I apologize for taking so long to write but for the past rwo weeks (and the next five days) I have been travelling for conferences and meetings. I spent last week in Buenos Aires at the 75th Anniversary Conference of the Banco Central de la Republica Argentina, where I gave a presentation on China and the global imbalances. Four days ago I spoke at an event in Amsterdam, while in the past three days in Brussels I spoke at an event organized by the Carnegie Endowment and had meetings with a number of EU officials. Today I am off to London for three days of investor meetings.
In all of my meetings I think people were pretty surprised to hear about my misgivings over Chinese growth and the banking system, and shocked to hear that there is a worried and sometimes acrimonious debate taking place in China among policymakers and their advisors about the urgency of a (perhaps radical) adjustment in the growth model. It seems to me that foreign reports about China mainly fall either into the easily-dismissible China-is-about-to-crash-and-burn camp or, more likely, into the everything-is-going-wonderfully-well camp. Most people I spoke to assumed that China had emerged from the crisis largely unscathed and was about to embark on a new growth surge that would pull the world behind it. There was a hopeful sense that for all the mess in Japan, Europe and the US, there might be a ray of economic light emanating from China.
My claim that China has some deep-rooted problems which will be especially difficult to resolve, especially in a world of sluggish demand growth, was, for many I think, a serious downer, especially in Argentina. I also discussed why I believed that deepening imbalances in the world, set off especially by the financial crisis in the trade-deficit countries of Europe, would make global trade tensions much worse and would make the adjustment for trade surplus countries like China, Germany and Japan all the more difficult. My European friends generally agreed, very glumly, with the logic of the argument, although for all the heroic efforts of the likes of Martin Wolf at the Financial Times a surprisingly large number of people had not made the connection.
But as if to make me look foolish, trade numbers for both China and the US were released Thursday suggesting unexpected improvements in both the American and Chinese trade imbalances. The US trade deficit in July narrowed sharply from June’s $49.8 billion to $42.8 billion. China’s August trade surplus also narrowed. Here is what an article in the Financial Times said:
China’s trade surplus narrowed last month, with imports growing much faster than expected though not enough to defuse political pressure on Beijing over the level of its currency. According to figures released on Friday, the trade surplus was $20.03bn in August, down from $28.7bn a month earlier and short of analysts forecasts. Exports grew 34.4 per cent in August over the year before while imports increased 35.2 per cent.
Will these better-than-expected numbers reduce the threat of serious trade conflict? Almost certainly not, in my opinion. The US monthly trade deficits bottomed out in early 2009 at a still-mighty $26 billion or so, if I remember well, and have risen very steadily since then. July’s $42.8 billion is perfectly in line with that rising trend and only looks small because of a very sharp and unexpected spike in June. More importantly, the improvement in the trade deficit wasn’t caused by a surge in exports, which only grew 1.8%, but rather by a decline in imports, which dropped 2.1%.
In spite of the decline in the overall US trade deficit and in the overall Chinese trade surplus, the trade deficit with China barely budged, dropping from $26.2 billion to $25.9 billion. This means that China’s “share” of the US deficit rose from 52.6% to 60.5%. We should never over-interpret bilateral trade numbers, which contrary to much otherwise informed opinion are largely useless in explaining trade imbalances, but there is no question that the bilateral balance with China is politically very sensitive. The latest numbers are not going to soothe the concerns of US policymakers who worry about the impact on US employment of trade and industrial policies in China and elsewhere.
Interestingly enough although the US trade deficit declined against most of its major trading partners, it actually rose against Europe, from $9.4 billion to $12.3 billion, or from 18.9% of the total to 28.7% This should not be a surprise, as I discuss in my May 19 entry. Everyone, even in Europe, is relying on increased exports to the US to resolve domestic unemployment problems, and the weakness in the euro seems to be having a big impact on European competitiveness. I have written before about Germany’s role in the global imbalances and suggested that Germany-bashing in Europe and the US would become an increasingly popular sport. The latest numbers aren’t going to make life any easier. Basically they mean that not only does the collapse in the deficits of trade-deficit Europe have to be fully absorbed outside of Europe (i.e. the US), but Germany will even benefit from weakness in the euro to expand its surplus even further.
But there’s more. Friday’s Wall Street Journal had an article on Japanese anger at Chinese purchases of yen which, according to Japanese government data released Wednesday, showed that China’s yen purchases this year equal $27 billion, more than six times China’s combined yen buying in the previous five years.
