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September 11, 2006

More Fuel For The Yuan-Debate Fire...

... which, thanks to Tyler Cowen (here and here), Brad Setser (here and here), and others, was burning pretty hot last week, comes today in the form of the latest report on the Chinese trade surplus.  From The Financial Times:

China’s trade surplus reached $95.7bn through the first eight months of the year, soaring to a monthly record of $18.8bn in August, according to customs statistics released on Monday.

The figures for August were the fourth consecutive monthly record this year, well exceeding the $14.6bn reported in July. China’s trade surplus this year is expected to exceed last year’s total of $102bn within weeks.

Says Brad today:

The soaring Chinese trade surplus though does imply that the scale of capital outflows needed to keep the RMB from rising, should Chine ever liberalize its capital account (which, as Drezner notes, isn’t about to happen), has grown.

I reckon that's right, but I couldn't help notice this story, also from the Financial Times

Xinhua, Beijing’s official news agency, on Sunday issued rules demanding international counterparts censor news and information distributed in China and barring them from dealing directly with local clients.

The rules, which take effect immediately, mark a dramatic resumption of Xinhua’s efforts to regulate the Chinese operations of rival foreign news agencies tightly...

Sunday’s ban on the distribution of any agency content that “harms China’s national security or honour” or “disturbs the Chinese economy or social order” matches other recent moves by Beijing to tighten media censorship.

Where this will lead is still anyone's guess...

However, it is unclear how forcefully Xinhua will be able to implement its new regime, which is likely to be opposed by domestic banks and other financial institutions as well as by the foreign news agencies themselves.

... but I'm moved to emphasize this passage, from Tyler's original New York Times article:

The yuan should not, as matters stand, float freely with free capital movements. Large quantities of Chinese savings, currently restricted to the domestic currency, would probably flee the country, worsening the serious solvency problems at Chinese banks. The Chinese must first clean up their banking system before they can have free capital markets. Contrary to the conventional wisdom, a market-determined value for the yuan might well be lower than today’s exchange rate, not higher.

Here's a question: What would normally happen to a free-floating currency, unrestrained by pervasive capital controls, in the wake of, to borrow the characterization in the FT headline, moves to "tighten the leash on foreign media"?

September 11, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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It would fall, in the abscence of other factors.

But what would normally happen to the official foreign-currency reserves in a country that "tightens the leash on foreign media"?

Posted by: ErikR | September 12, 2006 at 07:13 AM

A few disjointed observations. The experience in Korea over the past several years leads me to increasingly question my long held standard econ view that a large yuan appreciation would lead to meaningfully slower Chinese export growth and a smaller trade surplus. This has just not happened in Korea despite won appreciation from 1400/$ to 950/$. Korea's exports grew about 14%yoy in H1 06 and its non-oil surplus hit a record high.

HOWEVER, this is not to say Korea has not experienced any adjustment to this appreciation in the real exchange rate. The current account surplus has plunged from $30bn several years ago to about $4bn this year, in large part because of a sharp deterioration in the net services balances. The lesson being that where the economy is very productivie - manufacturing - the excahange rate adjustment has been compensated for via productivity growth, but where the economy is less competitive and productive - in a variety of services - the real appreciation has swung flows powerfully.

I am not saying China should not appreciate. I am merely making the perhaps pedantic point that appreciation may not yield the 'standard' outcome in exports and the trade balance most commentators expect. And from a political economy perspective, that's the point. The Chinese fear yuan appreciation will lead to severe dislocations in the rural agrarian sector in which China is uncompetitive. This is politically important because this is where the bulk of the population resides. This labor is generally less educated and less able to transition into domestic services. So the fear is an even faster pace of rural to urban migration that is socially destablizing (and perhaps provides more fodder for ultra cheap Chinese basic manufactures/exports). Again, I'm not saying this definitively justifies the Chinese position, but it does help one to understand where it comes from.

Finally, i feel the bit about a free capital account is a red herring in the whole yuan debate. First, even the IMF now agrees that free and open capital accounts should be approached very, very cautiously by developing countries. Second, a free capital account is neither a necessary nor sufficient condition for a freely floating currency. Currency regime is a totally separate decision. Hong Kong has a completely free capital account and a very tightly pegged currency. Third, read the emperical findings, hold your breath, have an extra cup of coffee, and look at Japan. Japan had de facto bankrupt banks and ZERO interset rates, but never had a massive, destabilizing flight of deposits from its banking system. The combination of home bias and a government guarantee do wonders to keep a deposit base stable, despite low real interest rates. And remember, something like 80% of China's deposit base is in government owned banks (read, already guaranteed).

Posted by: rfarris | September 12, 2006 at 08:45 PM

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August 10, 2006

Will Nouriel Be Proven Right?

No, not about his contrarian view that the U.S. economy is about to go in the tank, but about his prediction that a major revaluation in the Chinese RMB is in the offing. As Brad Setser reported yesterday. "China's monthly trade surplus is still rising", and according to the Financial Times the People's Bank of China may have had about enough:

China’s central bank stoked expectations of further renminbi appreciation on Wednesday by saying the exchange rate could play a role in addressing international payments imbalances.

The statement, in the People’s Bank of China’s second quarter monetary report, came a day before China announced a record trade surplus for the third straight month in July, data that would add to the pressure on Beijing to adjust its currency...

