The Chinese new year has only just started, and already trade tensions are ratcheting up. This is perhaps appropriate — astrologers tell us that the year of the Tiger is often a year of instability and conflict — and I suspect things will almost certainly get worse. The timing of various domestic political events in the US, China and Europe will make it harder than ever for any of these countries to back down before 2012 (by which time, presumably, the world will have ended anyway).
Last Thursday President Obama made a fairly strong speech in which he urged China to adopt a “more market-oriented exchange rate”. The timing of the speech was important. On April 15 the US Treasury department will release its report stating whether or not China is a “currency manipulator”, and it is hard to believe that the Treasury department is not facing some pretty stiff pressure.
China’s response to Obama’s speech was pretty rapid and pretty angry. According to an article in the Saturday issue of the Financial Times
What it means to “politicise” the currency policy wasn’t made clear, but on Sunday Premier Wen also jumped into the fray. He denied that the RMB was undervalued and, in the words of an article in Monday’s Wall Street Journal, added the following:
Wen is absolutely right. Undervaluing or depreciating a currency certainly is a form of trade protectionism, but that, I think, is exactly the point. In a world of sluggish growth and rising unemployment, everyone’s currency policies are legitimately going to be scrutinized over whether they constitute trade protection.
An article in the People’s Daily has Wen also warning that “China opposes accusations and even forceful measures that press for yuan appreciation, which will not benefit the exchange rate reform.” The claim that external pressure will never advance reforms in China is now much debated in Europe and the US, and may be less widely believed abroad than it has been in recent years. We’ll see.
These are murky political waters into which I do not want to dip, but it is hard to escape the politics of the debate. The same issue of the People’s Daily had another article pointing out that US debate on the currency was driven mainly by domestic considerations and that the only reason Obama brought up the subject of the RMB was to address domestic polls.
There is, as always, a certain amount of nonsense in these articles. For example the exchange rate itself affects the ratio between savings and investment, so while the first part of Zhao’s statement is more or less right — although not as a “fundamental reason” but rather as part of an accounting identity — the second part is certainly wrong and probably meaningless. More interestingly, it seems a little weird to argue that one of the benefits that China has provided the world with its undervalued exchange rate is low consumer prices that allow countries like the US “to consume excessively”. Aside from the fact that this pretty explicitly acknowledges that the currency is undervalued, since excess consumption is exactly the problem in the US, and since Chinese per capita consumption is much less than 10% of that of the US, it seems that China should be more approving of US attempts to return the favor and allow Chinese consumers the benefit of subsidized US prices.
Everything is politicized
Still, I do think the People Daily‘s article is right to say that the RMB is becoming an important domestic issue for Obama, and that it is domestic US politics that is driving much of the recent noise and the rancor. Obama’s popularity has dropped considerably, and ahead of the upcoming elections he needs to show that he is addressing fundamental economic problems. And of course it is also always easy to get votes by bashing foreigners — this is one of the many attitudes that the US and China share.
But even though the People Daily‘s criticism is correct, perhaps that doesn’t change anything meaningful. The concern over the effect of the RMB on US employment may still be a perfectly valid one, and the fact that Obama is under domestic pressure to address the currency is not an especially good reason to dismiss his concerns. On the contrary. Obama has little wiggle room, and as Paul Krugman pointed out in a fiery, and probably influential, speech last Sunday, the US may hold the stronger cards in any showdown. According to the relevant article in Business Week,
Krugman elaborated further Monday in the New York Times in an article, and then in a follow up article Wednesday, both of which are likely to be much quoted and widely read. Although Premier Wen noted again in his speech Sunday that China is “worried” about the value of its US dollar reserves, perhaps as a warning that China would counteract any US trade move by selling off USG bonds, Krugman doesn’t seem especially worried about this threat.
He may be right. Aside from the fact that it is not clear how China can dump Treasury bonds, he claims that it would only help the Fed in its quantitative easing, and would probably do far more damage to Europe (since China would presumably have to buy euros) than to the US.
The latter point is almost certainly correct. China’s selling dollars and buying something else would allow the US to get even more bang for its protectionist buck, probably at poor Europe’s expense. I would also add that the main long-term impact of dumping USG bonds might be no more than to cause a liquidation of Chinese assets at very low prices, and an equivalent transfer of wealth from China to the US (or to others likely at some point to buy cheap dollar assets).
Remember that at the beginning of WW1 something similar happened. In an urgent attempt to raise gold reserves to pay for the war, in the late summer of 1914 European belligerents dumped onto US markets what amounted to a far greater share of US assets than China currently holds. This caused about six months of havoc, and many sleepless nights in New York and Washington. But the US responded by putting into place temporary capital and stock market controls, and when the dust settled, the net effect was one of the most massive short-term transfers of wealth ever recorded from one group of countries, the European belligerents, to another, the US. European dumping caused a collapse in prices, and US investors ultimately scooped up the assets up very cheaply.
That doesn’t mean that there will be no cost for the US if China dumps, but rather that the cost might be absorbed fairly comfortably over a reasonable time period. I suppose I will be very unpopular for pointing this out — especially with people in the US Treasury department and among Chinese cold warriors — but please don’t blame the messenger. I am just trying to use the limited historical precedents to figure out what is likely to happen. We have seen asset dumping before, and on an even larger scale, and the US capital market is deep enough that it might easily absorb it.
Where I disagree with Krugman is with his claim that the chance of triggering a trade war is small. In fact, the day Krugman published his article, 130 US Congressmen sent an open letter to secretaries Timothy Geithner (Treasury) and Gary Locke (Commerce) demanding that China be designated a currency manipulator. They called for duties to be imposed on Chinese imports to counter the effect of the undervalued RMB. This raises pressure significantly, and I am sure in the next week or two there will be a lot more. There are also strong rumors of some high-powered and relevant Congressional session next week. Stay tuned.
Of course regular readers of my blog won’t be surprised by any of this. The logic behind a prediction of trade war is almost unchallengeable, and the two countries are simply the two most visible in a world in which trade tensions must inexorably rise. Just ask the Germans and their European partners. Trade relationships will continue to get much worse, largely because the cost of trade war for high-deficit countries is so much lower than for high-surplus countries, and there seems to be no real attempt on either side to tone down aggressive actions or rhetoric. We seem to be caught in a downward spiral, and the longer it goes on the harder it is for anyone not to participate.
But while I think the economic effect of a tariff war on the US is likely to be smaller than many expect (and much smaller than that indicated by some of the outraged yelping I saw on a CNBC show dedicated to the subject today), and maybe even employment-positive in the short term, I do not think it is in the longer term interest of the US. I think trade war would be very painful for China, and forcing them into such a difficult position will poison the relationship for many years. This is likely to be the most important global relationship of the next few decades, and we really need a better way to resolve these very thorny issues, but that almost certainly isn’t going to happen.
To return to the People’s Daily article, I think many in China have argued that a revaluation of the RMB may have a significant effect on China’s trade surplus without having an equivalent effect on the US trade deficit. The same would be true of tariffs on Chinese goods. In either case, say many in Beijing, China loses, but the US doesn’t gain, so why is the US so determined to force this outcome?
I think this claim is probably correct. An RMB revaluation in itself might not have as big an impact on the US deficit as many think. To see why, I thought I would try to outline what the impact of an RMB revaluation would be for China and the world by asking a few basic questions and coming up with my best possible answers. Here goes:
What will the balance sheet effect of an RMB revaluation be on China?
There are broadly speaking two different classes of revaluation effects, the economic effect and the balance sheet effect. By the former I just mean the impact a revaluation will have on the future development of China’s economy, and by the latter I mean the immediate balance sheet losses and gains for China. Obviously these two are related.
Let me begin with balance sheet impacts. Two weeks ago I posted a rather long entry on that very subject. For those who can’t bear reading or re-reading such a long post, the quick answer is that, contrary to common perception, a revaluation of the RMB is likely to have a very small, and probably positive, overall balance sheet impact on total Chinese wealth.
That is, however, not the end of the story. There is a significant transfer within China of wealth, which will create clear winners and losers. Basically any economic entity that is explicitly or implicitly long dollars (by which I mean any foreign currency not pegged to the RMB) and short RMB, will lose in a revaluation. Conversely, any entity that is explicitly or implicitly long RMB, and short dollars, will win. In my earlier entry I pointed out that the PBoC is the single biggest loser. It is long, if correctly counted, roughly $3 trillion in dollars, against which it is short an equivalent amount of RMB.
Exporters and manufacturers in the tradable goods sector will also lose. Their expected revenues (which can be conceptually capitalized as an asset) are mainly in dollars whereas their expected costs are partly or mainly in RMB. This means that the value of future revenues will drop relative to the value of future expenses, and so they will take a loss.
Finally in that entry I pointed out that any wealthy Chinese individual with a substantial amount of honest or ill-gotten gains stuffed in bank accounts abroad will also lose. But I forgot to mention another big group of losers — anyone in China who has stockpiled inventories of goods or commodities whose prices are set in international markets. Those prices will immediately drop in RMB terms upon a revaluation, and if the asset purchases were financed by RMB borrowing or assets, there will be a loss. So to the extent that companies or individuals are stockpiling iron, copper, chemicals, or anything similar, they will also take an immediate loss.
So who wins in a revaluation? Nearly everyone in China who has at least part of his consumption basket consisting of imported goods, which basically means every one in China except pure subsistence farmers. Because the rise in the value of the RMB causes the price of all imports automatically to fall, a revaluation increases the wealth of Chinese households by increasing the real value of their current and future assets and income.
This is the key point. A revaluation shifts wealth from the Chinese government and the manufacturing sectors (and some wealthy Chinese) to Chinese households — which, by the way, is pretty much what is meant by “rebalancing” in the Chinese context. There are many other ways besides revaluation to shift income this way. The PBoC can raise deposit rates, wages can rise faster than productivity, companies can be privatized by giving away shares to the public, and so on. They all have the same effect. They shift resources to households and away from producers, infrastructure investment, and real estate developers. This allows household income to grow relative to national income, which ultimately increases the consumption share of GDP.
What will the economic effect of an RMB revaluation be on China?
So as things stand currently, the reason an undervalued RMB distorts international trade is because it transfers income from Chinese households (they have to pay more for imports) and subsidizes Chinese manufacturers in the tradable goods sector. This is one of the many mechanisms by which households are forced to subsidize production and investment.