Tokyo turned up the heat on Beijing for contributing to a strong yen, which is threatening Japan’s economic recovery and adding to tensions between the two countries. As the yen hovered near a 15-year high against the U.S. dollar Thursday, Japanese Finance Minister Yoshihiko Noda called for talks with China over its recent yen-buying spree, which has helped drive the Japanese currency higher, making Japanese goods less competitive with China’s.
“I don’t know the true intention” of China regarding its growing appetite for yen-denominated bonds, Mr. Noda said Thursday before the Japanese parliament’s upper house. “We are paying close attention,” Mr. Noda said. Mr. Noda reiterated a pledge to intervene in currency markets to stem the yen’s rise. Japan hasn’t entered currency markets since 2004, the last time it sold yen for dollars in order to weaken the yen. If Japan does intervene, it would add another complication to the China-Japan relationship.
Everyone is playing the same game — trying to force the brunt of the adjustment abroad — and here we have China and Japan squabbling over Chinese attempts to recycle its trade surplus into Japan rather than into the US or Europe. Japan is having none of it, although my older readers will remember wryly that twenty years ago Japanese officials dismissed as bizarre and dishonest American arguments that currency intervention of this sort justified angry responses. Times change, of course, and I guess you have to keep up with the latest trends.
Since I am travelling I haven’t been able to look closely at the Chinese trade numbers, but I did notice another article in the Financial Times. It pointed out that:
China, the world’s largest consumer of commodities, including copper and iron ore, registered strong growth in crude oil and copper imports in August, allaying fears of a slowdown in the country’s demand for materials. The preliminary numbers, published on Friday by China’s customs bureau, are a closely watched barometer of demand.
Imports of crude oil increased 13.3 per cent in August from the year prior to 20.9m tonnes – more than expected after figures showing weak oil import demand in July. Imports of copper jumped 16.7 per cent from a year earlier, continuing strong growth from the previous month thanks to demand from China’s expanding power grid.
The increased importing of commodities may be for real domestic use, but if it is for commodity stockpiling (including, I might add, stockpiling in the form of “use” in empty apartments and offices purchased for speculative purposes), it really represents investment, or anticipated consumption, more than current consumption, and so should be removed from the trade numbers to give clearer picture of the real trade balance.
What does this all mean? I would argue that the trade imbalances are getting worse, but the rising US trade deficit is not being driven by another US consumption binge. No matter what US consumers might choose to do, the US trade defcit will continue rising as an automatic consequence of events and policies abroad, and as they do, the US fiscal deficit will probably need to rise even faster to minimize the employment impact. This will keep on going until the US retaliates. For me this is not a matter of if, but when.
How could US retaliate? Will it really work? Maybe for US, this is a matter of how.
why do you keep on saying that the euro is weak? The euro is still overvalued, PPP would suggest that the euro should trade between 1,10 and 1,20
When the chips are down
The latest Big Mac index suggests the euro is still overvalued
http://www.economist.com/node/16646178?story_id=16646178
“This will keep on going until the US retaliates. For me this is not a matter of if, but when.”
The US will retaliate as the sherrif in Blazing Saddles held a gun to his head and warned if anybody moves the sherrif gets it
From what I’m reading Congress and the Senate are on track to pass China yuan legislation before the election, despite the Obama administration’s attempts to delay the whole thing until after November (when it might not happen, or happen much later). We’ll see what happens at the hearings next week. How much will Tim Geithner squirm, and will Treasury finally acknowledge the obvious in the October report?
Michelle, if the US finds that a country has provided subsidies, whether in the form of currency intervention, interest rates, or anything else, it has many legal ways to retaliate. I am not sure why so many people seem to believe that the US has no ability to intervene in trade. China and the US are two countries notorious for refusing to cede even the most minimal sovereign rights to external bodies.
Daniel, there is a difference between calling a currency weak and calling it undervalued. The euro may be overvalued, but if it is declining in value it is weak.
If i remember correctly, Mark G., the strategy worked fine in Blazing Saddles. I think, however you are mistaken. At best you might argue that US retaliation will hurt a lot of countries, including the US, but even that I think is overstated. Most evidence suggests that diversified economies with large trade deficits benefit (at least in the short term) from attempts to alter the terms of trade to their benefit, whether through currency intervention, trade restrictions, or other industrial measures. This is clear from rereading the 1930s experiences as well as from noting the impact of the euro depreciation on German growth and Japanese determination to avoid yen appreciation.
