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 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

Trends and Recent Developments in Foreign Direct Investment, June 2006, OECD

Other sources cited:

Prospects for Foreign Direct Investment and the Strategies of Transnational Corporations, 2005-2008, UNCTAD

2005 Foreign Direct Investment Confidence Index Report, A.T. Kearney

World Investment Report 2004, UNCTAD

World Investment Report 2005, UNCTAD

US-China Business Council document mentioned:
Foreign Investment in China
Published April 2006

Study cited by UNCTAD:
China is not Crowding Out FDI from the Rest of East Asia, Experts Say


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

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

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


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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