Sunday, March 21, 2010

Ludicrous claims about the renminbi

With the Treasury’s verdict on global currency manipulators coming up on April 15th, the debate on the Chinese renminbi has not just been increasingly heated; it’s also turned ludicrous.

The ludicrous took center stage last week after a key figure in the Chinese leadership suggested that the renminbi is not undervalued.

Shortly after, two of the most loyal Ambassadors of Ludicrous—top economists at a couple of brand-name investment banks—argued that “the renminbi is not particularly undervalued…. China is importing a lot”; or that the US should mind its own business and save more.

Needless to say, these claims are, well, ludicrous.

Starting with the US savings argument… Since the third quarter of 2006, the US trade deficit has declined by almost 3% of US GDP—i.e. US national savings have risen by as much. And yet, the bilateral trade deficit with China has NOT. MOVED. (in US GDP terms). All the adjustment in the US external imbalance has been borne by other countries, notably oil/commodity exporters, Japan and the eurozone. China’s own contribution has been practically zero so far.

On top of that, most people refer to the global imbalances as a US vs. China problem. Not true. The eurozone, which has been running a trade surplus, has seen its trade deficit with China rise almost uninterruptedly for years now. Indeed, the increase in the bilateral deficit with China accounts for 70% of the deterioration in the eurozone’s trade balance since end-2001 (when China joined the WTO) and for one third of the deterioration since mid-2005 (when China began to appreciate its currency).

Both these examples show that the “need for higher savings” argument is bogus. No, I’m not saying that the US does not need to save more. The point here is that despite the recent rise in US savings, China has yet to bear the brunt of this adjustment, instead displacing other exporting countries, many of which are as poor or poorer. Yes, China is “importing more”. But clearly not *enough*. And a prompt and meaningful real exchange rate appreciation is a critical policy tool to make “enough” happen.

Then you have those who say that a renminbi appreciation won’t be of much help in reducing the bilateral deficit with the US. To support this, they point to the currency’s 21% appreciation vs. the US dollar since July 2005, which, seemingly, had no impact on the US deficit with China (the deficit kept increasing in dollar terms until the crisis escalated at the end of 2008).

This argument is equally bogus for at least two reasons: First, it ignores the role of domestic demand growth as a driver of imports. But more importantly, even a 20% change in the exchange rate means very little when the price and wage levels start from an extremely low base.

Chinese wages remain a tiny fraction of wages in the advanced world when measured in US dollar terms. They are also much lower than many of China’s developing-country competitors in global markets for, say, textiles or manufactures (e.g. see Peru, Turkey, Mexico, Romania). Meaning that even a further 20% or 30% appreciation may not be enough to bring wages to par with competitors.

Incidentally, for a country with a stated objective to reorient growth towards domestic demand, raising real wages would be an obvious starting point.

But it goes beyond that. Recent press reports cite that stress tests by China to assess the resilience of its exporters to renminbi appreciation found that some firms would be very sensitive and probably go out of business. In other words, many Chinese exporters only exist because of, effectively, a subsidized exchange rate level. Apart from being unfair in the context of a global competitive landscape, it’s also detrimental for China’s own efforts to move up the value-added chain, by fomenting complacency among its firms.

Finally, it’s amazing to suggest the renminbi is not overvalued when China has continued to accumulate FX reserves at a rate of $50 million an hour throughout the crisis! And don’t tell me it’s insurance!

After correcting for (an estimate of) valuation effects, almost half of that accumulation in 2009 was accounted for by the trade surplus—no need for insurance there. Another 20% can be accounted for by foreign direct investment flows—the most stable form of foreign investment with little need for precautionary reserves. Even if all the remaining flows were “hot money”, insurance does not involve covering 300% of those flows with reserves, esp. when you already have another $2 trillion in your coffers!

China’s exchange rate policy is a major distortionary force in global trade and also a key impediment for the smooth functioning of global capital markets and the conduct of monetary policy everywhere (including in China itself). As we speak, there are emerging market countries whose stage in the business cycle demands a tighter monetary policy. And yet, they don’t move because of fears of an exchange rate appreciation that would ruin their competitive edge in major markets.

China, along with every major economy interested in participating in, and profiting from, an increasingly globalized world, has a duty to take policies that foster stability in trade and capital markets. In China’s case, exchange rate policy is the number one issue. It's irresponsible for anyone calling him/herself an economist to claim the contrary.


Anonymous said...

Consider using a car avatar that shows a car's lines. Maybe something from the 50's or 60's.

It's hard to say if the yuan is still undervalued. They devalued 40% before they joined the WTO, then they pegged. The devaluation and other poor policies have fueled malinvestment; at some point the malinvestment will catch up to the devaluation leaving the currency worth what the goverment pegged it at...

Bruce Krasting said...

China's 2009 trade surplus was $196b. Less than half the rate of "$50mm per hour" indicated here.

There is too much hype of the currency issue. Be careful you don't get what you want want. The end result of this squabble could be that they say, "the hell with the US. We will invest elsewhere".

That result would cost us much more than the benefits of a 5% reval. of the Yuan.

Fungus FitzJuggler III said...

China will soon have 600,000,000 workers in cities, with 400,000,000 children and 2-300,000,000 agricultural workers. Because of these numbers, US and Euro businesses have been investing with mid level tech factories. They know they cannot compete even at 200% revaluation....

