enough to satisfy the demands of the Washington Consensus. The almost 10% revaluation of the Chinese yuan versus the US dollar over the past two years is significant by almost any objective measure. It’s not China’s fault that the US massively misallocates capital on McMansions and stupid wars in the Middle East; public infrastructure and investment in human capital is seriously neglected. The Chinese leadership should pander less to Washington and foremost concentrate on the rural development of China’s economy where the bulk of the population lives today. When the inevitable collapse of the US dollar reserve currency occurs, then China will have a large enough domestic consumer market to support economic growth of the Asian regional economy without the requirement for significant exports to the United States. For the trillions of dollars of consumer products representing “real economic wealth” exported to the United States, what has the Chinese government received but several trillion dollars of fiat paper money printed in unlimited quantities by the Federal Reserve.

DC: It’s not China’s fault that the US massively misallocates capital on McMansions and stupid wars in the Middle East;

The real estate bubble in the US is nowhere as bad as the bubble in some urban areas in China. And regardless of what one may think of US intervention in Iraq, the fact remains that it is the US military that keeps the oil from Saudi Arabia going to China.

Also we are all in the same boat. I don’t think one needs to spend too much time arguing whose “fault” things are, since that just produces finger-pointing that makes it harder to *fix the damn problem*. Developing the rural Chinese market is going to take *decades*. In the meantime, there is no reason to be overly confrontational against the United States since the US could make China’s rise either easier or more difficult.

About Chinn’s paper. One thing that seems to be missing is looking at the relative value of capital assets. The other thing is that it is far from clear what is the proper metric to use to determine the correct value of the RMB. If you look at asset prices, the RMB can be argued to be overvalued not undervalued, and appreciating the RMB is going to make that overvaluations worse.

My own thinking right now is that current reserve acculumation by China is unsustainable for more than three to five years, and the key limit is the ability of the PBC to invest currency reserves But a system in which China runs a persistent trade deficit and in which this money is recycled into foreign capital investment by non-state actors can last a lot longer.

DC: For the trillions of dollars of consumer products representing “real economic wealth” exported to the United States, what has the Chinese government received but several trillion dollars of fiat paper money printed in unlimited quantities by the Federal Reserve.

Well, it’s getting the US State Department telling the President of Taiwan that a referendum on joining the UN is a really bad idea, and that he is welcome to visit the nice city of Anchorage, Alaksa rather than Washington DC. It’s making it extremely unlikely that the US is going to spend more money on its navy than its army. It’s got a whole bunch of farmers and bankers strongly opposed to any effort to destabilize Beijing or press the Chinese government too hard to change politically.

(If anyone has seen Monty Python, I’m reminded of the “What have the Romans done for us?” scene)

If you want to be rich and powerful, your life is a lot easier if you make yourself useful to people and countries which are already rich and powerful rather than to try to work against them.

Brad — I wonder what kind of a yuan appreciation you prefer. An ordered (a few percents/year) appreciation against a basket of currencies, or a sharp and substantial (40-50-?%) appreciation immediately? If you think that the latter would be desirable (from your writings, I think you do), then don’t you think that such a move could ignite an immediate stock market crash and bond market turmoil in the US? This could hurt the US more than China.

I agree with AC that RMB will appreciate more (against other currencies) if USD strengthens. EUR is very overvalued vs USD on a PPP basis. Why should China link to EUR? Among major currencies USD seems to be the cheapest on a PPP basis.

T N says what I was trying to say but better –

I have no idea what the US share of the value-added of US exports is — i would assume it is high, but it clearly is not 100%. the most valuable bit of a Boeing is typically american (the engine), but a lot of other parts are not — especially for the 787.

as for the import share of US consumption – consumption is roughly 70% of GDP. Imports are around 17% of GDP, but some of those imports are capital goods (tied to investment) or imported components (for the 11% of GDP the US exports). Let’s say around 12% are consumption goods (counting imported oil as a consumption good) — the real number is calculatable if you go to the BEA web page and spend some time doing the work. that implies imports account for about 1/5 of US consumption. they obviously account for a larger share of US goods consumption than US service consumption — my guess is that the import share of goods consumption in the US could be as high as 50%, but that is a pure guess. if anyone knows, do tell. it almost certainly is higher than a third.