Professor Pettis,
I rarely post comments, but have been reading your blog religiously for many months. I live in Tianjin and visit Beijing regularly, as well as many other Chinese cities.
I agree with much of what you write in relation to empty apartments, white elephant trophy projects and global macro imbalances.
Basically, here are my 2 questions:
Most people with an economics/finance background know intellectually or at least intuitively, that the global financial/economic system that has existed since the end of WWII is now broken. As you have written the imbalances are only getting worse, and trade war or a second crisis (or both) more likely.
1. Do you have any gut feeling as to how long this process could take to play out? I.e. trade war and retaliation and protectionism from the US which cannot continue to absorb the deficits indefinately without collapsing it’s currency.
The US will not willingly bankrupt itself (unless it’s already too late). USD reserve status is a double-edged sword if it means that the US must run a deficit to satisfy demand for USD. How long until it closes its markets? What do you think the catalyst would be?
2. Since China cannot float the RMB quickly without destroying its own economy, Japanese Yen is a basket case due to ageing population/demographics, deflationary trap, debt to GDP ratio, and political stagnation, Euro is dead without a fiscal union and there are no real alternatives, what is the way out of this? Gold to 5000USD? Float of RMB in 5-10 years to peg gold and topple USD currency? SDR? global supranational currency?
I know what your responses are to some of my alternatives (e.g. SDR) as you’ve written about them previously on several occassions.
The trillion dollar questions are when will this all play out and what the likely result will be once the dust settles.
Clearly you are a pessimist (realist?) but as an investor, you can’t know the timing of these events without a crystal ball. Does that mean you just diversify as much as possible and hope for the best? Does it mean you hoard gold and cash (in case of inflation/deflation)?
Do you short everything and build up your position until the day of reckoning?
Ultimately the whole gllobal economy is like living in a building in China on fault lines, waiting for the earthquake. You know it’s coming, you know the building has shoddy foundations, but there’s not much you can do to protect yourself other than living in a bunker with guns, ammo, baked beans and anything else worth bartering.
You seem to great at analysing these economic and political problems but offer very little in the sense of advice (for policy makers or investors), detailed forecasts, etc.
I respect immensely your remarkable extremely rare ability to articulate complex problems so eloquently. I wish you would put yourself out there more by giving your best guestimates about timing and what could be done to avoid the seemingly inevitable carnage. This seems logical and natural given your affiliation with Carnegie Endowment for International Peace.
Many thanks for your contribution to the ongoing challenges that require the most capable, dedicated and honourable minds to find and offer solutions.
A reasoned call for a trade war?
http://www.nakedcapitalism.com/2010/09/auerback-china-is-still-a-renegade-nation.html
Of course, let’s not forget these contributors to the U.S. trade deficit:
http://www.eia.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html
There will be no trade war anytime soon. Exports from China have a 50% Chinese content at best. Changes in exchange rate affect the rest of the world as much as China. Unless the multinational corporations, which moved U.S. manufacturing base to China in the first place, lose their grip on political power here in the U.S., there will be no real policy changes against China. The trade unions who complain of “China’s unfair trade policies” constantly are barking to the wrong tree. They will never win, because they are actually fighting America’s big corporations when they think they are fighting China – when was the last time the unions really won anything against the big corporations? Especially the unions have been weakened to such an extend – less than 10% working class belongs to a union.
Dr. Pettis, while I agree with your economic analysis, I’m not certain about the US political analysis pertaining to your prediction of US retaliation. If US politics / policy were rational, I would concur. However, in this age where FOXNews has a media stranglehold on opinion, those primarily to blame for the US economic melt-down (Republicans) are expected to be returned to power, and little anti-trade-deficit noise is to be heard here in the US, I simply don’t see much ‘blame China’ rhetoric not logical thinking going on here.
If Republicans are returned to power as expected, I think their pro-globalization stance can be expected to continue, & damn the logic (in many matters). Which leads to my first question – If the US does not deal with the in-balance through protectionist measures in the nearer term, it will happen through collapse. Assuming policies don’t change and the trade deficit trends continue, how long can the US sustain the existing imbalances and what signs should we look for that point to a trade collapse?
My second question is based on Chinese rationale. The Chinese must be aware that investing in US treasuries, Japanese bonds, and now basically dirt (ok, iron ore), they are most likely dumping their money down any hole they can find. How long can this continue and what will be the long term effects of this ‘continued growth at any cost’ policy?