The renminbi has risen just 1.66 per cent since Beijing’s 2.1 per cent revaluation last July, in spite of soaring trade surpluses and complaints from the US that the currency is undervalued.

However, the PBoC has recently permitted slightly greater daily volatility in the renminbi-dollar rate and allowed a series of record highs for the currency. This has fuelled predictions it will widen the current 0.3 per cent daily trading band and allow a more rapid appreciation..

It gave no details and the statement falls far short of a commitment to either appreciation or even significantly greater flexibility in the renminbi exchange rate – which the bank repeated should be kept “basically stable at a reasonable balanced level”.

But some analysts said the report supported the view that a consensus was forming among Beijing policymakers behind a stronger, more flexible currency.

How reliant the Bank will be on revaluation versus other policy options remains to be seen.  From China Daily:

China will boost imports, loosen controls on outflows of capital and make the yuan more flexible to help curb a record trade surplus and slow the fastest economic growth in a decade, the central bank said...

But the bank said that China cannot rely solely on currency appreciation to balance its external payments.

"As part of a policy package, the exchange rate can play a certain role in adjusting the imbalance in international payments. But the fundamental way to resolve the international payment imbalance should come from expanding domestic demand and lowering the savings rate"...

We will use various monetary tools to reasonably control lending growth and prevent the economy from overheating," the central bank said. "We will speed up the implementation of the policy of boosting domestic spending and adjusting the economic structure to promote the balance of international payments."

The central bank said it will "adjust the bias in the management of foreign exchange which currently encourages foreign-exchange inflows and restricts outflows"...

The government will adjust preferential policies toward foreign companies, speed up the unification of domestic and foreign company corporate income tax rates and regulate policies by local government to attract foreign investment, the central bank said in Wednesday's report.

And from Xinhua Online:

China's central bank reiterated on Thursday the country's currency, the yuan, will remain "basically stable at a rational and balanced level".

The early move, according to the China Daily article, went in the "wrong" direction...

The yuan fell 0.08 percent to 7.9772 per dollar as of 3:30 p.m. in Shanghai.

... but it's early yet.

CORRECTION: I think I misread that last China Daily passage.  The word "fell" here, I believe, applies to yuan needed to obtain one dollar -- so a decline in the exchange rate means that the dollar is depreciating against the Chinese currency.  It has definitely depreciated since -- from Bloomberg:

The People's Bank of China fixed the reference rate for yuan trading at 7.9688 against the U.S. dollar today, compared with a close of 7.9772 yesterday on the interbank market, the strongest fixing since the currency was revalued in July 2005.

Now that makes more sense.

August 10, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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July 25, 2006

What The Dollar Bears Have Been Waiting For

From Bloomberg:

China should increasingly diversify its foreign-exchange reserves to reduce the risk of losses from declines in the dollar, the country's National Bureau of Statistics said...

"The U.S. dollar may continue to weaken, increasing the risks of foreign-exchange losses in our currency reserves,'' the statement said. Speculation that the dollar will fall "also boosts expectations that the yuan will strengthen.'' The bureau didn't provide reasons why it expects the dollar to fall.

Well, beyond the obvious fact that the U.S. current account deficit is pretty large, there are the reasons included in the update in this post.  And, of course, there are the simple facts on the ground.  From Brad Setser:

Floyd Norris of the New York Times highlights something that was also on my radar screen:  a sharp fall off in foreign demand for US treasury bonds. For the first time in years, the US budget deficit is being financed by domestic investors.

Foreign inflows to the US haven’t fallen off, to be sure.   But the composition of these inflows has changed.  Foreigners are buying more agencies and US corporate debt and fewer Treasuries.  First quarter data is here; the TIC data from April and May do not indicate that the story has changed.

And (again from the Bloomberg article):

"Diversification is a continuation of China's reserves management,'' Standard Chartered's Hui said. "There's evidence or suggestions China has been moving gradually away from U.S. dollars into other major currencies, such as the yen or euro.''

There are, of course, the not atypical mixed messages:

[China] should also encourage Chinese companies to invest abroad to curb expectations of a stronger yuan, the bureau today said in a statement on its Web site...

Today's statement came a day after China said it may allow its brokerages to raise hard-currency assets and invest them overseas for the first time As part of the central bank's efforts to encourage capital outflows and reduce pressure on the yuan to rise.

That should give you pause, but if you are looking for a fearless prediction, here it is:

Fund outflows "will be gradually increasing, but they probably won't have an immediate effect in reducing the upside pressure of the yuan,'' [Tai Hui, an economist at Standard Chartered Bank in Hong Kong] said. The Chinese currency may strengthen 3.8 percent to 7.80 to the dollar by the end of this year, he said.

Even at the lower end of that range, I'd declare Nouriel Roubini's 5-percent prediction a winner.

July 25, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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Since US Dollar is in poor condition, how come the interest on High Interest US Dollar savings accounts is still high? 4.5% on some.

Posted by: L505 | August 11, 2006 at 04:19 PM

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July 24, 2006

More On China And The Yuan

Hat tip to Claus Visteen for bringing to my attention this comment from Dan Harris at China Law Blog in response to my WSJ debate with Professor Roubini:

... both [Roubini and Altig] talk about China's overheating as a fact and they both cite Chinese growth statistics as though they are wholly accurate.

More importantly, however, is that both economists ignore the political and social imperative for continued growth in China.  I am of the view that the Chinese government wants growth.  I am of the view that the Chinese government needs growth.  I am of the view that the Chinese government's comments about wanting to slow down the economy are mainly for foreign consumption...