Re: Saudi. The point I was making is that the US army helps to keep the Saudi regime in power and the US navy helps keep oil flowing from Saudi Arabia to China. Financing said army and navy seems to be a good way of keeping those things from being used against you.

Also, one reason that Western oil companies have left the Sudan and other political disasters is that you just don’t make that much money in those areas. Chinese oil companies are discovering this too. If you really want to drill in those areas without having human rights groups screaming at you, there are all sorts of ways that you can do that, and the reason Western companies have avoided those areas has as much to do with $$$$ than with bad PR.

‘ecoshift’: as the unvalued member of this community who posted the Sesit excerpt and link, and as some ‘guessing’ seems to be allowed on this topic, for what it’s worth, my first response was that you may have been inferring Brad’s interpretation ended a bit too soon. If it may read something like: “…no economic activity in the US other than collecting, [and recycling by: 'spending' - at least in part through the portion of the firm's profits which presumably are allocated to healthcare benefits and wages paid to 'local workers' - both NR's and citizens - employed in the HQ, along with locally outsourced entrepreneurs and professional services providers, who in turn, spend and invest the money on a huge range of products and services which also create and develop markets for tradables and 'non-tradables' - and remittance flows) and reinvesting; in the firm's expansion through research, design, education, technology upgrades, advertising and marketing... and in the expansion of US financial products and services facilitated by the firm's growth and profitability, presumably part of which also filters into the multi-trillion dollar U.S. pension fund industry, tax-deductible contributions to the philanthropy and endowment industry, and at least some taxes paid to a government which presumably shares an interest in the firm's capacity to grow from] the profits sent back by the chinese factory…”

Whether some part of these flows may also facilitate job creation in the private and semi-private sector US economist industry, given its obsession with this topic. That being said, a bit frustrating, perhaps to them too, that they can’t come up with something “I have no idea what the US share of the value-added of US exports” when that seems to be such an important part of the equation.

‘Twofish’: I can’t speak for the other guests, but on the negative externalities question, and looking at today’s headlines, that the worry may be the extent to which (hidden) negative externalities extend beyond China’s borders, and what appears to be China’s lack of concern about its own responsibility in dealing with those issues.

2a) It would make US financial assets even cheaper than they currently are, leading to pressure for massive Chinese purchases of US assets.

I don’t think 3) will turn out to be that important, since:

1) the cost difference between US and China won’t disappear for most manufactured goods if we are talking about a revaluation within tens of percents, and

2) the main effect of the RMB appreciation will be to move production from China to other countries (Mexico), I don’t see the jobs going back to the US

brad: Plus, since i think adjustment off an equilibrium that relies on subsidized access to cheap chinese goods and credit is good, i am willing to accept the dislocations associated with the transition.

My worry in any sudden appreciation is that there will be some unforsee consequence that will cause a massive crisis. Unforseen crises tend to happen when there is 1) a sudden change and 2) strong and unclear linkages in a complex system. The global economy is an extremely complex and poorly understood system, and any suddenly change is likely to cause someone unexpected to happen, and if that this is unexpected bad, there may be no time to step back, and deal with the problem. If you make gradual incremental changes, when the unexpected thing *does* happen, you can step back and deal with it.

What will be interesting is to see the July inflation numbers. There is a lot of talk among Chinese economists that the PBC has reached the limits of sterilization and that China has to something to cool the economy. If the July inflation numbers show that the June CPI numbers aren’t a fluke, then I think you’ll see a much more rapid appreciation. The other debate that seems to be popular among the Chinese economic press is to what extent the Japanese appreciation in the late 1980′s led to the collapse of the Japanese stock and real estate markets in the early 1990′s.

The virtuous cycle for adjustments start with the rise of food prices which leads to higher farm income. Farm income not only directly affects a major part of the Chinese population that are most likely to covert income into current consumption, it also sets the wage of unskilled labor at the margin (due to the unique land distribution pattern in China). I hope the Chinese government doesn’t lose sight of this endogenous demand — a large appreciation that suppresses food price will kill it off and most benefits will accrue to those who don’t need a further boost in purchasing power.
It is silly to fear the mild inflation in China. China needs it to readjust from exports to internal demands.