Thanks again for your thoughtful blog.
The WTO put much institutional constraint on the US’s ability of retaliation. The outsourcing US industries that import from China as part of the supply chain management will not support the trade restriction. Maybe only the workers will mobilize to enforce the retaliation. They are actually taking actions.
http://worldtradelaw.typepad.com/ielpblog/2010/09/chinese-energy-subsidies.html
But I am not convinced by the “deficit-steals -job” argument. There is always job opportunity if the price is right (down with the wage). House boom help to create artificial demand that support the overpriced wage level. The correction should be reprice the factors so that US regain attractiveness for capital investment. Promoting innovation and improving productivity have the same effect.
In my view, trade restriction is pursuing a strategy of import substitution. It will keep inefficient jobs for US, which will hurt the economic growth in the long turn. I doubt that such kind of job it created will last long.
Michael:
Can you explain this in a little more detail?
“as they do, the US fiscal deficit will probably need to rise even faster to minimize the employment impact.”
I’m having a hard time following the logic.
Thanks…and thanks for the great blog.
David
I think the likely beneficiary of the US trade restriction on China will be other emerging economies. Redirecting the stimulus money into industry subsidy that promotes export may be a better instrument.
The quantitative easing of the US central bank is causing overheating in almost all emerging economies without helping the investment growth in the US. It only gonna to work until the inflation in the emerging economies makes the investment in the US attractive again. But the inflation through imported goods may bite the USA much earlier.
The US economic policy may need to focus on the domestic reform, though it is understandable much more politically difficult.
We do need one global economic policy, instead of many national ones.
Professor Pettis, thanks for another succinct and persuasive entry.
For this passage,
“The increased importing of commodities may be for real domestic use, but if it is for commodity stockpiling …. and so should be removed from the trade numbers to give clearer picture of the real trade balance”,
I don’t quite understand…what do you mean by “real” trade balance? Isn’t it true that as long as China bought something from abroad, it should be registered as “import” no matter for the purpose of consumption or investment?
Michael I do not know how this works but someone has hijacked your link or RSS feed
Check out how your feed looks on my blog.
http://globaleconomicanalysis.blogspot.com/
Your links have a viagra target.
Also would you please privately send me your email address. Thanks
Mish
I would favor some retaliation, and the sooner the better, simply because things are only getting worse.
But I think we have a set of geeks in Washington who are too wimpy to upset the apple cart in this way. I don’t think they’ve got what it takes. I’m sorry to say, Obama is a weakling (I voted for him).
Wow! Sounds like it’s not just US policy makers and politicians who are clueless, but it is widespread. Clearly, the trade deficit is killing the US economy, and with it the Obama presidency and the careers of a lot of incumbent politicians. You would think they should have figured this out by now. Your blog should be required reading for policy makers in the US and elsewhere.
IMO you are right; it is not if but when the US will (be forced to) retaliate. The silly thing is that the trade surplus countries seem to have the false idea that a large ongoing trade surplus is essential for growth and employment. Implementing policies to increase spending of their export earnings within their own countries would increase their growth and employment while reducing their trade surpluses.* This would reduce the impact of the impending trade war (or possibly even avoid it). But public statements and policy actions suggest they are also clueless. At the G-8/G-20 summit Obama pressed the surplus countries to work to increase their internal consumption spending. Response from Germany (Merkle)-no! Germany is going to do just the opposite. Response from China-pay lip service but do nothing.
I, for one, support early assertive action by the US. However, working in the trees is not very effective; they should first focus on the forest. A good start would be for Obama to declare directly: The policy of the United States of America is balanced trade, and this will be one of the guiding principles of all future trade related international agreements. This would be followed by assertive actions to move in that direction over a period of time. The surplus countries could then decide if they prefer to balance their trade by reducing production or by increasing consumption and investment.
*Note. If it is assumed that reducing a trade surplus requires reducing production to bring exports into line with imports then it could be concluded that eliminating a surplus results in reduced growth and increased unemployment. However, if a surplus is reduced by increased internal spending of export earnings then reducing the surplus results in increased growth and reduced unemployment. While this seems pretty obvious, it does not seem to be widely understood. Else why do I keep reading statements suggesting that the surplus countries rely on their trade surpluses to maintain growth and employment? Spending their export earnings internally would do far more to generate growth and employment.
Michael Pettis, thank you for your brilliant analysis.