And is China's economy really "overheating," anyway?  I have certainly seen a lot of talk about inflation fears, but I have yet to see any numbers indicating much of it already...

I am not going to predict whether China will or will not allow the Yuan to appreciate further, but I will say that in analyzing this question, one must do more than just look at the economics; domestic politics must be considered and domestic politics say there will be no appreciation.

Good observations all, though I would point out that if it is difficult to trust Chinese growth statistics, it must be equally difficult to trust the inflation numbers.  And the Chinese government does seem to take the overheating issue seriously.  As Claus points out on his blog today, China has, for example, just announced plans to trim export subsidies "as part of measures aimed at rebalancing and restraining economic growth and its swelling trade and current account surpluses. "

However, the point that the exact truth regarding economic circumstances in China remains murky is well taken, and it is one of the reasons I believe that estimating the future of the yuan is even trickier than the usual shadow-chasing business that is exchange rate forecasting.

July 24, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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Yes, but is China trimming those export subsidies out of concern for overheating or concern for looking good to the U.S? And, didn't it increase export subsidies for its tech products at the same time?

Posted by: China Law Blog | July 24, 2006 at 01:22 PM

Perhaps China's exports will slow, but I don't believe it.

Here's why.


China's Economic Hydrology Powers - Part I

Betting against China's continued growth has been a losing bet. For good reason.

UNCTAD's Report, 'Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008' advises that "prospects for global foreign direct investment (FDI) are promising in both the short term (2005-2006) and the medium term (2007-2008)."

China is by far and large the most attractive global location for FDI investment, according to surveyed TNCs. "Half of the top ten countries ranked by both experts and TNCs alike belong to the developing world. China is considered an attractive location by 87% of TNCs and 85% of experts - at least 30 percentage points above the ranking of the next best performer. The other countries in the top five tier were the United States, India, the Russian Federation, and Brazil."

TNCs ranked the top ten FDI opportunities of interest in this order: 1. China (87%), 2. India (51%), 3. USA (51%), 4. Russia (33%), 5. Brazil (20%), 6. Mexico (16%), 7. Germany (13%), 8. UK (13%), 9. Thailand (11%), and 10. Canada (7%).

A.T. Kearney's 2005 Foreign Direct Investment Confidence Index Report states that "China and India are considered the world's 1st and 2nd most attractive FDI locations globally. China held the top spot for the forth year in a row and India rose from 3rd to 2nd place, surpassing the United States. Hong Kong and South Korea dipped slightly from 8th to 10th and 21st to 23rd, respectively. Singapore and Thailand maintained their positions at 18th and 20th place." As importantly, do not overlook the number of greenfield FDI projects in China as compared to other nations. China sits atop the greenfield investment list.

According to the US-China Business Council, China had over 44,001 FDI projects in 2005. Of that total, there were 10,480 equity joint venture (EJV) projects, 1,166 cooperative joint venture (CJV) projects, 32,308 wholly foreign-owned enterprise (WFOE) projects, and 47 foreign-invested shareholding venture (FISV) projects. In addition, the Ministry of Commerce (MOFCOM) of China reported 18 foreign-invested banks, insurance companies, securities firms, and fund management operations. "Although official MOFCOM statistics still do not count these deals toward China's total FDI, they accounted for an additional $12.08 billion in capital inflows and would combine with the official FDI figure to reach a total of $72.41 billion in foreign investment." Looking forward, "issues likely to affect foreign investment in 2006 include the new labor contract law, the discontinuation of foreign-invested enterprise representative offices, the antimonopoly law, and the implementation of distribution rights."

A study cited by UNCTAD indicates that "China has no significant effect on [FDI] inflows to other East Asian countries. In fact, during 1992-2001, China's FDI was positively related to FDI in other countries. This would indicate that most FDI flows do not compete with each other, and that for potentially competitive (export-oriented) FDI, China is encouraging investment in other countries as a complement to its role within Asian production networks. Thus, the Asian giant appears to be crowding in rather than crowding out FDI in the region."

China FDI inflows (excluding Hong Kong):
1998 - $45.462 billion (global rank - 3)
1999 - $40.318 billion (global rank - 7)
2000 - $40.714 billion (global rank - 7)
2001 - $46.877 billion (global rank - 5)
2002 - $52.742 billion (global rank - 2)
2003 - $53.505 billion (global rank - 1)
2004 - $60.600 billion (global rank - 2)
2005 - $72.410 billion (global rank - 3)

Hong Kong, China FDI inflows:
2001 - $23.8 billion
2002 - $ 9.7 billion
2003 - $13.6 billion
2004 - $34.0 billion
2005 - $35.9 billion


China FDI data sources:

World Investment Report 2004 - FDI inflows page, UNCTAD
http://www.atkearney.com/shared_res/pdf/FDI_data_2005_S.pdf

Trends and Recent Developments in Foreign Direct Investment, June 2006, OECD
http://www.oecd.org/dataoecd/54/58/37010986.pdf


Other sources cited:

Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008, UNCTAD
http://www.unctad.org/Templates/webflyer.asp?docid=6520&intItemID=3600&lang=1&mode=toc

2005 Foreign Direct Investment Confidence Index Report, A.T. Kearney
http://www.atkearney.com/main.taf?p=5,3,1,140,1

World Investment Report 2004, UNCTAD
http://www.unctad.org/Templates/webflyer.asp?docid=5209&intItemID=3235&lang=1&mode=toc