HZ: The virtuous cycle for adjustments start with the rise of food prices which leads to higher farm income.

I don’t see an easy way of boosting food prices enough to make that much of a difference to the farmer. Also most of the recent rise in food prices hasn’t gone to the farmer. The cause of it was that supply of pigs was hard hit, which means that farmers net income didn’t increase.

HZ: Farm income not only directly affects a major part of the Chinese population that are most likely to covert income into current consumption.

I don’t think so. Since most farmers have few grandkids to support them in their old age and they also don’t have any pension benefits, I think that most income will go into retirement savings.

HZ: It is silly to fear the mild inflation in China. China needs it to readjust from exports to internal demands.

The worry is that a slight budge in food prices has traditionally been the first sign of bigger problems. The trouble with the Chinese economy is that since macroeconomic controls are crude, by the time there is definitely a big problem, it’s too late to do anything except slam on the brakes really hard.

twofish — all the money invested in subprime debt looks so good right now, doesn’t it? I am not totally convinced the US is the best at generating debt that the rest of the world wants to buy. private investors seem less impressed by us debt than central banks. and i think the biggest problem isn’t subprime – it is something different. in an economic sense, external debt is a claim on future exports. china may be buying an MBS, but it hopes to trade the $ it gets from a US household for goods and services that can be used in china. and the us hasn’t exactly taken out debt recently to invest in future tradables produciton. that implies, at least to me, that us dollar denominated debt isn’t all that great an investment for those who ultimately don’t want dollars, but rather goods and services. And i put china in that category –

i don’t see much evidence the us will deliver a better real return on the debt china has bought than it delivered on the debt some europeans bought in 2000 and 2001 …

on your other point, there is no reason why trade between the us and china should balance. but it also is qualitatively different than trade between two us states. the state of kansas doesn’t have a central bank that finances the much richer state of new york. trade deficits between us states are financed entirely by private capital flows. that isn’t the case for the us and china.

re: “there is no reason why trade between the us and china should balance”

but hasn’t one of your central arguments been that it should?

re: “US assurances that it is AAA”

the big lie? the hegemon never lies.

jkh — you are right; it is a claim on the external sector of the economy (including investment income) but a debt position does not necessarily need to be paid back per se, and indeed, you can borrow to cover some interest payments — tho generally not to finance an ongoing trade and transfers deficit — without an exploding external debt to GDP ratio. so technically, the us simply needs to move toward a position where it pays for its import bill with exports —

that said, i was making a broader point that taking on external debt to finance homebuilding, consumption, fiscal deficit and LBOs (financial engineering) is different than taking on external debt to finance an expansion of tradables production — and the current expansion of the us net debt position (offset by gains on the equity side) doesn’t seem to be financing investment in tradables, which likely implies larger losses for the united states creditors than otherwise would be the case.

guest — i have argued that but for chinese intervention in the fx market, china’s trade would move back towards balance, and that the combination of china’s huge external surplus amid an investment boom is strange. and i have argued that the US global trade deficit needs to move back towards balance to stabilize the us external debt position/ reduce US dependence on central bank financing. but i don’t think i have argued that either should necessarily always have a zero trade deficit/ surplus, or that the bilateral us-chinese trade should balance.

Beijing Smog Forces Olympic Teams to Prepare for Asthma Attacks
2007-08-08 07:51 (New York)