It seems the world needs a kind of commercial game (let’s avoid another word, “war”) whereby trade-deficit countries make trade-surplus countries react and play globally rebalancing strategies.
Is there any way individual trade-deficit countries can be rewarded by invidually choosing to put pressure on trade-surplus countries? The United States can take legal, protectionist measures against China and others, but what about other smallish economies? Specifically, what about European peripherical countries?
I have come up with a possible strategy. What would happen if trade-deficit countries decided to delay payment on its public debt until they had a trade surplus? This would put pressure on trade-surplus countries, which would be losing money with every passing year the world is not rebalancing.
The Euro – is weak as Michael describes, and overvalued as well. The Euro came in at 1.17 on introduction when it was expected to be in the range of 1.06 to 1.16 to the dollar, prior to its inception. Whereupon over the next few years it fell to .84 or .86 USD, which is the number that most used when considering dollar weakness rather than the range that it was analyzed to come in at prior to its inception, which I would argue is probably closer to its true value. Certainly, Germany, by common conceptions is doing “better ” than it had been when it was close to the costs of its reunification, if the costs of the Euro, has closed factories, in low to mid-range consumer goods across the Southern core of Europe, due to competition from abroad. With the vast increase in the value of the Euro, it is likely, that many businesses across that region, were closed and moved, either to Eastern Europe or further afield. The longer the Euro stays overvalued, the greater that process would be. if it does mitigate cost of living increases, and calls for more generous social safety measures in a Europe that bought some time for need of addressing those issues do to the high value of the Euro as Euro denominated bonds were purchased post inception of the Euro, which is the primary reason for the rise in the currency, although it was able to be used politically, unto the recent crisis as validation of the EU system. Thus as the Euro rose, the EU replaced the US as a primary destination for cheaper external imports if the EU as a whole does maintain a moderate deficit. When discussing the EU, it is always so confusing, when people mention it are they talking Eu 7, 15, 27, or 35.
When discussing the impact of retaliation by the US, or any other soveriegn, it is import to note that there are winners and losers under maintanence of the status quo, or alteration. Consumers may lose under retaliation, producers and potential employees might win. Regardless, with so many new participants in the new system, something will have to give, and the previous period of growth will not be seen for some time, trying to play the same old game will only lead to more problems. The volatility created by such a process is dangerous globally, the sheer and utter waste of resources domestically is potentially astounding, and the policies that enable this, work to the detriment of other developing nations primarily. By depriving them of a fairer share of the development and capacity pie, more than it negatively affects developed countries, although in differing types of countries, ther3e can be hope or despair, wailing or smiles, often wroingly. This is why Michaels clear-headedness on these issues is important. Frankly, the system is operating sub-optimally to the detriment of all, if it does support dominat stakeholder groups interests.
Somehow people confuse a country that pays their employees in the middle class 1/3 US minimum wage as ruling the world. The US could restrict consumer credit to start and China would implode. It is only a matter of time before much of this stuff comes back to the US and I would suspect that once Congress gets their heads out of their butts and realizes China presents itself as a potential enemy in the not too distant future,they will move to protect the US steel industry. There will be plenty of unemployed bankers to run the factories. Also, China is a financial bubble of its own, issuing evergreen notes to fund failing enterprises. A country can only misallocate capital so long before boom turns to bust. China does not have an externally convertable currency because the country has few legiitimate property rights. Problem is an overleveraged China cannot continue to leverage an overleveraged United States for long. Also, the world cannot continue to run on phony accounting much longer and expect for the world economy to hold up.
Hello Professor Pettis:
Many thanks for your interesting analysis on China’s imbalances. I have not been able to figure out how to download Chinese data from the IMF/IFS website — so I made some back of the envelope calculations.
At end 2005 the PRC’s fx reserves were reported at $821.5 billion and recent press reports indicate that in July-August 2010 they topped $2.5 trillion. If my numbers are correct and I convert GDP from RMB to US$ that means that 70% of the GROWTH in nominal GDP has been accumulated in fx reserves.
If you add the costs of financial repression (you put a ball park number on this of 5% of GDP in an earlier posting) — the costs of financial distortions are surreal.
Have I missed something on my envelope?
I had always thought that the hukou system was the major price distortion in the system — but financial distortions look like an equally big challenge. best regards James
Interesting article!
Correct me, if I am wrong. But Professor Pettis seems to imply that it’s going to lead inevitably to a trade war. That’s how the Germans and the Japanese were forced to raise their exchange rate and cut their exports, when the Nixon administration imposed unilateral and retaliatory tarrifs on imports.
