The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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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.


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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