A revaluation, then, is part of the rebalancing mechanism. It helps to reduce subsidies to manufacturers and returns the income to Chinese households, who can then increase their relative consumption. But there is a cost to this rebalancing. China’s current industrial policies sacrificed household income in order to spur manufacturing growth, and this had the obvious secondary effect of speeding up employment and, with it, household income. So in a way by repressing household income growth China was paradoxically able to achieve rapid growth in household income. Neat trick, eh?
But of course this growth wasn’t unencumbered. Much Chinese growth was based on concealing the true costs behind hidden subsidies, so that real economic growth was likely to be lower than recorded economic growth. More importantly, because everything in the world must balance, the imbalances within China required the opposite imbalances outside of China — which mostly meant in the US. Just as this global system implicitly taxed Chinese household consumption to subsidize Chinese manufacturing and employment growth, it also implicitly taxed US manufacturers in order to subsidize US consumers. American consumers got cheaper (foreign) goods, American manufacturers had to compete against lower (foreign) prices.
So Americans over-consumed and Chinese over-saved. The system worked well for quite a while, until, as happened with the Japanese case in the late 1980s, US debt levels and unemployment rose to economically and politically unacceptable levels.
For China and the US to adjust means both of them unwinding this trade-off. Beijing will have to enact policies that reduce the subsidies to manufacturers and return the income to Chinese households. But this automatically means depressing economic growth and, more importantly, depressing employment growth.
This shouldn’t be a serious problem if it happens slowly. As Chinese manufactures gradually lose their subsidies, they will rely more than ever on the consequent rising Chinese consumption, and so domestic consumption will replace subsidized foreign demand as the source of growth. Not only will China have a safer and more balanced economy, but it will be more innovative (consumption tends to drive innovation, not production) and much more efficient.
But China cannot adjust too quickly. If Beijing removes the implicit subsidies, including those caused by the undervalued exchange rate, too rapidly, that could force large-scale bankruptcies as Chinese manufacturers found themselves unable to compete globally or at home. If these bankruptcies forced up unemployment, then paradoxically even as the transfers from households to businesses are being reversed, household income would nonetheless decline as unemployment soared. In that case Chinese manufacturers would find themselves becoming uncompetitive in international markets just as domestic markets are collapsing.
The conclusion? A rebalancing is necessary for China, as nearly everyone in the leadership knows. This will involve, among other things, a significant revaluing of the currency. But rebalancing cannot happen too quickly without risking throwing the economy into a tailspin. That cannot and should not be a part of the US or Chinese policy objective. By the way if China is forced to revalue the currency too quickly, it will have to enact countervailing policies — lower interest rates, suppress wages, increase credit and subsidies — to protect the economy from falling apart, and these will exacerbate other imbalances that may be even worse than the currency misalignment. Currency revaluation, then, should be part of a broader adjustment process.
So how can the global system adjust?
If we abstract for a moment, and call all trade-deficit countries the United States, and all trade-surplus countries China, there are broadly speaking two ways the system can adjust. Remember that each domestic imbalance requires the other, so that if China adjusts, the US must adjust too, and if the US adjusts, China must adjust too. (For those more technically inclined, by the way, this is one of the points that Krugman makes in his second article, although using different terms: China’s exporting of capital must create capital imports somewhere else, and these capital imports are the obverse of the trade deficit.)
One way in which the system can adjust is for China to take the lead and reverse the policies that cause households to transfer resources to its manufacturers. As a consequence consumption will no longer be taxed to subsidize production. This will cause household consumption to rise as share of GDP — the good way by a surge in consumption, the bad way by a collapse in economic growth.
Either way, the rebalancing in China will force an equivalent rebalancing in the US. As the price of Chinese goods rise, the net impact will be to transfer resources from US consumers, who have to pay more for their imports, to US producers (US producers become more globally competitive). The rise in Chinese consumption relative to Chinese production would be necessarily matched by a rise in US production relative to US consumption. (Some readers will notice that I am ignoring the role of investment in economic growth, and of course changes in investment matter, but over the medium to long term the basic argument is unchanged.)
The second way in which the system adjusts is if the US drives it. The US can put into place policies that favor manufacturers at the expense of consumers. These include consumption taxes, manufacturing subsidies, penalties for consumer borrowing, subsidies for investment, or, more ominously, import tariffs. These can all have the same aggregate effect on the US trade account by shifting the relationship between how much Americans produce domestically and how much they consume. And of course as the US adjusts, China must also automatically adjust. Tariffs just on Chinese goods, by the way, will have a minimal impact on the US adjustment since trade may very well just shift to other countries.
Note that in either case both countries will rebalance, but rebalancing says nothing about how rapid economic growth must be. I addressed this in a blog entry last week when I discussed Japan’s dismal post-1990 rebalancing. In this context rebalancing just means that in China economic growth will be less than consumption growth, and in the US consumption growth will be less than economic growth. The problem is that China will try to adjust by pushing the cost of the adjustment onto the US, and the US will try to adjust by pushing the cost onto China. Each country can strive towards the good outcome (rapid economic growth) or find itself facing the bad outcome (declining consumption). This is why policy coordination and gradualism is so important.
Will a revaluation cause China’s trade surplus to decline?
Yes, all other things being equal, but of course all other things are not equal. Within China there are several things that will affect the trade surplus. Remember that the trade surplus exists because of the imbalance between Chinese domestic production and Chinese domestic consumption (technically the surplus is the difference between savings and investment), and so anything that affects the subsidies to manufacturers, or that affects household income, will also affect the trade surplus.
I have already argued that interest rates and wage growth that is lower than productivity growth can affect the trade surplus as much as the undervalued currency. In that case, if the RMB revalues, and at the same time real interest rates are forced down by a sufficient amount, or wage growth is restrained, the net result can easily be a rise, not a decline, in the trade surplus. It depends on the relative magnitude of the different factors.
The external environment also matters. If US interest rates decline for example, unlike in China where declining deposit rates is likely to spur savings, US consumption may rise even as the cost of Chinese imports rises because of a surge in the RMB.
Quite a lot of defenders of RMB stability have made the point that the rise of the yen after 1985 and the rise of the RMB after 2005 were most emphatically not associated with declining trade surpluses. According to their arguments, this clearly proves that the currency doesn’t matter.
This is nonsense, and even if it were true it seems more an argument in favor of revaluing than an argument in favor of not revaluing. But it isn’t true because in both cases there were countervailing changes. Perhaps most importantly, local interest rates in Japan and China declined in real terms, thus reducing local consumption, and US interest rates also declined, spurring US consumption (I know, I know, this sounds strange, but the wealth effect of interest-rate changes in the US is the opposite of that in Japan and China because of the differing structures of household balance sheets). All that happened in both cases was that the rebalancing effect of the currency revaluation was swamped by the exacerbating effect of other factors. The only thing that Japan after 1985 and China after 2005 prove is that the currency is not the only thing that matters.
Will a decline in China’s trade surplus cause the US trade deficit to decline?
Not necessarily. Beijing has pointed out many times that a contraction in the Chinese trade surplus does not necessarily mean an equivalent contraction in the US trade deficit. All it requires is an equivalent contraction in the rest of the world’s net trade deficit. This could easily happen with an improvement in the trade balances of Vietnam, Mexico, Korea or anyone else, enough fully to absorb the reduction in China’s trade surplus. In that case, the US trade balance does not improve, and the US gets none of the employment benefit of the RMB revaluation. China will simply import fewer jobs from abroad and some other countries will import more, or export fewer, jobs.
Remember that if the RMB revalues, this is the same as if all the currencies of the rest of the world depreciate. This will cause a shift in the rest of the world so that households will see a small reduction in their real income, and non-Chinese producers in the tradable goods sector will see a small increase in their competitiveness vis a vis the rest of the world (largely because Chinese producers becomes less competitive). This will reduce non-Chinese consumption and increase non-Chinese production, and the distribution of these changes among different countries, including the US, will depend on a vast array of factors.
So Beijing is absolutely correct in arguing that an RMB revaluation might not have a major impact on the US trade balance, although there is one important caveat. A number of other developing countries, especially in Asia, are concerned about excessively loose domestic monetary policy and inflation, and would like to raise the values of their own currencies. They cannot do so, however, until China does. During the crisis China has expanded its share of global net demand at their expense. If an RMB revaluation causes revaluation in other countries with large trade surpluses, the net impact on the much smaller “rest of the world” will be much bigger, and so simply as a function of arithmetic the US is bound to benefit.
This fact again argues in favor of globally coordinated action rather than an excessive focus on RMB bashing. If China is forced to revalue the RMB, in order to gain the optimal global rebalancing it should be done as part of a general realignment of currencies (although of course cynics will point out that surest way to ensure that something doesn’t get done is to coordinate it globally).
Is it only China that must act?
China will rebalance, but it cannot do so quickly. If it does, as I discussed above, it may easily fall into a spiral of declining competitiveness leading to rising unemployment leading to declining domestic consumption leading to more unemployment. Clearly this is not in China’s interest.
There is another problem. There are several countries with structurally low consumption and high production — Germany, Japan and China being the most important (and I leave out the OPEC countries for obvious reasons). Simply forcing China to adjust, in that case, might cause damage to Chinese growth prospects without helping the US rebalancing effort.
For example, a sharp rise in the RMB, especially if accompanied by a rise in other Asian currencies, will take depreciation pressure off the dollar. Since currently most of that depreciation pressure is borne by the euro, a revaluation of the RMB could easily also result in a decline in the euro, whose economies will then see a sharp improvement in their net trade balance. This means that a significant part of the benefits of Chinese revaluation may accrue to Germany, a country that has yet to resolve its own internal imbalances.
So limiting the whole rebalancing discussion just to China and the RMB may end up not helping much. It is true that the US could force through a rapid domestic rebalancing of its own, including by raising import tariffs generally (and not just on Chinese goods), if it really wanted to, and the benefits to the US would be a surge in employment and manufacturing at probably little real long-term economic cost. But unilateral action on the part of the US risks creating at least some problems for the rest of the world, especially China, Japan, and parts of Europe.
So what must be done? Clearly there is a problem with the undervaluation of the RMB and with Chinese domestic imbalances. But just as clearly there are also problems with a number of other major over-consuming and over-producing countries. In addition Chinese producers have become so addicted to a wide variety of implicit subsidies, besides the currency, that they cannot possibly adjust very quickly. It will take years of continuous adjustment to wean them away from an undervalued currency, too-low interest rates, excessive credit aimed at SOEs, and sluggish wage growth.