World Investment Report 2005, UNCTAD
http://www.unctad.org/Templates/webflyer.asp?docid=6087&intItemID=3489&lang=1&mode=toc

US-China Business Council document mentioned:
Foreign Investment in China
Published April 2006
http://www.uschina.org/info/chops/2006/fdi.html

Study cited by UNCTAD:
China is not Crowding Out FDI from the Rest of East Asia, Experts Say
07/03/05
http://www.unctad.org/Templates/Webflyer.asp?docID=5795&intItemID=1634&lang=1

>>

Posted by: Movie Guy | July 24, 2006 at 11:10 PM

Perhaps China's exports will slow, but I don't believe it.

Here's why.

China's Economic Hydrology Powers - Part II

U.S. technology transfers to China growth initiative. A major move.

I am expecting this initiative to drive further export growth of China. I don't see how it won't cause it.

April 11, 2006
U.S.-China Meeting and Agreement:
United States-China High Technology and Strategic Trade Cooperation
http://www.bis.doc.gov/News/2006/JCCTPressRelease04_10_06.htm

May 26, 2006
U.S. Asks Taiwan to End China Trade Limits
U.S. trade representative calls on Taiwan to lift restrictions on trade with China
TAIPEI, Taiwan
By STEPHAN GRAUWELS Associated Press Writer
http://www.cbsnews.com/stories/2006/05/26/ap/business/mainD8HRD8TG0.shtml

June 9, 2006
Speech: Win-Win High Technology Trade With China
David H. McCormick
Under Secretary of Commerce for Industry and Security
U.S. Department of Commerce
At Center for Strategic and International Studies
http://www.bis.doc.gov/news/2006/McCormick06-9-06.htm

>>

Posted by: Movie Guy | July 24, 2006 at 11:11 PM

So, there you have my input.

I don't believe that China's exports will drop off very much absent major currency valuation changes or a large global downturn.

Too many inbound props and external incentives (FDI and other considerations) are driving China's export growth.

This doesn't mean, of course, that China's domestic consumption economic won't experience continued growth. It will. At least until the crisis occurs.

Posted by: Movie Guy | July 24, 2006 at 11:19 PM

I stumbled across your blog while I was doing some online research. As someone who has lived and worked in China, as well as in other Asian countries, this is a topic that particularly interests me. Thanks for an informative and thought provoking post!

Posted by: thebizofknowledge | July 31, 2006 at 05:40 PM

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July 22, 2006

Odds And Ends -- July 22 Edition

A rainy morning in Cleveland, and an opportunity to do some quality blog-surfing.

The confluence of Chairman Bernanke's Congressional testimony and the release of the June FOMC meeting minutes got lots of people thinking about what is next for U.S. monetary policy. Brad Delong is "surprised that there hasn't been a pause yet" and thinks that we haven't seen one because "the Fed is scared of the 'soft on inflation' headlines that a pause would generate."  The Capital Spectator offers a terrific round-up of the week's economic news, and claims that "In theory, a slowing economy makes it easier for the Federal Reserve to cease and desist with its current round of interest rate hikes. In practice, life's more difficult, thanks to the worrisome rise in core CPI in June..."  Tim Duy also thinks that "although the Bernanke sounded soothing relative to expectations, the incoming data argue for another rate hike in August."  Toni Straka believes the "rate trend will stay the same and probably accelerate." At Hypothetical Bias, the opinion is "Once more and done (for a bit, at least)". William Polley is leaning that way tooBarry Ritholtz reiterates: The Bernanke bounce in the stock market is a "sucker bet".

Speaking of the Chairman -- more specifically his ideas about the global savings and investment and their relationship with interest rates -- Mark Thoma has a legitimate beef with the use of the word "glut."

Other summaries of, and commentary on, the week's economic news: From Dr. John John Rutledge (here and here). Calculated Risk provides a nice graphical look at where housing inventories are building, replicated from the Wall Street Journal. The Nattering Naybob Chronicles has its usual rundown of the week in bond and equity markets. MacroMouse contemplates the end of quantitative easing in Japan, and sees lessons for U.S. policymakers.  Tim Iacono has plenty of this and that, as does The Skeptical Speculator.

On my exchange with Nouriel Roubini on Chinese currency reform, Kash agrees "it does not feel like we're getting closer to some sort of crisis" but wonders "what should we expect it to feel like?"  Paul at Truck and Barter gets right to the substance of our exchange, while Brad Setser adds his own, ever insightful, thoughts at RGE Monitor. The Skeptical Speculator notes that "China has taken additional steps to cool its economy." Though not about the Chinese case specifically, Daniel Gross addresses a related and really important question: Is the end of American dominance in capital markets done?

Russell Roberts echoes an argument made this week by Ben Bernanke: In dealing with low-wage workers, an earned-income credit is preferable to a minimum wage.  He also takes on Paul Krugman's position on both the minimum wage and the inequality statistics that Krugman argues support a minimum wage policy.

Brad DeLong highlights an interesting column by Hal Varian on luck and taxation.  (Bottom line: If luck -- as opposed to hard work and risk-taking -- is a big part of being rich  progressive taxation makes good economic sense.  The intuition would be that luck is not sensitive to prices, and so won't be diminished by relatively high taxes.) 