So these industries are leaving for China. Not importing things made there will not enable industries in the west. Arguing by megaphone is very satisfying to those in politics, but those industries are lost. The local industries that cannot be outsourced and the very high tech will survive. All else is just a question of how much is paid and to whom for the products from China. All sound and fury signifying: nothing! There is no guarntee that the Yuan will move any way for long. The Han are just starting and may respond to a more nuanced style. Blaming "enemies" for the ills of a society is not a new game. It will alter nothing. The US factories in China will eventually be copied and only then will such a debate be real. Until then, no US industries will be penalized by tariffs etc.

Why not address a real issue?

James said...

The ludicrous took center stage last week after a key figure in the Chinese leadership suggested that the renminbi is not undervalued.

You follow all those comments through, and they also said USD is overvalued... a claim with which I find myself in agreement.

But beyond that, pulling back the covers and taking a closer look at things....

* you make big deal of 3% decline in US deficit w/commensurate savings. You do not mention that this is mostly (maybe entirely) due to global finance meltdown, an event precipitated by US financial fraud. Additionally, that 3% "savings" is illusory when dissected: it doesn't account for the huge losses in savings prior to meltdown, nor the means by which those savings disappeared (fraud).

It also doesn't account for hardship(s) being experienced by those who lost... 401ks & retirement funds, nor (IMO worst of this) expose ludicrous imbalance of bill foisted on US taxpayer (eg: those who got robbed) to refinance the crooks who perpetrated this heist... and who, having been now refinanced, have taken their 0% loans and built up their balance sheets through various carry trades that have done nothing... nothing for health of US economy.

And perhaps most ominous (but never addressed by this "revalue the renminbi" crowd) the whole capitalism mantra which fueled this theft of America: eg. capital flows to where it's most needed... well, sheesh.

And where has it left us?... what are the "most needed" thingies to which this capital flow didn't arrive? Energy grid, rapidly growing water shortages, unreliable food supply, badly dilapidated 2nd'ary Ed... it's a long, long list, and it's stuff that directly affects the efficiency (or lack thereof) of US economy.

* You talk about China displacing other countries in manufacturing, but make no mention of China's steady reinvestment in improving almost everything they do... across the board: energy, manufacturing, engineering... all of it. In Viet Nam, Thailand (across Asia)... even Pakistan, Chinese industry is being brought in to both build and train the locals, at a fraction what US (or western) industry can match. This is being done by agreement... as a result of rapid progress in things that matter. The Chinese are bringing expertise that these poorer nations you mention just don't have.

* In one paragraph you say a 20% RNB upward swing would do wonders, while later saying it may not...

We have become a nation which tortures, yet incapable of discussing, much less accessing the moral costs therein.

We have been lied into a nonsensical Iraq liberation which, aside from being massive drain of currency, has produced a quagmire and ignored the problems it was intended to fix. Yet, we financed this "war" w/(moslty) Chinese purchase of US bonds, while convincing a public they were geniuses flipping houses on top of a bubble.

And this, while simultaneously shipping our manufacturing/tech/engineering over seas for cheap quick profits of a few under the guise of "free markets".

This was executed, in case you missed it, by a bought and paid for congress & fed gov. infiltrated by the interests who profited, at the same time giving those interests tax breaks while US industrial tax base evaporated.

Saturating corruption.

We've hidden $t's of toxic assets on FED's balance sheet, leaving US w/virtually no economic engine... and what are we doing about it? Debates dominated by evils of socialism fueled by corp interests that received the biggest socialist bailout in history...

Geezus... the functioning of US society is dysfunctional to the point of absurdity. Value is being determined by propaganda while reality gets ignored.

And you want to hang our mess on a billion Chinese who've worked their butts off to deliver our big screen TVs (and just about everything else)... who you trying to kid?

Moopheus said...

Global consumer boycott of Chinese-made goods is in order. Admittedly, it would be impossible to cut off the sales of Chinese goods entirely, But I don't think it would be impossible to generate a large enough boycott for China to notice. Just encourage people to check tags and buy stuff not made in China whenever possible.

Anonymous said...

There is a myth which pervades our foreign policy.
Every people in the world wants to live like we do.
Make a nation more middle class and it will become much like us.The Neo-Con fantasy of Iraqis "greeting us with rose petals" grew out of that myth. One would have hoped that Iraq put paid to that Idea. But it continues to influence much thinking about China.
China plays by its own rules thank you, and they are summarized in "The Art of War".
China used this Idea and our greed for short term gains to its own advantage and endured a semi-colonial status to industrialize and modernize its military.
Politically it has returned to a semi-Imperial format still run by a group of Barons, North Korea already provides us with the model of a hereditary Leninist state.
The recent statement by the US Chamber of Commerce indicated that they have made their bundle and are prepared to move on.
It is totally within our national interests to clip China's financial wings by insisting on a reasonable Yuan exchange rate.
One idea I suggest we copy China is that of the Shenzhen special economic zone put as a buffer between China and Hong Kong.
I would suggest that the US and Mexico establish such a Zone across all or much of our common border. This would be made to attract the
FDI to relocate in an area which could serve our national interests.