That suggests that if we want to resolve the global imbalances in an optimal way that maximizes global growth and equity, we would need all the major problem countries to work out a program, perhaps over 8 to 10 years, in which China, Japan and Germany take concrete measures to shift subsidies away from manufacturers and return the income to households, and the US, the UK and other deficit countries shift income from households to investment.
Of course the cynic in me says getting a global solution will prove impossible. Each country that benefits in the short term from stonewalling on any aspect of the complex adjustment process will do so. So I guess that just leaves trade war. This is the year of the Tiger, after all.
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short version, usa has to get its act together a lot more than china does .. unavoidable, and resisted on all fronts in usa .. fools
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A bit off topic, but a point regarding your previous posts on what China can, and can not, do with their reserves. I believe they actaully could use the reserves to “pay for” a bank recapitalization in one sense. Lets say they need 6.8trl Yuan to recap the banks. They can issue 6.8trl Yuan in government debt to the PBC, effectively monetizing it, and have the PBC “sterilize” the monetization via the sale of $1trl in US Treasuries, with the PBC effectively swapping Treasuries for Yuan on the asset side of their balance sheet.
I think the key point to keep in mind is that the PBC does not currently hold “liquid Dollars.” They hold notes & bonds, which are effectively contracts to receive Dollars, with interest, at various points in the future.
Lets assume for the sake of simplicity that instead of holding bonds, the PBC simply held long-dated, long-USD forward FX contracts. (Interim interest payments and counterparty risk aside, they’re functionally equivalent to USD bonds). Now lets look at how the PBC might unwind these trades to generate funds for domestic use:
1) They Sell forward USD / They Buy Spot USD (unwinding a long-dated, long-USD forward trade, or in reality, a Tbond).
2) They Sell spot USD / They Buy Spot Yuan
3) They Sell Spot Yuan / They Buy Forward Yuan (in the form of Yuan govt bonds)
Voila, they’ve swapped a Treasury Bond for a Yuan Govt bond on the asset side of their balance sheet. Of course, in practice, a rather large fx trade has gone through the fx market, eliciting all manner of front-running, speculation, position-squaring, and no doubt a bout of wicked volatility. Nonetheless, we can surmise these effects should eventually pass as, can plainly be seen, in a global sense, the supply/demand balances for both liquid (ie spot) Dollars and liquid (ie spot) Yuan have been left unchanged. Recall the now widely held understanding that in the medium-term, “sterilized intervention doesn’t work.” This trade I’ve outlined is simply the unwind of a sterilized intervention. So it shouldn’t “work” – ie permanently effect the exchange rate – either.
As to why sterlized intervention doesn’t work, I like to say that the FX markets “discover” the exchange rate, they do not “determine” it. The exchange rate will be the result of the intersection of GLOBAL supply and demand for liquid (ie spot) USD and for Yuan. To take the argument to an extreme, if the PBC decided to double their balance sheet overnight via domestic local market ops (buying Yuan bonds) we would surely expect the Yuan to fall at the open of trading, right? But the first FX trade to go through at the lower Yuan exchange rate certainly wouldn’t be the cause of the decline, would it?
All of which leads me to one last point. In theory, the PBC could have pegged the USD/CNY rate for the last several years without ever purchasing a Treasury Bond, but instead simply expanding the Yuan monetary base until the desired exchange rate was achieved. Would their currency peg then be open to silly charges of “FX manipulation?”
MIchael,
What a useful post. There must be a some higher purpose to Official China giving you time to write very long pieces by disabling your ability to respond to comments. Such wisdom!
Great post though and maybe some bright spark in either country understands that time is running out for China, but, but that no US politician does the world a favour by getting a trophy revaluation and China losing face. That is precisely the wrong way to treat a future super power, unless you are reasonably certain that the other side will not acquire that status and thus inherently risky. But unfotunately history is made interesting by the policy mistakes of leaders/elites, not their correct calls…
” In either case, say many in Beijing, China loses, but the US doesn’t gain, so why is the US so determined to force this outcome?”
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Poll numbers. Support of incumbent democrats are collapsing. They need a boogie man, a Saddam, an Osama to stand up against and to protect the American people from. Of course, Wall St., TBTF entities and US politicians pose a much bigger threat to the citizens but, Wall St. and TBTF’s pump money like tapwater to re-elect incumbent politicians so, they are off limits.
China should just play the game, fund a few PAC’s, create some 501C-3′s to pump money to the spineless US politicians. US politicians would then move along and find another boogie man elsewhere.
Professor, thanks for a very lucid post again.
Regarding the point “US producers [will] become more globally competitive” in the case of RMB appreciation, while I understand this what theory says (Stopler-Samuelson et al), I do not think it is necessarily true, or at the least there could be significant mitigating factors.
If American manufacturing’s usage of Chinese intermediaries and inputs (like electronics hardware at the unbranded stage etc.), is more important than China as a market for its final products (all this at the margin of course) – then American manufacturing may not gain.
And, as per your earlier writings, an RMB appreciation will likely strengthen the dollar vis-a-vis the Euro, so not much help there. (But of course, if the Chinese appreciation was the first one in a series of Asian appreciations – then the answer could be different, but we will still have to ask the same question in my humble opinion – whats more important? “Cheap” capital intermediaries from throughout Asia now, or Asia as a bigger market because of relative dollar devaluation)
I do not have numbers, so I am just suggesting this possibility which could of course be not plausible at all
Very interesting read.
I’ve spent some time trying to figure out how this all hangs together, and I often get the feeling the debate is upside-down. I think China is the country that would benefit from a floating of the RMB, while the US would lose. (in general that is – of course there’d be winners & losers in both countries)
As a country you’d want as valuable a currency as possible – if the value of the RMB was a million times what it is now, the Chinese could stop producing alltogether and just consume – the country would be super rich! (Of course this is not possible.)
If a cheap currency is desirable, why not devalue indefinitely? Lets’s decrease the value of the RMB to 1% of what it is now! Everyone would be able to get a job – but nearly everyone would be dirt poor.
If I agree to work for 10% less I would be more competitive, but only because I’m letting myself be poorer.
We’re not producing for the fun of it, we’re producing to consume. Household purchasing power is what matters in the end, that’s why we have an economy in the first place!
If the Chinese economy (eg. GDP) would grow more slowly because it would have to rebalance by increasing the household consumption, to the actual people living within the economy this is great, it means an increased standard of living! If the US would have to rebalance by increasing the production part of GDP and decreasing the consumption part, this is bad for the US. It means more work and less play! Lower standard of living. Not that this can be avoided in the long run.
Right now the low RMB subsidizes the American consumer at the cost of the Chinese consumer. Instead of letting all revenues from exports stay in the country the central bank invests some of the value in USD assets, which is going to turn out to be a bad investment. This keeps the USD at a higher value than it otherwise would be, and it helps keep inflation down in the US.
The money flows back into the US through the US budget deficit (right?) and keeps it all going. If the US got their budget balanced and stopped borrowing money from abroad the trade deficit would have to shrink as well, no need for an RMB revaluation to achieve that.
Or maybe I’m missing something??
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Mr Pettis
You mention the fact that a wealth transfer will take place but you did not mention a time frame of how long it would take to adjust. In the short run I would imagine that re-balancing would decimate the balance sheets of the Chinese exporters, lead to huge Chinese job losses, deflation in Chinese asset prices, and leaps in the CPI in the US. In your opinion would this take a few years, a decade, or more?
[...] Michael Pettis, “A revaluation shifts wealth from the Chinese government and the manufacturing sectors (and some wealthy Chinese) to Chinese households…” (China Financial Markets) [...]
Mr Pettis
One more question. Wasn’t the Great Depression in the US fundamentally a rebalancing of the US economy?
[...] in which he urged China to adopt a “more market-oriented exchange rate”.Originally posted here: How will an RMB revaluation affect China, the US, and the world???????????? ???WordPress??????: How will an RMB revaluation [...]
Your last there articles have been SUPERB!!! I just wish they could be printed in the NY Times or something. The ignorance on this topic is just so monsterous.
[...] more on how a trade war would affect the global economy read Michael Pettis’ piece How will an RMB revaluation affect China, the US, and the world?. He notes that surplus countries like China have the most to lose and feels that the short-term [...]
[...] More here: How will an RMB revaluation start China, a US, as well as a world? [...]
Professor Pettis,
What would the effect of a quick RMB revaluation be on the US stock markets in the short term, and in the long term?
And,
what would the effect of a gradual RMB revaluation be on the US markets, in the short and long term?
There’s been an interesting back and forth between Krugman and the Economist’s economics blogger, Ryan Avent. The Economist, of course, urges caution and forebearance on the part of the US, as opposed to Krugman’s more aggressive take. In many ways I agree with the Economist’s conclusions, though its economic argument is weak. They present an overly narrow and traditional view of trade policy as though explicit tarrifs are only things that matter.
But, as you lay out here, there’s no quick way to adjust the Chinese economy, so I don’t think Krugman is really being helpfull. I may be being polyanish about this, but I suspect Obama and his team understands the difficulty of adjustment and we’re likely to see more trade brinkmanship than actual trade war. I have some hope the IMF can play a constructive role here too (so yeah I guess I am being polyanish).
Keeping the CNY down is self-fulfilling. In the end, China will have printed so many CNY that it is not undervalued any longer. We may already be there.
First things first. The people responsible for shipping our factories over to China need to be hung for treason and all their assets confiscated. Then after we rebuild our industrial capacity we can worry about trade wars.
Michael…interesting piece…thanks…but I’m curious…during the last big PRC inflation scare and during a period of significant hot money inflows you argued back in Sept of 07 that you were “convinced more than ever that until the government allows a rapid increase in the value of the RMB – and perhaps the least damaging way would be to engineer a sudden maxi revaluation of 15% – there will be no good way of dealing with the problem…” of hotter inflation and speculative inflows…..the question is…don’t we have the same environement now with US protectionist sabre rattling as we did then and if so…why would the “maxi revaluation work then…but not now? What’s changed?
Excellent piece as usual. It is difficult in this economic and political environment to image 2 countries coordinating much less as many as need to, so I am left to agree with your final two sentences. For those who might wish to read another excellent take on this, read Wolf’s piece on “Chermany” which can be found
here: http://blogs.ft.com/economistsforum/2010/03/ft-column-china-and-germany-unite-to-impose-global-deflation/
and here:http://www.cnbc.com/id/35909653
yeah,trade war.
no other options left on the round table.
sometimes, be a realistic is kinda sad.
something i don’t really understand, if america can’t really be 100% benefit and china will be 100% suffer from the appreciation of RMB, then, why americans are doing so hard to push it?