But it’s too general to say that such measures would “hurt a lot of countries.” China’s export sector would be hurt badly, but Beijing could point finger at Washington, and shift the blame for the adjustment to US. Its finance is in better shape, and with a authoritarian system, it could better handle the crisis with administrative measures.
On the US side, the manufacturers may get some benefits. But it’s not a sure thing, since much of their production is in China too. The US consumers would lose big, with much higher prices in Wall Mart. The treasuries would suffer, now that the export countries don’t have the trade surplus money to buy the treasury notes. The political fight in Washington would be messy, with a sinking economy and ballooning deficits.
My feeling is that this is going to be messier in US, and that’s why they have not started the trade wars, despite the calls made by Paul Krugman and alike.
I see a parallel between Greece and US. Back to the early 2000, due to the globalization, both were experiencing capital outflow and decline in investment. Both had borrowed from the international market in a low interest rate environment. The borrowed money fueled the house bubble and over consumption, which help to ease the pain of adjustment. There has been capital misallocation in both countries, as the growth in public service, construction, etc. is not sustainable.
The response of the developed countries towards the globalization (the changing relative scarcity between capital and labour, free capital flow), could be 1) lower wage 2) improving labour productivity through organizational restructuring and innovation, to keep attractive for investment; or3) borrowing money to ease the pain. Germany indeed did a good job by reform and fiscal discipline.
The constraint of the national states to take option 3 is maybe the rating agency:) The game of borrowing money will be over once the international borrowers have doubt over the financial sustainability of the country. The interest rate for borrowing will be higher and the value of the currency will go down.
The Greece and US were lucky(unlucky) not to have such constraint. Greece is in the Eurozone and enjoy a credit rating free-ride. And US is able to borrowing at unreasonable low price because the Asian exporting countries chose to peg (lending to US is the only way to defend the peg).
Foolish, incompetent and corrupt US politicians may retaliate vs. China’s currency, trade policies but, the markets govern the US and if equities markets bleed out the politicians will shut up. None the less, efforts will be to no avail in terms of creating US jobs as the politicians will frame the anti-China rhetoric. Jobs will be created in Cambodia, Vietnam and Bangledesh, not the US. This would be harmful as environmental and labor laws are non-existant in these countries. My question is how far is the bottom as the global race to the bottom rages on?
I see your point about the trade balances and possible conflicts. I don´t get why you are so foccused on Germany´s trade balance rather than the overall trade balance of the EU(common market) or at least the Eurozone(common market¤cy), which is pretty much in balance. If you bare with me for a moment I´ll explain why: Lets assume that the US really tries to impose trade restrictions on the surplus countries(in Europe esstentially Germany and the Netherlands), or let´s just assume the less serious case, that the domestic trade federations see comments like yours or those regularly read in the FT as bad for business. What would keep them from encouraging their member firms from just running their exports(&European distribution) through their, lets say, Spanish subsidiaries, or just transforming themselves into SE´s and choosing Barcelona, Bilbao,Athens, Madrid,.. as their nominal headquaters.
According to your line of argument, this would nicely solve the German surplus problem, in fact it would probably be possible to create almost any desired level of intra european(by extention overall) trade surplus or deficit. German trade in equilibrium, EU´s overall trade balance(still in equilibrium), problem solved and Europe is no longer a factor in the trade imbalance discussion. All of that without really changing anything “on the ground”. I guess it could be done by Christmas.
I don´t disagree that there are serious imbalances in intra-european competitiveness, these however are about as relevant to a discussion of world trade as the international (and national bilateral) trade balances of say Michigan, California or Maine would be. I don´t understand why you keep on mixing these two very seperate issues.
Maybe we need to a new round of Plaza Accord to allow the US to do the “strategic devaluation”. The problem with the China is that the nationalist populist sentiment put political constraint on the Central bank. Central bank is accused for being a US puppy.
There are many wealthy interests in the U.S. that favor the current set-up: cheap Chinese labor (skilled or unskilled), higher profits, bonuses and stock options. There’s no reason to think anything will change unless there is push back from the general population, which isn’t happening in the U.S. , at least. Just the other day the governor of CA was in China stroking their new high speed trains for import, to be purchased with money borrowed on the bond market, one guesses.