By Wing-Gar Cheng and Grant Clark
Aug. 8 (Bloomberg) — Gunn-Rita Dahle got a taste of
Beijing’s smog at a race last year that left her fretting over
the defense of her Olympic mountain-biking title.
“It’s probably the most polluted place I’ve ever
competed,” says the 34-year-old Norwegian. “Your mouth and
throat dry up because of the dust. It’s not good for the
system.”
While the Chinese government is spending $13 billion to
clear the air in time for the 2008 Olympics, national teams are
preparing for the worst. The U.S. plans to base its athletes in
Korea, and the Australian team will be accompanied by an asthma
doctor for the first time. The games begin one year from today.
“There is nothing we can do to stop the pollution or
improve the air quality, but we can be prepared for the effects
of it,” says Juan Manuel Alonso, medical director of Spain’s
Olympic track and field team. “We have to make sure the first
aid box is well-stocked.”
Air pollution is choking Beijing as economic growth of 10
percent a year drives a building boom and increases demand for
cars. Construction spending increased 13 percent last year, and
new car sales jumped sixfold in the past five years, according to
government statistics.
The U.S., which won the most medals in each of the past
three Olympics, will base athletes in South Korea, 75 minutes
away by plane, so they spend as little time as possible in
Beijing, says Randy Wilber, senior sports physiologist for the
U.S. Olympic Committee.

Parachuting In

Most U.K. athletes will stay in Macau, 2,200 kilometers
(1,365 miles) to the south, says Marco Cardinale, a doctor for
the British Olympic Association.
“You don’t want to acclimatize to air pollution, you want
to avoid it as much as possible before you compete,” Wilber
says. “Some of our strategies and equipment are, quite frankly,
top secret.”
Beijing’s air contains the second-highest level of tiny
particles that can trigger asthma attacks, according to a ranking
of 20 Asian cities in the United Nations Environment Program’s
2006 Year Book. Only New Delhi had worse air quality.
In 2005, Beijing’s air contained an average of 145
micrograms of particles per cubic meter, almost three times the
World Health Organization’s recommended maximum, according to the
State Environmental Protection Agency.
Concerns about air pollution also clouded the buildup to the
2004 Athens games, only for the event to go ahead without mishap.
Particulate levels in Maroussi, where many events were held,
breached the WHO standard on 47 days in the Olympic year.

Beijing Optimism

Beijing officials say pollution is manageable. In a trial
run to cut vehicular emissions, the city may take 1 million cars
off the road for two weeks this month. Beijing’s biggest steel
plant will move out of the city before the games, and builders
will be asked to stop work during the event.
“We’ve invested vast sums of money over the past few years
to tackle the issue,” says Deputy Mayor Ji Lin. “Although some
problems still exist, the conditions are improving.”
The city targets 245 “clean-air days” in 2008, compared
with 241 in 2006 and 100 in 1998. Still, the Chinese threshold
for particulate matter is three times higher than WHO guidelines.
Endurance events such as cycling may be postponed if
pollution levels are too high during the games, said
International Olympic Committee President Jacques Rogge, speaking
on Cable News Network on Aug. 7.
“We are going to put the athletes first, we’ll have
contingency plans,” Rogge said.
Endurance athletes such as runners and cyclists are pre-
disposed to asthma because heavy training damages their airways,
says Karen Holzer, an asthma specialist who will travel with the
Australian team.

Seconds From Glory

About 27 percent of U.S. athletes at previous Olympics
suffered from respiratory problems, and the incidence will be
higher in Beijing, Wilber says. In response, all American
competitors will get facemasks and have lung tests to see if they
need asthma drugs.
“It’s all about identifying athletes who are at risk with
asthma and making sure they have strategies in place to minimize
the impact of pollution on their airways,” Holzer says. “Mild
asthma results in a drop in lung function of about 10 percent.”
Such margins may be the difference between winning gold and
sporting oblivion. Just 11 seconds separated the first two places
in the 2004 women’s marathon.
Pollution also threatens athletes’ performance in other
ways. Sinus, throat and nose problems suffered by water polo
players and track and field athletes at last year’s World Junior
Games in Beijing were probably the result of bad air, says Peter
Baquie, Australia’s chief team doctor.
Dahle, the Olympic mountain-biking champion, says she plans
to stay in Beijing for the shortest time possible. She rues the
decision to award the games to Beijing.
“I’ll minimize the amount of time spent in the city and
will stay as much as possible inside the hotel,” Dahle says.
“There would have been many far better alternatives than
Beijing. It goes against all common sense when it comes to doing
sports.”

–With reporting by Dan Baynes in Sydney, Bob Bensch in New York,
Alex Duff in Madrid, Robin Wigglesworth in Oslo and Sam
Sheringham and James Cone in London. Editor: Pritchard (wsm)