Mark Thoma noticed the Varian piece too, and has several links to others opining on the inequality debate more generally. I'd also check out Greg Mankiw's ruminations, Tom McGuire's recent "Stalking Points", and, if you have the time, everything in the Cafe Hayek archive on inequality.

Taking a more global perspective on poverty and inequality, J.S. at Environmental Economics shares some thoughts on "Rethinking Development Aid For The 21st Century" (thoughts which sound pretty darn sensible to me).  Also, NEI Nuclear Notes asks "Should Developing Nations Embrace Nuclear Energy?"  In the category of excellent advice, The New Economist quite rightly commends your attention to the Private Sector Development Blog. (So do I.)

A colorful picture of who gets what from oil revenues across the G7 is available at Contango.

John Irons documents the continuing, and puzzling, mix of profits versus labor compensation in overall income.  As I've noted before, however, there may be more to this story than meets the eye.

Hat tip to Captain Capitalism for the link to this article about a county in Oregon that is running its own monetary systemMark Thoma comments intelligently on a proposal to implement a commodity-based monetary system backed by "local renewable energy" (whatever that might mean).

Daniel Drezner links to an interesting article in the Economist on the value (or lack thereof?) of large quantitative trade models.

July 22, 2006 in Asia, Economic Growth and Development, Energy, Exchange Rates and the Dollar, Federal Reserve and Monetary Policy, Housing, Inequality, Saving, Capital, and Investment, This, That, and the Other | Permalink

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These posts of yours are great Dave ...

Cheers

Claus

Posted by: claus vistesen | July 22, 2006 at 07:25 PM

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July 21, 2006

The Yuan Float, One Year Later

Nouriel Roubini and I debate the issue, in the latest edition of the Wall Street Journal Online's Econoblog feature.  I'm a bit distressed, though not really surprised, that so few questions have been resolved since Nouriel and I last met on the Econoblog battlefield.

July 21, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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» Yuan float - questions unresolved from New Economist
Dave Altig and Nouriel Roubini debate The Yuan Float, One Year Later over at the Wall Street Journal Econoblog column. Dave comments on his weblog that:...I'm a bit distressed, though not really surprised, that so few questions have been resolved since... [Read More]

Tracked on Jul 21, 2006 3:22:15 AM

» Chinese Yuan Rising? -- But What About China? from China Law Blog
Today's Wall Street Journal has an interesting article on the Chinese Yuan. Will it appreciate? When, by how much, and what will its impact be? The article is in the form of a back and forth exchange between two leading economists, Nouriel Roubini and ... [Read More]

Tracked on Feb 2, 2010 1:16:39 PM

Comments

Hi Dave,

He he, yes the question of the yuan float and subsequent appreciation certainly seems in a stalemate. The show troddles on in other words ...

On that note ... have you seen this from China Law Blog?

http://www.chinalawblog.com/chinalawblog/2006/07/chinese_yuan_ri.html#comments

'These guys [that would be you and Roubini] obviously know their economics, but I fault them for essentially ignoring China's reality on the ground in their discussion, as though that will not play a huge part in what happens to the Yuan. They both talk about China's overheating as a fact and they both cite Chinese growth statistics as though they are wholly accurate.'

I am not chosing side here, just pointing to another angle.

Cheers

Claus

Posted by: claus vistesen | July 22, 2006 at 05:20 AM

Hi Claus -- I had not seen that. Thanks much for the heads up.

Posted by: Dave Altig | July 24, 2006 at 07:20 AM

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July 10, 2006

China Buzz

UPDATE: The original posting of this item was, for some reason, scrambled.  All fixed now. (Thanks Shadya!)

The Chinese surplus machine is showing no signs of slowing down. From Forbes.com:

China's trade surplus is bigger than expected and the government hopes to see more balanced trade, Liao Xiaoqi, the vice minister of China's Ministry of Commerce said...

China recorded a trade surplus of 33.75 bln usd from January to April, up 61.4 pct in the same period last year, according to Ministry of Commerce data.

No surprise, however, that the global policy village is less enthralled. From Bloomberg:

U.S. lawmakers say an artificially weak yuan is partly to blame for a record trade deficit and the Group of Eight nations said on June 10 ``widening global imbalances'' are a risk to the world economy. China's surplus has also flooded the world's fastest-growing economy with cash, undermining the central bank's efforts to control investment and inflation.

"There's a considerable inflow of money into the economy and it's a challenge for the central bank stop it adding to the money supply,'' said Tai Hui, an economist with Standard Chartered Bank in Hong Kong. "The government will want to keep a lid on money supply and lending growth to prevent it from stoking inflation and asset price bubbles down the road.''

I have noted before that, abstracting from capital controls, theory would predict an undervalued currency is a problem that should eventually take care of itself.  The reason is that pegging the nominal exchange rate -- the only currency price a central bank can hope to influence in the long run -- requires flooding the world with your domestic currency.  Given enough time, the inflationary consequences of those policies will cause the fundamental value of the nominal exchange rate to fall on its own. These dynamics are, apparently, of more than academic concern in China today:

Higher food and fuel prices pushed China's inflation rate higher in May. Food prices rose 1.9 percent from a year earlier and costs of fuel and vehicle spare parts fore 13.2 percent, the most since August.