Prof. Pettis- Wonderful, lucidly written analysis of a complicated issue, as always.
While I wouldn’t change anything about your site, might I humbly suggest that you add Patrick Chovanec’s blog to your links section? I think you and Prof. Chovanec together publish the two best English blogs on Chinese economics out there.
In case you haven’t already seen it, Prof Chovanec’s website is here: http://chovanec.wordpress.com/
IF China does sell its US Tsys, who will absorb the selling? US Households are in no shape to stand up to that buying as chronic unemployment and low household savings stare the US in the face. The only buyer I can see picking up the slack is the FED as the quantitative addiction roars forward.
There has been an increasing drumbeat in the past 2-3 weeks pointing the finger at China, as if the criminal deeds of Goldman Sachs, et al, here in the US didn’t precipitate this global fiasco.
What I’m seeing overlooked in all of these pieces — including yours — is the effect this will have on the prices of consumer goods. Most electronics are now made and assembled in China.
I see a sticker shock for those coming akin to the shock that happened with OPEC in the 1970s. Why isn’t this ever mentioned?
Mr. Pettis, I sense you are treading lightly on this issue. Perhaps your position at BeiDa requires you to.
What does it mean that the Chinese over-saved? I understand how an entity (individual, country, etc) can over-consume (spend more than it has) but what does it mean for an entity to over-save?
“Wen is absolutely right. Undervaluing or depreciating a currency certainly is a form of trade protectionism…”
=====================
I would go further and call it an attempt to defraud.
Hi, Harsh Gupta, if the US manufactures see things in the same way, they will undertake lobbying work to prevent protectionism from happening.
And, thank god, we do have WTO! The lawmakers´ behavior has its constrain.
More likely, we will see an increasing of creeping protectionism as a real trade war.
Regarding your statement:
“Exporters and manufacturers in the tradable goods sector will also lose. … This means that the value of future revenues will drop relative to the value of future expenses, and so they will take a loss.”
What makes you think that? Did that happen during the few years of steady renminbi appreciation? I rather have the impression that inflation in China was subdued possibly due to some sort of deflationary pressures generated by currency appreciation, and maybe other things. What makes you believe that the nominal value of future expenses won’t drop?
Another question: do we have any reason to believe that the slow-down in renmbinbi appreciation before the fixing was caused by anything other than market forces?
Sorry for being ignorant, but I’d like to understand that in full detail:
“So as things stand currently, the reason an undervalued RMB distorts international trade is because it transfers income from Chinese households (they have to pay more for imports) and subsidizes Chinese manufacturers in the tradable goods sector. This is one of the many mechanisms by which households are forced to subsidize production and investment.”
This situation exists now for quite a few years. Don’t you think we have a somehow balanced situation right now in real terms? If not, what should have prevented that balance? The Chinese manufacturing IMHO profits from a low standard of living, from low environmental standards etc. This may not have to do anything with exchange rates at all.
?
“So I guess that just leaves trade war. This is the year of the Tiger, after all.”
Maybe you should try to establish a suggestion regulating that “trade war” through the WTO. Example: countries are entitled to raise import tariffs to counter trade deficits…
Maybe not the best solution, but better than not preventing exaggerations at all.
[...] What is needed is a gradualist approach (Michael Pettis) [...]
First, Mr. Pettis thank you for blogging! I want you to know I don’t take your efforts for granted.
You write, “The system worked well for quite a while, until, as with Japan in the late 1980s, US debt levels and employment rose to economically and politically unacceptable levels.”
I was in Japan in the late ’80s, teaching university students among other occupations, and the cutthroat competition among companies to hire new graduates was amazing. Given the chronic US problem of an underclass, though, I find it difficult to imagine that levels of employment could really become too high here even if a certain amount of optimal economic efficiency were sacrificed. I’m not an economist, so I’m probably missing something obvious, but if I were Alan Greenspan I’d be calling the acceptance of decrease in NAIRU a real achievement that made a big difference in the lives of many youngsters from disadvantaged backgrounds. This is all the more obvious given how the current job market has affected the most vulnerable, not to mention issues detailed by borderlandbeat.com among others.
Regarding “China’s Bad Debtor” by Yu Yongding….
http://www.project-syndicate.org/commentary/yu2/Englishhttp://www.project-syndicate.org/commentary/yu2/English
I’m finding this pretty difficult to parse. Not looking for Prof ZZZ of YYY university to take on anyone in particular, but maybe you could illuminate this sort of discourse for people like me who believe they readily understand what Martin Wolf is on about with “Chermany”. Or point to someone else who you think does a good job of it.
Your prescription for coordinated action over several years is on the money, but legitimacy is under pressure in all the big players and I fully agree that it’s tough to be optimistic.
[...] How will an RMB revaluation affect China, the US, and the world? Michael Pettis [...]
[...] what’s at stake among various interest groups within China, we turn to the eminent Professor Pettis: A revaluation shifts wealth from the Chinese government and the manufacturing sectors (and some [...]
If China is unwilling to appreciate the RMB would it be possible for the US to depreciate the dollar?
What would the side-effects of this be besides higher commodity prices for the US?
Michael , I am an avid reader of your blog and you noticed one spelling mistake and some in the past.
“The PBoC can raise deposit rates, wages can rise faster than productivity, companies can be privatized by giving away shares to the pubic, and so on.”
well, you know it should be public. Just would like you to know
[...] China Financial Markets: How will an RMB revaluation affect China, the U.S. and the world? [...]
China would benefit hugely if they raised the yuan . The manufacturing sector in China is super dependent on very cheap energy , water and environmental cost – this cant go on much longer . High-tech retooling is the next step China have to take to reduce the energy and recourses content pr. unit produced . A strong yuan would make this invective step much cheaper coz they have to buy the retooling in the vest .
A gradual 20 % increase in the Yuan over say 2 years would not do any harm to the Chinese manufacturing sector – who is capable to outperform the Chinese manufactures ? the Vietnamese ? NO – to small ! In the time frame from raising the yuan to the retooling is complete – competitors to the cheap Chinese manufacturing could take a little marked share from the Chinese – only to be outperformed big time when the retooling come due . With a new high efficient manufacturing base the government and municipal China would save very big money in avoiding a ticking environmental WMD . A bonus for China in this scenario is that they will be able compete higher up the in value chain and the vest should be scared of what they wish for !! US is acting like p`ing in their pants to keep warm on a clear winther day in inner Mongolia – a very short relief .
Excellent post, Michael. Certainly the best I have seen to date on the subject and, if I may, identical to my own views on the effects on wealth redistribution inside and outside China that yuan revaluation and relaxation of capital controls would have. I was very relieved to read Paul Krugman’s views and now yours (much more explicit) because for a moment I thought I was alone in entertaining this critical-analytical stance.
Having only recently come across your work (I was at Cambridge UK, Economics & Politics), may I congratulate and exhort you for your level-headed and insightful commentary – nothing short of inspiring. Ciao.
Great post as usual, glad you get past the blocks at last!
You mention of China and German made me think of Martin Wolf’s recent “Chermany” article in the FT, in which he puts the blame more firmly at their doors.
Also from the FT (LEX):
“Beijing was asking for it. On Friday a central bank official invited the US to refrain from “politicising” China’s currency policy. On Sunday, closing the annual meeting of lawmakers, Premier Wen did little else, with a series of pointed allusions to the “Three Ts” dominating the two nations’ relationship: Taiwan, Tibet and the trade surplus.”
Martin Wolf re-raised the point that the WTO could come under significant stress if this process becomes more hostile. US tariffs on Chinese exports, be them CVDs or other, will be actionable at the WTO. Since the WTO has no responsibility for currency issues (unlike the IMF), then it will be very hard for the US to maintain such actions short of totally undermining the (limited neo-liberalist) authority of the WTO.
As an aside, i think that the RMB for Iran Sanctions deal is a distinct possibility at the moment. Obama seems to be a realist, if he thinks Iran sanctions are more important than RMB revaluation, there could well be a quid pro quo.
[...] Source [...]
i think usa’s problem is actually as follows(from nakedcapitalism-maniam.)
USA banks profits(business model)
-Federal reserve bank print money(turn paper to money)cost=paper cost.banks’capital.
-1st profit-exchange paper(printed money&interest free)for gov bonds(interest paying).
government/people become debtor.(people didn’t do anything but get debts.)
People through government owe them(bankster) money.
better still for banksters this new paper(money)earn interest.
But this interest paid by people when people work,eat,drink,breath through taxes,tariff,etc.to banksters.And govenment help banksters to collect this people’s ‘debts’(in the form of-disguise- interest/taxes/tariff,etc.)
-2nd profit-bonds earn interest.(now people/government owe the banksters principal+interest)
government collect taxes,income tax,tariff,land sake,etc to pay this interest(to bankster).
but bankster are very clever and never ask principal to be paid so that interest can be collected forever.
instead keep creating debt through war,market turmoil,currency turmoil,chaos,fraud,etc.
-3rd profit-deposit bonds with treasury&get back money(printed money)-used this money to give out loans at 10 times(fractional banking).
Take any loan from bankster they take a cut.
People do business bankster take a cut through loans,profits tax,etc.if people’s business fails bankster take over and own the business for free.
Therefore bankster loot from people
(i)directly when people get loans from them or
(ii)indirectly through government taxes,income taxes,tariff,land sale,etc.to pay interest on government debts.
ultimately ends up in bankster coffers.
The beneficiaries.
Federal reserve banks.the 12 reserve banks.
The shareholder of these banks are jp morgan chase mahattan,morgan stanley,goldman sachs,citi,bofa,wells fargo.
Every time money is printed or loans created,people lose and in debt without people realizing it.
This is how a nation is conquered and enslaved silently and insidiously through debts.
the enemies are inside usa.
[...] Pettis: How will an RMB revaluation affect China, the US, and the world? – China Financial Markets [...]
These esoteric discussions are great, but they assume that aggregate consumption can continue infinitely. Yet the world is finite. Every gallon of gas burned in a Chinese consumer’s car is one that will never go into an American SUV. There are more than 3 times as many potential Chinese consumers, and car ownership is skyrocketing.
We are approaching the zero sum game just as climate change and peak oil begin to show tangible effects. Few outcomes seem likely other than massive de-industrialization or population reduction. How we get there is a fertile subject for consideration.