It just looks like China is overwhelming most of the world in production, and is increasingly moving into high value added areas. Even Germany is worried about it. Unless China challenges dollar reserve status, which would directly impact wealthy factions in the U.S. the current set-up could and maybe will go on indefinitely.
Mr. Pettis,
I believe you will find this useful in enriching your analytical framework.
http://www.newleftreview.org/?page=article&view=2854
“In fact, Chinese companies face enormous competitive challenges in operating on the international stage. Contrary to the belief of mainstream economists that opening up developing economies would provide opportunities for indigenous firms to catch up with those of high-income countries—a perspective epitomized by Thomas Friedman’s 2005 The World is Flat—the three decades of globalization in the run-up to the 2008 financial crisis witnessed an unprecedented degree of international consolidation and industrial concentration. [2] This process took place in almost every sector, including high-tech products, branded consumer goods and financial services. Alongside a huge increase in global output, the number of leading firms in most industrial sectors shrank.”
Prof Pettis, I just wonder about this idea of “stockpiling” or “running up inventories”. You seem to have been saying it for a long time now. I just searched back, and every time copper is mentioned on your blog over the last two years, it seems to be accompanied by warnings about stockpiling. I remember you warning about car sales as well – that China’s bumper car sales last year may not be sustainable. But thus far they seem to have been sustained.
I’d love to see you assess some of your predictions and claims over the last two years, and whether there’s any real evidence of the worrying slowdown you’ve been predicting. Like many people, I’m very impressed by the depth and quality of your arguments, but it feels to me like your predictions haven’t been born out. China is still growing at a blistering pace. Were you wrong? Is the slowdown going to start now, when the 2 year stimulus runs out?
It really is a shame that one of the largest US exporting companies is located in Illinois. Obama’s home state might not be so affected and public opinion skewed because of it.
Michael, was Brad Setser travelling with Larry Summers? If ever I was hungry for an update from Brad, it is now.
A) What forms of rebalancing/retaliation does the U.S. have in order of least incendiary to its trading partners to most? Where is the U.S. now on this list?
B) If the Democrats are beaten in the fall elections, will 2011 be the year when trade dominates headlines? If the public gets wary of fiscal deficits, will Summers, Goolsbee, & Co. rethink fiscal deficit strategies to offset the risk of losing Obama’s ear (assuming Obama will follow what keeps him in office: votes)? Or put another way, who stands out amongst the economic advisors as grasping trade issues really well?
C) As ideas start being thrown around by politicians, what do you think of Warren Buffett’s plan from 2003 to address the trade issues facing America?
http://www.zerohedge.com/sites/default/files/Berkshire%20Hathaway%20-%20Growing.pdf
Thank you for sharing your sharp insights.
As always, excellent article. I check back every day until the new article comes out.
In regards to trade imbalances, “if something can’t go on forever, it won’t.” This applies to many individual items in our current economic situation but, I think, especially the US fiscal and trade deficit.
To allow the trade imbalance to continue to rise, “the US fiscal deficit will probably need to rise even faster to minimize the employment impact.”
So, to enable a rising US trade deficit requires a greater increase in the US fiscal deficit. I think this may be the key to the unraveling of the trade imbalances between the US and the rest of the world. The US fiscal deficit cannot, for much longer, continue to rise. Within less than 3 years, the US (official) debt will reach $20T.
One of two scenarios seem, to me, to be possible:
1) FED monetizes the debt, trying to keep Treasury rates low (most likely). This is self-limiting as eventually, money printing causes the dollar to drop sharply against other currencies, interest rates must then increase (along with inflation) and the US economy craters. Americans can’t afford to by expensive imports and the trade deficit drops.
2) FED doesn’t monetize the debt, allowing Treasure rates to rise (unlikely). Once again the economy crashes as only credit (and government handouts) keep the US economy alive.
Either way, increasing Treasury rates force austerity on the US. As interest expense begins to overwhelm the US budget, the two choices are government cutbacks or government default (most likely a combination of the two).
Bottom line is that with a $20T national debt, taking the 10 year rate (current 2.7%, long term average 7.3%) as the average cost of debt service, debt service would go to something closer to $1.5T/year versus <$0.5T/year at current rates. This results in debt service increasing from 25% of Federal tax receipts to 75%. That can't be done.