The government, which controls fuel prices to limit their impact on inflation, is authorizing higher charges to help refiners such as China Petroleum & Chemical Corp. cut losses and to allow prices to more accurately reflect global oil markets. The oil refining industry lost $9.8 billion yuan in the first quarter, the government said in April.

There are signs that companies are beginning to pass on higher energy and raw material costs to consumers. Prices of consumer durables rose in May for the first time in at least 17 months, today's report showed.

"Upward pressure on inflation is greater than downward pressure,'' the People's Bank of China said in its quarterly monetary policy report, published last week...

M2, the broadest measure of money supply, rose 19.5 percent from a year earlier in May, the biggest gain since December 2003, the official Shanghai Securities News said June 9. Outstanding loans rose 16 percent, the most in more than two years.

The central bank has said it will step up measures to slow money supply growth, which has led to a surge in bank lending for investment projects. The bank says unbridled investment in factories is creating overcapacity in some industries and driving up raw materials prices, hurting corporate profits.

As that passage makes clear, ignoring capital controls is just too big an abstraction in the case of China.  But, at least rhetorically, the Chinese government seems fully aware of the fragility of economic growth built on a platform of such controls.  From Forbes:

China needs to address its mounting dependence on offshore stock markets as many quality large-cap firms list overseas, an official with the Ministry of Commerce said in remarks published in the official People's Daily.

'Large numbers of domestic firms listing on offshore stock markets increases the savings surplus, makes the country subject to extra foreign exchange risk and increases pressure for the yuan's further appreciation,' said Chen Lin, an official with the MoC.

'Finally, it weakens the independence of the country's monetary policy.'...

Chen noted that China should speed up the establishment of Miltie-tier fund-raising markets and further open up to foreign capital as a way to improve its stock market.

If you ask Moody's, this is more good news.  From China Daily:

Moody's Investors Service rewarded China on Friday for a surging balance-of-payments surplus by upgrading its outlook for the country's foreign bonds.

Moody's said the change in outlook for China's A2 foreign currency bond rating to positive from stable also reflected China's success in holding down its overseas debt.

"Prospects are that China's external payments position will remain resilient to domestic and external pressures," Tom Byrne, a vice president at the ratings agency, said in a statement.

China has built up foreign currency reserves of US$925 billion, the largest stockpile in the world, as a result of intervention by the central bank to buy most of the dollars that flow into the country from its trade surplus and foreign direct investment.

The reform road is never straight, however, and some folks think that bringing monetary policy under control will, paradoxically, serve to increase Chinese surpluses, at least in the short run. From The Times Online:

Since the end of April, China’s central bank has moved to cool bank lending and investment activity by hiking interest rates, increasing commercial bank reserve requirements and mopping up excess liquidity in the financial system.

However, Qu Hongbin, an economist with HSBC in Hong Kong, said the trade surplus figures were not a surprise given external demand and China’s monetary policy tightening.

"If anything the monetary tightening will slow investment [and] will slow imports, so we should expect a big surplus," he said.

It just goes to show: It's always something.

July 10, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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"…pegging the nominal exchange rate … requires flooding the world with your domestic currency. Given enough time, the inflationary consequences of those policies will cause the fundamental value of the nominal exchange rate to fall on its own."

This argument depends on the intervention being unsterilized. If you use one hand to flood the world with domestic currency and the other hand to remove that currency from your domestic economy, then presumably there are no net inflationary consequences. And it seems to me that the issue of sterilization is not as clear-cut as sometimes seems to be assumed: it depends on the counterfactual of what open market operations would have been conducted in the absence of forex intervention. Also, the money demand function associated with money created in forex transactions may be different from the one associated with money created through open market operations.

Posted by: knzn | July 10, 2006 at 09:03 AM

knzn -- First, I congratulate you for being able to make any sense out of my extremely middled first post. Second, I agree with you completely about the sterilization issue. Last year I appealed to the evidence that the Chinese seemed to be engaging in a lot of sterilization as evidence that the value of the yuan was perhaps not as far out of whack as many thought. There is of course the argument that the forex and domestic markets are segmented, but I'm more inclined to think of money creation as money creation -- I stand with the evidence suggesting that there really is not much impact from sterilized interventions.

Posted by: Dave Altig | July 10, 2006 at 04:27 PM

Dave, if you're more inclined to think money creation is money creation, then would you tend to side with the conspiracy theorists that think the Fed dropping publication of M3 is so they can inflate the federal government out of their debt problems.

Posted by: cb | July 11, 2006 at 11:28 AM


I stumbled across your blog while I was doing some online research. As someone who had the privilege of living in several Eastern countries for a number of years prior to returning to the United States, I have learned much about their business practices and ideology. This is a global market, after all, so we should be open to new ideas--new to us, that is, since they have certainly worked in other countries.

Posted by: panasianbiz | July 11, 2006 at 09:40 PM

The productivity of China return Be increasing by leap and bound.China values badly now to the trade.Therefore, the foreign trade sum also increases very quickly.China has already become the factory of the worlds.Just at firmness this position.


--------------------------------------------------------
http://www.zhonghuarising.com

Posted by: archilangelo | July 15, 2006 at 10:22 PM

cb -- As I have indicated before, I don't think that M3 represented a good measure of money, an opinion that I think is shared by the few among us who even still care about measures of money per se. That was, in fact, the justification for ceasing its publication, and I confess it is a decision I am comfortable with.

(panasianbiz -- welcome; I certainly grant your point.)