[...] to earn 0% (at their detriment). Could they dump dollars on the market? Sure. But as Michael Pettis said, this would have a negligible impact on the deep U.S. capital [...]
[...] to earn 0% (at their detriment). Could they dump dollars on the market? Sure. But as Michael Pettis said, this would have a negligible impact on the deep U.S. capital [...]
The analogy with WW I is flawed. The U.S. suspended the international convertibility of the dollar by shutting down the capital markets where Europeans could have sold their assets. The markets reopened only when the volume of European war orders had reached the point where the money from the asset sales would be staying in America. The great transfer of wealth was temporary; by the end of the war Britain and France owed the U.S. money and the debt was never, in fact, repaid.
My last comment was truncated. What the WW I experience does support is Michael’s point that reserves by themselves do not offer any competitive advantage. They are like Napoleon’s comment about bayonets: you can do anything in the world with them, except sit on them.
Another likely consequence of a one off 10-20% RMB appreciation is that it will help solve the problem of unaffordable home prices for the locals, the very problem that the leadership wants to solve. Oversea capital flow have been buying apartments in the big cities, and are very much responsible for inflating the housing prices beyond the reach of local Chinese. A sky high home price puts additional strain on local consumption, as disposable income is forced into this particular form of capital accumulation. An instant appreciation will help steer all that capital towards other use to better the life of ordinary Chinese. The winners will be the average Chinese people, the loser will be the real estate developers and local officials who controls the allocation of land use rights.
[...] floor on which to earn 0% (at their detriment). Could they dump dollars on the market? Sure. But as Michael Pettis said, this would have a negligible impact on the deep U.S. capital [...]
[...] Pettis on China Revaluation (as often is the case, Pettis seems to nail this one out of the park) [...]
Professor Pettis:
RE: “or, more ominously, import tariffs”
Excellent article. You and Prof Chovanec are the only two people consistently writing insightful english language content about Chinese economics. Thank you.
QUESTION: In spite of WTO membership, do you believe that China is engages the world in Free Trade and embraces the spirt of the WTO?
Everything made outside of China has a 17% VAT tagged on, in addition to tariffs that in my industry (cinema equipment) average another 10%. That’s 27% tacked on by customs. How much does the undervalued RMB add, maybe another 10%? Additionally, much of what the USA produces today is intellectual property, and China is specifically noteworthy for not enforcing intellectual property rights. Last, at Copenhagen, Beijing sought specifically to obstruct US objectives in protecting the environment.
I’m probably just biased since I’m in the business of selling American manufactured products to Chinese customers, but if China is already raising my daily import costs by 30-40%, I can’t grasp why you would write “or, more ominously, import tariffs”, as it seems to me that China has never let go of their import tariffs – why not directly match China’s policy tit for tat?
If the Chinese government is proving to be a poor economic partner for the USA, then wouldn’t it be in the best interest of the USA to facilitate relocating the forces of production to other, more cooperative locations?
In terms of a US/China trade war, who has the leverage?
True we are dependent on China’s labor to assemble many of our high tech items, clothes, etc, etc..
But they are dependent on this process even more, no?
Truthfully, we could stomach everything at Wal-Mart being 25% more expensive. It would be painful, but it is doable. And it would reactivate many dead industries on our shores.
But could China spontaneously begin to design, market, sell and buy most or all of their own goods, and decouple? That seems totally undoable.
Or would they not miss a beat and increase exports to other areas? That would only be a different brand of the same poison.
The US might not be in quite as precarious a spot as China. But as per Prof Pettis’ post, an orderly unwind seems like the best alternative.
I am really sorry to read articles on Krugman’s blog recently. Sometimes I thought if he wanna be the president of US in future?
Thanks for your post. This is a great post in terms of Chinese economy, as usual.
[...] to earn 0% (at their detriment). Could they dump dollars on the market? Sure. But as Michael Pettis said, this would have a negligible impact on the deep U.S. capital markets: “the net effect was one of [...]
[...] but valuable analysis: “How will an RMB revaluation affect China, the US, and the world?“, Michael Pettis (Prof at Peking U), 17 March [...]
Michael:
I suggest this is not a new Obama issue but has been pushed since 2006 by Graham and Schumer. The buzz last year was that Obama asked them to chill for a year. The bill has strong labor support and strong Republican support.
I consider the pair two of the smartest Senators. So when I see at the same time Obama is supporting the Schumer and Graham initiative on immigration reform, I wonder if there is some link. The US has everything to gain by encouraging the movement of DFI from China to Mexico
houhui,
The Wolf article about comparing China and Germany’s behavior was, of course completely within the city tradition of not liking the EUR and not liking the existing EU, which is slowly on course for much higher levels of integration. Greece is a great excuse for setting up a disciplining agency. The UK is half in half out and generally the British press, even the part that caters for literate people, struggles with that. Assuming that the EU will prefer comfortable stagnation (the labor force will shrink naturally anyway so there is little political gain in governing for growth, neoliberal style) to a breakup for the benefit of a highly hypothetical market economics utopia, UK governments will be facing increasing pressure to choose, and that will mean important sacrifices: the City, nationalism, the remnants of great power status, etc.
However, Germany acts as an engine of technological progress within what is left of manufacturing Europe and forces the rest to follow. If you look at how Germany has managed its productivity since Unification, with a minimum of foreign investment, you would be impressed, rather than critical. Of course, China and Germany both benefit from a fixed parity regime: China wrt the rest of Asia and the US and Germany within the EU. So does Rhode Island. The big difference between China and Germany is that China’s consumers are mistreated, while the Germans by and large feel that they are very comfortable. You cannot blame the citizens of a democracy for choosing politicians that give them what they want..
Interesting, the theme of tiger though has become nauseatingly overplayed – sorry, work phobia.
frankly, there may not be all that much to shout about short term re revaluation that is. One thing that has justified the ridiculously low interest rates in most parts of the world is low inflation, wouldn’t sharp revaluation of the order that the “bipartisan bill’ is suggesting create a not so benign inflation and thereby force interest rates up? Can’t see the markets being too happy about that.
Mr Pettis, very informative posts but starting to wonder if they form part of your lectures in university?
The US has everything to gain by encouraging the movement of DFI from China to Mexico
‘Washington’ is concerned about a destabilized northern Mexico , the problems of which are partially tied to the erosion of manufacturing to the Asia.
Mccartbi, yes, of course they could do that but what is the point and what does it have to do with reserves? At the end of the transaction the net impact would be that government debt had increased and it had been monetized by the PBoC, and total reserves would be unchanged. There are many ways the government can recapitalize the banks with debt, but the cleanest way is simply for the MoF to issue debt and give it to the banks. Any other way simply complicates the process and has no additional benefit.
Rien, I guess the problem is that Beijing has done nothing to rebalance and in fact may have made things worse, and the rest of the world has given up on working through the process in a more rational way. This kind of impasse is what usually happens, and the consequence is nearly always hasty and sub-optimal decisions.
Anton, of curse the US budget deficit matters because it increase net US demand, unless it goes to fund viable investment, in which case it only does so temporarily. One thing that many people miss if that the US needs to reduce its net consumption, and this inevitably means hurting the relative position of consumers. There is no way to do otherwise.
RS, the balance sheet adjustment would be immediate. Yes, you are right in saying that it could lead to a rise in unemployment f it occurs to too great an extent. That is why I call for (without much hope) for a gradual and coordinated response. And yes to your second comment? Most economic crises, excluding of course those caused by war or natural disasters, can be seen as rebalancing or adjustment processes.
Dwayne, although many people disagree with me, I would argue that a quick or a gradual MB revaluation would be expansionary for the US economy, good for profits, and thus good for the US stock market. To the extent that a rapid revaluation raised uncertainty, however, the short term impact on the US stock market might be negative.
OGT, my interpretation s not that he is arguing for a rapid and forceful revaluation. It seems to me that he is simply arguing that polite discussions have had no impact, and so a very tough response, backed by a credible threat of trade war, might finally get things moving.
Stefan, this may eventually happen, but I don’t think we are there yet.
Peter Stock, I argued in favor of a maxi-reval back when the world was booming and Chinese export growth was out of control. Under those conditions it would have been much easier to absorb the adverse consequences of a rapid revaluation. In today’s world, however, confidence and growth are much lower, and it would be difficult for China to adjust too quickly. A magnificent opportunity was, not surprisingly perhaps, squandered. But governments never make the difficult decisions in the middle of the party.
Will, yes, I know Patick Chovanec and love his site. At some point when it is easier to do so I will try to add his link to my site.
Mike Cane,I am not sure why you say most people, including me, have neglected to discuss the effect of an RMB revaluation on US consumer prices. It seems to me that this has been one of the most widely discussed aspect of he debate, and i refer to it several times just in the above piece. The question for me is different: why do so many agree that US over-consumption has to decline but oppose the main mechanisms which would permit it? If consumer prices don’t rise, of if household income isn’t taxed, or if corporate taxes aren’t abolished, or if any of a number of factors that shift resources from consumers to producers don’t take place, then it is almost meaningless to talk about a reduction of US over-consumption, except perhaps as a consequence of some sudden religious revival.
Allen, it simply means, in this context, that consumption relative to production and other domestic is very low. You can measure it as the current account surplus.
Mark, it did happen but, as I discuss extensively, the currency is only one of many factors and can easily be overwhelmed by declining real interest rates, as it did in this case. As for your question “do we have any reason to believe that the slow-down in renminbi appreciation before the fixing was caused by anything other than market forces?”, I am not sure how to answer this. Market forces have never had much to do with the value of the currency. It is set by the PBoC, otherwise if you look at a graph of the value of the RMB against the dollar, you would have to conclude that the market subconsciously gives an inordinate value to smooth lines and curves. You may be right that “Chinese manufacturing IMHO profits from a low standard of living, from low environmental standards,” but if that were the main cause, one would expect that Chinese growth is heavily labor intensive and driven largely by polluting industries. Although the latter is partly true, it is hard to explain the capital intensivity of Chinese growth and the strong export orientation without some recourse to the cost of capital and the value of the currency.
Dave G, the US typically does not intervene directly in the currency markets, and sine the RMB is not traded or settled internationally, even if t wanted to it would be very difficult. the Fed could simply offer to pay to anyone who wanted to sell RMB (i.e. US exporters to China) a subsidy equal to the stronger rate it desired, and charge a tax on anyone who buys RMB (i.e. importers from China). That would effectively be what the PBoC does, but in a very complicated way that would create an awful lot of administrative problems.