Posted by: Dave Altig | July 16, 2006 at 09:56 AM

China's surplus has also flooded the world's fastest-growing economy with cash, undermining the central bank's efforts to control investment and inflation...china has already become the factory of the worlds...great lens will credit this and save.

Posted by: scoremore | October 11, 2010 at 08:35 AM

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June 26, 2006

The Chinese Saving Glut

Brad Setser writes:

Stephen Roach... certainly believes that the big US external deficit is a problem. He just doesn’t think the RMB/ $ has much to do with the US external deficit, or with China’s surplus. 

Roach’s argument is that the US would save too little (and China too much) no matter what the RMB/ $.

Perhaps.  But it sure seems to me that the availability of easy financing from the Chinese central bank (and a host of oil investment funds) is one reason why the US saves so little.  Roach views the US savings deficit as a product of US policies alone, I don’t...

All in all, I see far stronger links between China’s currency policy and low US savings than Roach does.  I don’t think the US would be saving as little without a credit line from the PBoC.  And it sure seems that China’s savings boom is correlated with its export boom, even if the channels linking a rise in China's trade surplus to a rise in Chinese savings are a bit more murky than the channels linking Chinese reserve growth to low US savings.

... A stronger RMB is not all that is needed to bring about a more balanced world. China does need to do more to stimulate internal consumption, and the US does need to do more slow the pace of demand growth (i.e. raise savings). 

Not going to happen just yet.  From Reuters, via China Daily:

China's Ministry of Finance said on Monday it would issue the country's first ever savings bonds, worth up to 15 billion yuan (US$1.9 billion), offering Chinese citizens a new investment option.

The tax-free three-year bonds, to be sold from July 1 to 15, would bear an annual coupon of 3.14 percent, the ministry said in a statement published on its Web site (www.mof.gov.cn).

The coupon compares with 3.24 percent for three-year fixed yuan deposits, but interest from the savings bonds is not subject to the 20 percent income tax for bank savings.

The non-tradable bonds would be sold through a pilot computer system linking big commercial banks to allow individuals to purchase, manage and redeem the forthcoming savings bonds electronically, the ministry said.

That will help in the long-run, as the web of existing capital controls is dismantled...

But they are largely forbidden from investing outside China, and their domestic options are limited to savings accounts and stock, bond and real estate purchases.

... but it doesn't exactly sound like a pro-consumption policy.  And here is an sometimes under-appreciated reason Chinese saving rates are so high:

Chinese citizens hold $1.8 trillion yuan in bank deposits, due in part to an underdeveloped social welfare system that pushes many to save for medical care and old age.

That one is not going to be fixed by capital-market and currency reform alone. As for RMB revaluation, feel free to take a breath.  From Bloomberg:

China's yuan fell after central bank Governor Zhou Xiaochuan said the nation will move "gradually'' to make the currency more flexible, disappointing some investors expecting greater gains to help slow the economy...

"We can be reasonably safe to assume that the pace of appreciation is going to be very, very gradual and it's probably going to be the scenario for next year,'' said Jan Lambregts, head of research at Rabobank Groep in Singapore. "China may feel like it's gotten away with it so far, so it's going to keep a very gradual track.'

All of which explains why Chinese trade surpluses aren't going away any time soon.

June 26, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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comparing saving behavior among nations is a tricky business, especially if you just look at the data and decide one country has thriftier citizens than the other. saving behavior is often a reflection of the credit available to consumers, as well as confidence in the continuation of general economic good fortune. when we only need 5% down to buy a house and a couple thousand to lease a $75,000 car, and the data does not include 401k deductions, U.S. households look alot less thrifty than a nation requiring 50% down on a house and cars sold COD.

Posted by: steven Blitz | June 27, 2006 at 11:41 AM

The savings data does include 401k contributions.

Where does this erroneous idea come from? All anyone had to do is go to BEA.GOV to find it has no basis in fact.

Posted by: spencer | June 27, 2006 at 01:56 PM

I am really lagging at the moment ... :)

Excellent rap-up of sources on an important topic Dave. I think this is important ...

'Roach’s argument is that the US would save too little (and China too much) no matter what the RMB/ $.'

This is probably very true and the reason for why this is, is an important contribution to the endless and, if you do not mind me saying, dull/one sided discussion of the US/China trade relationship.

Posted by: claus vistesen | July 03, 2006 at 02:45 PM

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May 29, 2006

Why I'm Not Convinced The Yuan Is Undervalued

From the May 30 edition of the Wall Street Journal (on the opinion page in the print version):

Though it's hard to believe, China's sickly mainland bourses are the best-performing in Asia this year to date...

In normal economies, stock prices are based on expectations of a company's future earnings. China, however, isn't a normal market. Sure, mainland company profits are up slightly. But Chinese corporate profit forecasts -- when they're available -- are often linked closely to expectations of how the government will regulate a sector or company. Not to mention the poor corporate governance, lax financial disclosure and haphazard regulatory environment that lace the mainland's markets...

Foreigners aren't behind the recent euphoria. China's qualified foreign institutional investor program, which lets the waiguoren punt alongside the locals, is worth only about $6 billion. That's doesn't count for much in a market of around $450 billion. And not all of that foreign money is invested in stocks, either.

That leaves China's famed domestic punters, who may feel emboldened by other Asian stock market gains over the past few years. Or perhaps, given their limited investment options, China's investors simply can't think of anywhere better to park their cash...