Thanks Hoang. Thanks Joe Belbruno.
Lulu, it is a little hard for me to take seriously conspiracies that involve “banksters.” I am sure that I will be excoriated as naive by some for saying this, and presented with insurmountable evidence that the Rothschilds and the Queen of England planned the whole thing way back when, but I guess I have been bought out by them (although for the record they have never once invited me to any of their secret dinners to control the world, much to my dismay, even though I believe I have most of the necessary credentials.)
LetUsHavePeace, your explanation of what happened in 1914 and thereafter is not very compatible with what I have read. I think the first part of your statement in “the great transfer of wealth was temporary; by the end of the war Britain and France owed the U.S. money and the debt was never, in fact, repaid,” is wrong and the second part a non-sequiter. The negotiations over US loans and reparations had absolutely nothing to do with the 914 liquidation of European assets. Europe argued that they had borne most of the economic cost of the war and that the US had actually profited extensively before 1917, and wanted a more equitable distribution of those losses.
A&C, i don’ think Krugman has presidential ambitions, and if he did I am pretty sure he would be disabused of them pretty quickly.
Judy, I am not sure why it would be a problem if these posts form part of my lectures in university but, to answer your question, no they don’t. Most of my favorite students already know all this stuff.
Thanks Michael…yes…but at that point in Sept 07 the guests had actually begun to leave the party….and here we are again with the PRC in similar predicament and econ characterisitcs….asset bubbles, inflation rising, hot money inflows increasing, some “experts” predictng GDP growth of 10% this year, policy makers favouring export over consumption growth, threats of currency manipulation from US (and now others)…this is a replay of a bad movie….we agree I believe that the faster the PRC opens up its capital account the better we all will be…to that end….the US still carries a big stick and I hope that chimerica policy makers get together asap to correct these chronic imbalances….it would be helpful if POTUS pulled a Nixon and got on AF One, flew to Peking, and began free trade discussions with them…. with qualifications of course ie faster liberalization etc etc….i know…dream on!
[...] will an RMB revaluation affect China, the US, and the world? (China Financial Markets) As China accuses the US of ‘politicizing’ currency policy, Michael Pettis provides an [...]
I’m with Roach, let’s take a ball bat to Krugman and be done with him once and for all.
Just read the March edition of World Bank China Quarterly. The author mentioned that exports to the US accounted for 18.4% of total China exports in 2009, and exports to US, Europe and Japan combined totaled 46%. The ratios are likely to decline further in the years ahead. I wonder how much impact unilateral trade sanctions the US imposes on China would have… Obviously, marginally there will be an impact, but would it seriously damage the Chinese economy?
I am really surprised. Professor talks about solutions, and than brings the tiger back in discussion, and guess what, she ends the discussion with tiger !
One more thing I am very surprised with: no one talks about God as being a solution. No one says God will bring peace and understanding, after all he is in charge, isn’t he ?
So what is this going on here. Educated people end with pessimism and tigers, and don’t mention a word of God as part of the solution. It is about time we take Pat Robertson’s advice and put our faith in God and take over China !
I mean, I have had with it !
Hi Michael, great blog. I saw the Krugman articles as well; couldn’t help but wonder why the currency issue has suddenly attracted so much (seemingly politicized) attention in the US? Has CNN/Fox news done a feature on it? I think the answer is one of simple math. Undervalued yuan is an insurance policy; labor cost advantage and related issues, it seems to me, likely accounts for far more of the discounted price of Chinese goods…
This discussion is glaringly incomplete in not addressing the probable increase in long-term interest rates globally resulting from a market-priced RMB.
Consider that when China is forced by its domestic inflation to re-value, will not many nations whose inflating monetary policies have been encouraged by their competition with China follow suit?
Mr Pettis
Thanks for the response.
Do you see any parallels in 1930′s US vs 2010′s China. Right before each calamity they are the largest creditor nations, were they not?
Also Does the income gap have to close between the rich and the poor have to close in the US? IF if does then does that mean that in the US too asset prices must fall or incomes will have to skyrocket?
[...] Pettis, a professor at Peking University’s Guanghua School of Management gave us a wonderful discussion on this topic. Everything is politicized Unlike Krugman’s almost discriminate article on New [...]
Rien,
I see your point, but in the case of Germany they have a lot more control than China or Rhode Island, i wouldn’t be blaming German citizens for choosing what they want, and i don’t think i did.
The EU has no soverign political leadership, nor does the Eurozone. Whether or not the ECB is more influenced by one country or other is debatable, but personally I think it is obvious who controls the ECB’s direction – it is Germany by and large – and judging by the state of several other zone members’ finances, this is probably a good thing! China does not exert this kind of influence over “Asia” or the US. China’s central bank EX policy may force other competitors to stay undervalued too, but this I think different from the controlling their policy through a combined central bank.
Back in High School before the Euro was even introduced, we wrote essays on the disadvantages of currency union without political union and perfect flows of people. With Ireland and Spain’s “too low interest rates” over the first few years, and now the obvious problem that Greece and Germany are very very different, these school level arguments have been becoming quite common sightings in all sorts of newspapers and articles.
I am mostly interested in how Germany reacts. The EU was Europe’s way to contain a Germany that is simply too big (economically, technologically as you mention, and politically) when united and strong (WWI and WWII). Now Germany is united and strong, and Germany has a choice whether to provide assistance and through it mould the functioning of the Eurozone to its own liking, or to sit back and be prepared to provide bail-outs and support when the zone’s obvious contradictions bubble to the surface – and they almost certainly will do so again and again. This is Germany’s first non-unification period government, and i thought it interesting the other day when they mentioned proposals to vote out eurozone members who were not following the rules. THe idea that GReece and Germany should be sharing the same currency is a little bizarre, and i know for example in the US one area may be very different from another, but again in the US’s case there is a higher sovereign political authority in place to directly try and redress such imbalances.
I also think that the crisis has also shown that Germany was by no means perfect (few of us in the Banking industry consider German banks to have really sorted out their problems yet). The US crisis may have started things rolling, but Europe had its own set of problems quite seperate from subprime securitization. European politicians have had quite a big problem admitting this fact, which is why Europe still hasn’t got its house in order.
[...] [...]
Turner,
Thanks for your remarks. Unfortunately I am maybe a bit too old for this forum. While you were in high school writing your essays, I may have been about to retire, and living in Asia, and that may have given some distance and at the same time, depth to my appreciation of the problems. There is no way the EUR that we’ve got could be the end of the story. The end of the story is a long way off and since not everyone likes what we’ve got, lots of different interests may try to move the thing’s course. What I believe is that most of those attempts lack penetration power and will not succeed. There is a plausible equilibrium point and that is not fragmentation. Others may just make the thing wobble a bit. And other things again (like Grease) provide great opportunities as well as risks. Greece’s domestic market (and that is the thing that counts) is relative to Europe about as big as Duesseldorf’s is to Germany. Greece’s financial problems (as someone with far more knowledge said a while ago on this blog) should be understood from the perspective that the state is very poor and the citizens are (sometimes) very rich. In parenting terms that means that there is a capacity for improvement that has yet to be exploited. The EU would do itself a favour by not letting the Germans do the dirty work (they succeeded where the Italians failed in 1941 but the Greeks are poor losers) and indeed, ask for assistance from the IMF.
Of course, the issue is not Greece, it is moral hazard and the maintenance of a monetarist view of macroeconomics. Let the Greeks escape painlessly and who knows what mischief populists all over Europe may do next. The past two years have clearly demonstrated the risks of vulgar Keynesian populism and the EU cannot afford to nurture a moral hazard for the benefit of politicians without leadership and without an understanding that their higher loyalty is to the Union, not to the rabble on their doorstep. As there is no mechanism to ditch weak performers, the Union has to act decisively but with a significant amount of guile. That is what I am hoping to observe in the weeks ahead.
Incidentally, what has this to do with our main topic, China? Is it perhaps that the internal contradictions of China make action difficult and that the same applies to the EU? Where do they not?
China creates the goods/services we want and sends them here in exchange for dollars. The goods/services are scarce to China. Time, manpower and physical resources are necessary for their creation. By contrast, dollars are not scarce to the U.S. Our government has the unlimited power and authority to produce dollars, without using any resources, whatsoever. The press of a computer key sends billions of dollars from our government to anywhere. Lately, many have gone into our economy as a stimulus.
A trade deficit is an example of one country devoting great effort to create scarce materials for another country in exchange for something that requires no effort by the other country. In that sense, China is our servant. They work, sweat and strain to create and ship to us the things we want, while we, hardly lifting a finger, ship dollars to them. Who has the better deal?
Obviously, for any given individual, the situation is different. None of us has the unlimited ability to create dollars. We have to work hard for our dollars. Dollars are scarce to each of us. But when we talk about trade deficits, we are talking about governments, and there the situation changes. Dollars are not scarce to the U.S. government.
To satisfy our desires, China could ship us every yard of cloth and every ounce of steel in their country; they could burn all their coal and oil; they could employ every man, woman and child in dismal sweatshops; they could empty their nation of all physical resources, and still we would have plenty of dollars to send to them, simply by touching a computer key.
This may be more easily understood by looking at Saudi Arabia, with whom we also have a trade deficit. One day, the Saudis will have sent us every drop of their oil, leaving their country a hollow, empty sand dune, while we blithely will go on producing dollars.
Read more: http://curiouscapitalist.blogs.time.com/2010/03/15/is-the-chinese-yuan-too-cheap/?xid=rss-topstories#ixzz0ilycRnpE
Yuan appreciation will benefit mainly other Asian exporters at the expense of China. Why should China do that? It doesn’t make sense for China to raise the price, in effect, of all its exports. It should create more internal demand as soon as it can, but that move should come from the Chinese themselves. I would not mind seeing a real confrontation since I suspect the US might end up the loser and learn a very overdue lesson in trying to dictate to other nations.
[...] How will an RMB revaluation affect China, the US, and the world? [...]
What I’m left to wonder is whether or not American corporate interests will scuttle any attempts to ‘rebalance’. Greed plays very big over here, and profit, above all else, is the determining factor in corporate policy. Theory looks great on paper but does not account for human rationality.
Hal
China’s currency peg is protectionism, it makes imports more expensive than they should be, and makes exports cheaper to foreigners than they should be. Your first sentence could be reprhased as “The yuan peg is damaging other Asian exporters to the benefit of China, why shouldn’t they try to force China to stop this and try to compete without this unfair advantage?”
I think most would point out that many Chinese policy makers DO want to relax the peg, as they may acknowledge that it is not so simply beneficial to China and is bound to cause trade tensions since it gives China, as you indirectly say, a big advantage.
I am not sure how you calculate that the US will lose more from a trade war, since it is hard to prove with any economic theory. However, it is not only the US who are unhappy with China’s policies. More or less all of China’s trade partners are unhappy with the peg, not least the Europeans. The US, as the leader of the international system, may well be more vocal in pushing for fairness, but China’s policies do not only adversely affect the US.
I have wondered a long time about whether, in the face of the fury of words over “to reval or not to reval), whether China might just decide to “buy more stuff” from the US. This might be less costly to China’s employment situation especially if a RMB appreciation results in diverting US demand to other trade surplus Asian countries. Politically, the Chinese administration would not be seen as knuckling under to the foreign demands.
Indeed, perhaps that is happening. China Daily is predicting a trade deficit for China in March.
http://www.chinadaily.com.cn/china/2010-03/22/content_9619515.htm
In order to turn the volume down in Congress on this issue, I can see the central government going on a buying spree, especially focusing on technology items.
If one were to consider China were as a company, any company needs capital, labor, technology or know-how and raw materials. China has always had the labor. Now it no longer needs capital (swimming in dollars). It now will further turn its sights on know-how and raw materials. Making progress on raw materials thanks to Africa, the Middle East, South America and to some extent, Australia. As for know-how, watch the continued attempts to acquire process and technology know-how…whether through commercial transactions or more clandestine methods.
I think that Germany has benefited by having a currency that is lower in value than would be otherwise, if not shared by some of the other EU members. In a sense others have been doing Germany’s currency manipulation for them.
The troubling aspect of the current situation is the discord that will likley spill over from policy conflicts. China’s control over the media, along with political ass covering, spells trouble.
[...] consider How will an RMB revaluation affect China, the US, and the world? Although Premier Wen noted again in his speech Sunday that China is “worried” about the value [...]
[...] consider How will an RMB revaluation affect China, the US, and the world? Although Premier Wen noted again in his speech Sunday that China is “worried” about the value [...]
[...] consider How will an RMB revaluation affect China, the US, and the world? Although Premier Wen noted again in his speech Sunday that China is “worried” about the value [...]
Thought provoking post as always professor – Thanks.
Just had a question on the following that you said:
“I would also add that the main long-term impact of dumping USG bonds might be no more than to cause a liquidation of Chinese assets at very low prices… ”
Why would this happen? What’s the mechanism that would cause it? I would have thought that a dumping of US bonds would cause an appreciation of the RMB relative to the USD, which would make the value of RMB denominated assets relatively more expensive and help stem ‘hot money flows’, but I wouldn’t have thought a ‘liquidation at very low prices’ would occur… it sounds like you are referring to a ‘bubble burst’ scenario…
Michael, it seems that a trade war might on the horizon. So I was wondering if you any knowledge what the results and. What a trade war would look like based on history. Possible ideas for your next post?
Professor,
Thank you for your insight. I’m enjoying your blog very much.
I agree with your conclusion that “China, Japan and Germany take concrete measures to shift subsidies away from manufacturers and return the income to households, and the US, the UK and other deficit countries shift income from households to investment”.
But I’m a little bit curious about the relationship between interest rates and wage growth, which you say would affect trade balances. If the RMB is revalued, China’s leading sector, export firms, would get into trouble which could drag down the whole economy. If so, China would presumably lower its interest rates to offset the negative effects. The recession could cause wage earners to endure subdued wage growth. So, the revaluation of the RMB would be inevitably associated with lower (real) interest rates and restrained wage growth, which you say could cause a rise in the trade surplus. All of which has been just happening in Japan since the burst of the bubble economy. In your model, to rebalance the Chinese economy, the revaluation of the RMB would have to have the neutral effects on the economy. Is that possible?
Hua Qiao, if China were to resolve the US imbalance by buying more stuff from the US, from the US point of view that could certainly work. The reason the US opposes the trade imbalance is because trade deficits create unemployment, but if American manufacturers are able to hire workers to make more stuff to sell to China, then the trade deficit would disappear and the employment impact wouldn’t matter. You are right to suggest that China may be moving in this direction, but ironically this might be the least efficient way for China toaddress the imbalance. It would get rid of the trade imbalance, but it would not change the fact that China is still exchanging domestic goods for foreign goods at a terrible price. An undervalued exchange rate means that China gives away stuff cheaply and gets stuff back expensively. In spite of the fact that it is economically a very dumb way to rebalance, it does allow China to postpone the social cost a little longer, and so I think you are right in saying that they might do it.
Below0, no, if China quickly sold off its USG bonds, whether for other foreign currency of for RMB, it would immediately create a demand/supply imbalance in the market which would have to get resolved either by a sudden new and equal source of demand or by a decline in prices. Whenever a large seller enters the market, there is downward pressure on prices.
Hoang, the two most obvious historical precedents are the collapse in trade in 1930-34 and the US-Japan trade frictions in the mid-1980s. In no other case has the global imbalance been of the same magnitude.
KD, in fact thing if the RMB revalued sharply, real interest rates and real wages in China would probably be forced down to make up for the impact of the currency. This is only possible for a short time, however, because it still maintainsChina’s excess reliance on exports.
Thank you for another great post.
Just curious about one of your points: consumption drives innovation, not production.
While anecdotally agree with the claim, if you can point me to any books or studies that validate this point I’d be grateful.
-Stefan
Brilliant pragmatic discussion – reminds me of Keynes’s essays on German debt repatriation.
This problem is the most important security issue for the world at large.
If such situations are allowed to develop they have almost always led to war. I am thinking of the mercantilist conflict over Africa in the Edwardian era which provides missing explanation for WWI and Japan prior to WW II. It is an especially dangerous situation as the mercantilist with the resulting trade surplus more often than not mistakes that as proof of strength, when in fact it is the opposite.
Just reviewed reading about Pompeii and the pirates in 68 BC and to my view it does a good job outlining the true security risk of Islamism. Islamism is more a organizational challenge than any tax on the hard power of the coalition. But of course post 9/11 this enemy was considered dire. To free up capability, the US completely reversed the hard power policy that was being applied to contain China, pretty well leaving the area and ceding it as a Sino area of influence. The deal is that this status will go along as long as China does not move on Taiwan. Furthermore the enter the WTO and was given basic carte blanche for human rights policy within their own borders. To even further placate China, the resulting massive mercantilist binge that China pursued was allowed.
The bottom line is that it is cheaper, to the USA, to allow the current China trade policy than keep 2 aircraft carrier task forces in the Western Pacific and another 30,000 men in Japan and S. Korea.
China’s mistake was to perceive this tactical security move by the USA as part of a general declinism and proof of Sino ascendency. The USA mistake was to think Islamism required their basic evacuation of this space.
And now here we are. This is not a trade dispute with a country tightly bound to the USA in friendship and security treaties as Japan was approaching 1990. This is a country that feels no such ties and furthermore is being stoked with jingoism and completely unrealistic ideas as to their strength and USA weakness.
There will not be a “trade war” with China without a “hot war” resulting. Whether it is proxy was in Africa or a series of intense terrible conflicts will be the end results of a trade war.
I wish folks in both countries would calm down and the USA realize there is great danger down this path and China the possibility of unimaginable misery.
….sorry, another observation. Dr Pettis, I disagree to your sketch of a standard demand supply schedule to the impact on US Treasuries if China were to slam the market.
The price for a US$ risk-free security is the forward assumptions of the business cycle and inflation cycle in the US. Full stop.
China’s sale of US treasuries will very likely cause US treasuries to rally (yields dropping)as a risk factor is eliminated from the market. The impact of the curve will be to flatten as inflation, or inflation pressure, is exported to China.
In the last 30 years any use of flow of funds data in terms of figuring out what will happen to US treasury yields has been a dry hole.
Michael Pettis
Is the wealth gap between the rich and the poor a problem in the US and/or in China?
Will this be addressed by currency rebalacning?
[...] How will and RMB Revaluation affect China, the U.S., and the World? – Michael Pettis nails this one, going further than many of the analyses that I’ve read about revaluation of the Yuan. His post echoes many of the sentiments that I expressed in previous posts about a sudden revaluation of the Yuan (see China and the Yuan Again and China and the Revaluation of the Yuan). He, like I, advocates for a measured revaluation of the Yuan, but he cautions against inciting a trade war with China. It’s quite a long read, but well worth it. [...]
As the United States finds herself stuck in the economic mud, politicians and some economists like Paul Krugman are diverting the discussion away from the Banking scams and toward China’s currency manipulation.
But in a world of global competitiveness, it is necessary for America to deleverage to become competitive. House prices must come way down. Oil is too high as decreased demand miraculously pushes prices up. Perhaps we need to face the reality in the United States that we cannot afford to live above our means.
Taking down China will not allow Americans to live within their means. Only a decline in the high and artificial cost of living will allow Americans to live according to their means and allow wages to decline to a more competitive level.
Face it, the off balance sheet banking scam weakened America. Scamming the middle classes to feed Wall Street is not going to make America stronger. Americans need to save, and manipulated asset inflation is making that impossible. And it all benefits Wall Street, the real enemy of Main Street and the real enemy of deleveraging.
http://seekingalpha.com/article/195235-forget-krurgman-s-china-controversy-focus-on-making-u-s-more-competitive
Today’s House and Means Committee looks at the currency issue..
Opening remarks..
http://waysandmeans.house.gov/Hearings/OpeningStatement.aspx?OSID=3050
Testimonies..
http://waysandmeans.house.gov/media/pdf/111/10-03-24_Bergsten_Testimony.pdf
http://waysandmeans.house.gov/media/pdf/111/10-03-24_Ferguson_Testimony.pdf
http://waysandmeans.house.gov/media/pdf/111/10-03-24_Levy_Testimony.pdf
http://waysandmeans.house.gov/media/pdf/111/10-03-24_Prestowitz_Testimony.pdf
They all seem to agree that China is manipulating its currency and that the issue needs to be addressed. Philip Levy supports a negotiated agreement like Prof Pettis (exactly like Michael since he quotes him). Bergsten seems the most hawkish.
In the end all agree, and consistent with Michael that that the status quo no longer benefits anyone.