The interesting question is, where would that domestic saving go in the absence of the extensive capital controls that support the PBoC's ability to so tightly control the value of the yuan?  Anyone want to bet it won't be in China?

Bread Setser raises a related issue in a very interesting post on the Chinese government's attempts to recapitalize its (presumably) ailing banking system with its very nice collection of dollar-denominated assets. Says Brad:

That is the problem with giving the banks the country’s foreign exchange reserves.   It creates a currency mismatch on the banks’ balance sheet.  Potentially a big one.   RMB deposits need to be matched with RMB bonds and RMB loans.  Not dollars or Euros.   If the banks get dollars or euros, and the dollar or euro depreciates against the RMB, good banks will become bad banks quickly.  Depreciating assets are not a good thing for a bank...

There is one set of circumstances where China’s bad banks could require China to use its dollar reserves.  It goes like this.

Chinese bank depositors lose confidence in China’s banks, and start to withdraw deposits from the banking system in mass.  That would be a big change from the very strong deposit growth we are observing right now.   But it could happen...

As depositors pulled their funds out of the banks, they would end up holding a huge stash of RMB cash.   And they might want to convert that to dollars or euros.

China has capital controls, so this isn’t easy.  But let’s suppose for the sake of argument that the controls are lifted.   The central bank maintains a de facto peg – so the depositors could sell their RMB to the central bank for its dollars...

Bingo –

Two key points:

First, the dollars are useful if Chinese citizens want to pull their funds out of China. ..

Second, with a current account surplus of $150b (and growing) and net FDI inflows of $50b, Chinese deposits could send up to $200b a year without requiring the central bank to dip into its existing reserves at all.   Rather than financing reserve buildup, China’s enormous surplus in its basic balance of payments would just finance capital flight.

Of course, Brad thinks -- and he is surely right -- that there are a lot of other fairly good candidates to which that capital could eventually fly.  But I'd say you'd want to at least imagine that these arguments bound the downside.

May 29, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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May 26, 2006

China Beat

China continues to be one of the most fascinating economic stories going. And going, and going, and going.  From today's Wall Street Journal (page C1 of the print edition):

While there has been a stampede out of emerging markets in the past week, China's stock markets have held close to their highest levels in two years. It is the latest evidence that China's investors take their cues from events close to home.

Meanwhile, from China Daily:

China's yuan strengthened to close below the psychologically important eight to the dollar for the first time since last year's revaluation aimed at greater exchange rate flexibility.

In part, the strength might be attributed to the steady ongoing march toward market liberalization.  From the Journal article...

This year's surge has been prompted by Beijing's steps to fix problems that have tripped up China's stock markets for the past four years. So far in 2006, the benchmark Shanghai Composite Index is up 37% amid some of the heaviest trading volumes. The rise has been triggered partly by news, made official Thursday, that China will allow initial public offerings of shares for the first time in a year.

... and from Reuters:

In its 2005 report taking stock of the country's financial reforms, the People's Bank of China said liberalization of its exchange rate regime would continue to be a key policy focus.

"We will push forward reform of the foreign exchange management system and perfect the formation mechanism of the yuan's foreign exchange rate," the central bank said.

It also said it would push ahead with efforts to liberalize interest rates and seek to create new financial products, while continuing reform of state-owned commercial banks.

All good, but slow and easy still does it.  From the China Daily piece:

"There's definitely a trend for the yuan to rise in value in future," said Sun Lijian, an economist at Shanghai's Fudan University. "But it's not going to be as fast as many believe."

There is only so much change the Chinese economy can absorb and the banking sector in particular needs a stable environment to carry out much-needed reform, he argued Monday.

According to the World Bank, that's a good thing.  From Xinhua Online:

A major change in China's yuan exchange rate could have unpredictable effects on the country's booming economy and the Chinese Government's cautious approach to currency reform is understandable as a result, the World Bank's China country director said yesterday.

In a news briefing on the release of the World Bank's five-year development strategy in China, David Dollar said China was still a developing country with a weak financial sector and a lot of weak institutions.

  "For the exchange rate, I have a lot of sympathy for the Chinese Government approaching that cautiously," he said. "I agree with the macroeconomists who think that it's in China's interests to allow some appreciation of the currency but I respect the government wanting to make that move gradual."

"A big change in the exchange rate really could have unpredictable effects on economic growth," he said.

In fact, those financial markets remain a bit of mystery.  Once more, from the WSJ:

Interpreting market events is tough for China's investors. Personal finance columns in the tightly controlled media are often unsigned views on single stocks, while on-the-air commentators duck the specifics on the big trends by referring instead to historic charts, public opinion polls and financial news from overseas...

Wall Street experts aren't much use in China because few have licenses to dispense retail investment advice. No matter how much stock prices on the Shanghai and Shenzhen exchanges rise, their interest is limited by a cap on foreign investment of only 1% of the $530 billion in Chinese market capitalization. Instead, foreigners focus on Chinese stocks traded in Hong Kong, where different fundamentals prevail...

Until recently, Larry Lang was China's best-known economic gadfly. He appeared on television each Friday night to rail against inequities he saw taking place as China shifted toward a market-based financial system.

His show was canceled just as stocks started to sizzle. Prof. Lang declined to comment, saying by email: "This is not a good time for me to talk about stock markets."

And the beat goes on.

May 26, 2006 in Asia, Exchange Rates and the Dollar | Permalink

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