I’m illiterate on how the math works in economics, but common sense tells me that wages in China needs to go up and that in the US needs to come down. However, from what I perceive after having lived in North America for twenty years, I don’t see how the latter can easily happen, as:
1. Cost of living too high – large portion of income spent on necessities like food and energy.
2. Too much of the people’s productivity sucked up by the ‘giant squids’ – Wall Street and the US government and various other oligopolies.
3. Sense of entitlement among citizens and workers regardless of the common good.
4. Inflation of self-worth – workers think they deserve to be paid more than someone doing the exact same work elsewhere just because.
The mayor of Shanghai was asked if he was afraid of a terrorist aircraft attack now that his city constructed the tallest skyscraper at the time. His answer was that China maintains good relations with all of the Muslim nations of the world, and that China doesn’t have to worry about such an incident. If there is ever an issue about potential outside support of Xinjiang terrorists, President Hu Jintao can simply pickup the phone and dial the leadership of Iran, Saudi Arabia, or Pakistan. The elite security forces of those Muslim nations will immediately crack down on any supporters of Xinjiang separatists. Similarily, Nepal’s government has announced a crackdown on Tibetian terrorists.
Western powers should mind their own damn business. The era of colonialism is over, China’s national sovereignty that includes Tibet, Taiwan and the yuan currency is non-negotiable. If the US Political Elites doesn’t accept this reality, then please have all American corporations leave the Greater China region permanently.
Naturally, a sharp appreciation of the renminbi will cause the US trade deficit to fall. The US trade deficit ALWAYS falls during a severe recession, and when the price changes flow through, and just about everything in Wal-Mart, Target, K-mart and other have-to-shop-at stores (as opposed to the Macy’s and Saks Fifth Avenue, wish-I-could-afford-to-shop-at type stores) when the prices of daily necessities rise 20%, 30% or whatever, the US will immediately drop into a severe recession.
As a result, the trade deficit will get smaller.
What, you didn’t WANT the deficit to get smaller by jacking up the prices of things the least well-off American consumers HAVE to buy?
Then, chose a different policy solution.
[...] consider How will an RMB revaluation affect China, the US, and the world? Although Premier Wen noted again in his speech Sunday that China is “worried” about the value [...]
“Western powers should mind their own damn business.”
The ultimate in “minding your own business” is only buying domestically manufactured goods.
The fact is, access to export markets is a privilege, not a right. It is completely reasonable to establish conditions for that privilege, including, for example, the floating of exchange rates.
China May Resume Yuan Float, Avoid Sharp Gain, PBOC’s Fan Says
http://www.bloomberg.com/apps/news?pid=20601087&sid=a2WMGWrCeNKU&pos=3
Good to hear from some sensible folks at the PBOC.
The lukewarm reception of 5 and 10 year Treasury auctions this week I hope sends a powerful message to the White House and Congress to get their fiscal act together. The Chinese could help with the message by stepping away and buying something other than USD debt. Yields on high grade corporates are below those of the like term treasurys!
While this rejection by the market will be painful for the US, it is a necessary adjustment as the it deleverages and begins saving.
As noted previously, perhaps the PRC is now buying physical items so as to reduce the trade surplus even if it is buying those items at prices higher than they would if they let the RMB appreciate. An expensive way to maintain employment as Michael points out. See if China runs a trade deficit in March.
BTW, if you did not see it, Shrley Yam’s great column in the South China Morning Post does more to explain the connections in China’s real estate market than anything I have read. What a great columnist! Everything she writes is spot on.
Here is the link, but I think you need a subscription to get the whole thing…
http://www.scmp.com/portal/site/SCMP/menuitem.2af62ecb329d3d7733492d9253a0a0a0/?vgnextoid=e4fed8efd5677210VgnVCM100000360a0a0aRCRD&ss=Markets&s=Business
Those espousing free trade must allow for the free trading of the fundamental exchange good…currency. Don’t tell me about making progress reforming the RMB. I don’t want to hear “We are still a developing country.” You cannot chide other nations for protectionist behavior while still controlling the basic means of exchange. If you don’t provide a free and open market of exchange, then sit down and shut up!
Yo’ Mr. Emperor, there are no clothes here!
This is a wonderful blog. I’ve just spent 3 hours reading it.
[...] overstate this argument — just to clear up some wide-spread and very muddled thinking. In my last post I pointed out that I think Beijing may be right to argue that a contraction in the Chinese trade [...]
[...] this argument — just to clear up some wide-spread and very muddled thinking. In my last post I pointed out that I think Beijing may be right to argue that a contraction in the Chinese trade [...]
[...] this argument — just to clear up some wide-spread and very muddled thinking. In my last post I pointed out that I think Beijing may be right to argue that a contraction in the Chinese trade [...]
[...] Nobel Prize-winning international economist Paul Krugman has stirred up a debate over China’s exchange rate–and specifically, what the United States should do about it. Again, I don’t have time to wade into all the details, but it gives me an opportunity to repost a column I wrote for the Hazleton Standard-Speaker. (If you want to dive into the actual debate, you can find informed views here, here, here, here, here, here, here, here, here, here, here, and here.) [...]
[...] Voices From Within Filed under: Uncategorized — ranjanxroy @ 2:36 pm One of the odder aspects of the US -China currency revaluation debate is trying to keep track of which groups in which country support what. A Yuan (CNY) revaluation would hit Chinese exporters hard, as a stronger Chinese currency would make their products more expensive for US consumers and US businesses who buy in dollars. The flipside is that Chinese households would increase their purchasing power of foreign products, buying cheaper goods with their newly strengthened currency. As Michael Pettis noted, [...]
[...] Dollar-Yen chart, hourly. Manduca (interview above) says its about re-funding and demand not inflation. He also refers to what he sees as a protectionism end-game…which seems to be gathering momentum. Professor Pettis examines the interplay between US-China exchange rates, consumption, and employment. __________________________________ [...]
[...] financial crisis of 2008 barely behind us, the wheels of globalization have slowed and, in fact, calls for protectionism are growing louder. However with the global integration of trade, capital, information and labor [...]
[...] financial crisis of 2008 barely behind us, the wheels of globalization have slowed and, in fact, calls for protectionism are growing louder. However with the global integration of trade, capital, information and labor [...]
[...] What does an appreciated yuan mean? [Pettis] [...]
[...] financial crisis of 2008 barely behind us, the wheels of globalization have slowed and, in fact, calls for protectionism are growing louder. However with the global integration of trade, capital, information and labor [...]
The USA politicians forcing or requiring currency revaluation of the Chinese Yuan can mean only one thing: a phantom tax of x percent for every x percent of appreciation of the Chinese Yuan (Renminbi) Vs the US Dollar on US Citizens living and working in USA or anyone getting paid in US Dollars. Manufacturing and employment in the USA will only marginally go up. In reality, the biggest corporations will shift their production to other Asian, East European or Latin American countries anyway. My trade call – go long Chinese Yuan and Chinese companies doing majority of their business in China. With 1.3 billion people, a gradual revaluation of Yuan over long term at say 3-5% year over next 10 years Vs. US Dollar, it will lead to gradual transfer of wealth to Chinese households, spurring domestic demand, increased employment, higher wages, asset price inflation in China. With one of the highest savings rates, the Chinese will eventually own most of the world in next 20-25 years. Teach your children Mandarin Chinese and buy Chinese assets!
[...] In the meantime, you might want to read Business Economics which has a useful analysis explaining the economic and political drivers, as does China Financial Markets. [...]
Mr. Pettis I wanted to email you with a few questions I had, but the email provided in your about page did not work for me. I just figured I would put my message here instead.
I will be traveling to China for 3 months this fall (august-october) and was hoping to meet to speak with you at some point. I am visiting as many publicly traded companies on the US exchanges (Nasdaq, Amex, OTC) as I can fit into 3 months. My goal is 50. I am trying to visit only the most undervalued companies in China. Fortunately there are many.
Maybe I could publish an article detailing some of the questions we discuss, as I believe many people are interested in your opinions, myself included. Links to my articles are below. I write for thestreet and seeking alpha and also maintain my own blog.
http://seekingalpha.com/author/zack-buckley
http://www.thestreet.com/author/1172069/ZackBuckley/all.html
http://www.uncoveringalpha.com – my blog
Look forward to hearing from you
Zack Buckley
[...] [...]
[...] war out there – FT Alphaville Reining in the Chinese inflation dragon – FT Alphaville How will an RMB revaluation affect China, the US, and the world? – China Financial [...]
[...] on the Chinese economy. I have seen people giving a qualitative analysis (for instance, http://mpettis.com/2010/03/how-will-an-rmb-revaluation-affect-china-the-us-and-the-world/). How do we obtain a quantitative estimate of the [...]
[...] on the Chinese economy. I have seen people giving a qualitative analysis (for instance, http://mpettis.com/2010/03/how-will-an-rmb-revaluation-affect-china-the-us-and-the-world/). How do we obtain a quantitative estimate of the [...]
Dear Mr. Pettis,
In response to your present post aswell as your post on Asia Economonitor titled “Biejing’s stop-and-go” measures, I would like to ask a question. Given the present condition of the Chinese housing market, the lending estimate for the year of around 7500 RMB (a considerable proportion of which has already been met) and China’s aspirations of not been looked upon as nation who pegs its currency only to support its exports, would it not be only beneficial for it to go in for a market based exchange rate system or in effect an appreciation of the RMB? If so then other than for “political factors” why is there such resistance displayed by the Chinese towards the prospects of RMB appreciation?
[...] much weaker than the broad argument that China needed to move. Michael Pettis of Beijing University describes the downside: A rebalancing is necessary for China, as nearly everyone in the leadership knows. [...]
[...] [5.] How will an RMB revaluation affect China, the US, and the world? [Michael Pettis’s Blog] http://mpettis.com/2010/03/how-will-an-rmb-revaluation-affect-china-the-us-and-the-world/ [...]
Michael, this makes an interesting read, I wish I’d found it back when you wrote it.
I’m invested in several tech stocks in China (partly selfish, partly as an encouragement to give education a boost) and this provides a backdrop to my understanding of the situation.
What’s funny is finding Zack Buckley also commenting on here, I’ll have to track down his China visit now, too!
Money flow back to US through the US budget deficit and keeps it all going. If US got their budget balanced and stop borrowing money from abroad, the trade deficit would have to shrink as well, no need for RMB revaluation to achieve that.
[...] [4] Referring to Michael Pettis, “How will a RMB revaluation affect China, the US and the World?”, March 17th, 2010, http://mpettis.com/2010/03/how-will-an-rmb-revaluation-affect-china-the-us-and-the-world/ [...]