A trade war may ensue as increasing desperate US politicians flail around trying to maintain their grasp on power. However, it is the inevitable collapse of US demand, not trade restrictions, that will force a re-balancing of world trade patterns. Assuming that the rest of the advanced world is in a similar fiscal situation, trying to increase exports will work for no one because there is no "importer of last resort." The US held that role for the last 40 years. It's almost over. Trade will not disappear but it will be more balanced because:
1) No country can afford to buy much more than it sells because financing a trade deficit by borrowing will become increasing difficult (as capital owners realize how broke everyone is and refuse to lend at low rates).
2) We will move away from fiat currencies to a hard currency (or at least toward fiat currencies backed by something other than faith, as faith will be lost). This means that no one will trade exports for worthless pieces of paper. Ergo, trade deficits will have to be more balanced because to buy something, the US must sell something.
The US has lived well on borrowed money for a long time. Now it is time for both the US (and its enablers) to pay the price.
The world economy will not be destroyed; trade will continue. However, the US will no longer buy the production of the rest of the world because we are broke and can no longer afford it. We are moving towards a more uniform world, not just by increasing developing world standards of living, but also by decreasing developed world standards of living. (This assumes reasonably rationale behavior by all, i.e. no world war. That assumption is not a sure thing).
This partially answers one of the questions I posed above:
http://www.nytimes.com/2010/09/13/opinion/13krugman.htm
WHAT IF the Chinese officials are not stockpiling, but reducing the depletion of their own resources instead?
Long-term: rebalancing towards more internal consumption, but
short-term: rebalancing trade by offsetting it with depressing internal commodity production and limiting commodity exports?
At least at first glance, that looks like some sort of a plan to me.
The trade deficit is not a problem to the deficit country as long as trade surplus countries are foolish enough and willing to support the arrangement.
Many people are barking up the wrong tree. High unemployment is the problem in deficit countries. The solution is to run a budget deficit to create jobs. Generally this will lower the currency exchange rate making exports more competetive and imports less competetive. Eventually employment reaches satisfactory sustainable levels and a concensus trade balance is achieved.
The political problem is because Baby Boomers are in a wealth preservation mode. They think of the econonomy in terms of household finance. They are drawing the wrong conclusions in a misguided and selfish attempt to achieve a prosperous retirement.
I can only see one solution. Educate against the ignorant objections of Baby Boomers. Inject realism into their plans for personal wealth retirement funds. Educate them on economic realities. Then run a job creation budget deficit.
Financiers and corporations are the wild card. They are using their considerable political clout to satisfy short term profit motives. If it suits them, they will feed Baby Boomer misconceptions.
Michael:
Any response to the latest in the press about the doomsday scenario of Boston University professor Laurence Kotlikoff, who is saying, essentially that a minor trade dispute between China and the US might lead to a prospective dumping by China of its US bond holdings, thereby igniting a sell off in the Treasury Bond market leading to a stampede to convert US denominated financial assets into something else.
“A minor trade dispute between the US and China could make some people think that other people are going to sell US treasury bonds,” he wrote in the IMF’s Finance & Development review. “That belief, coupled with major concern about inflation, could lead to a sell-off of government bonds that causes the public to withdraw their bank deposits and buy durable goods.” This then, would lead to immediate monetization of a massive amount of debt, creating ultra-inflation.
I’m not buying it. (forgive the pun). I thought your piece a couple of months ago did a great job in explaining the issues. Any further thoughts?
@Jeff
Thanks, I had forgotten about Buffet’s solution. In today’s environment in might be the least of all evils. Walmart stock would fall big time on news of Congress passing this law.
To Phil Hand:
I second your motion that the pessimists might stand back and reassess their earlier dire predictions for the Chinese economy. To be sure there are a lot of problems to resolve, but to date the Chinese have muddled through a lot better than their high powered Washington brain trust counterparts (no doubt aided? by congress) .
Policy transmission mechanisms in China work differently than those in the USA because they are more path dependent (hysterisis) as information is opaque, limited and manipulated.
This may explain why the nay sayers who make “rational” predictions of the impending implosion of the property market, car sales, copper prices, etc. keep putting off the ultimate day of reckoning — because the power structure has informational advantages. regards James
Phil Hand,
I think Pettis’s predictions have been pretty good. He said that Beijing would follow a stop-go approach (panic to panic, he called it) but would maintain very high growth until 2012, and after that begin a difficult adjustment. So far I think he has been right. The real call is whether, as he says, a serious trade conflict next year will derail Chinese growth.
TomasG
Professor Pettis, form my browser lynx/linux I see
adds for cialis and viagra all over your site.
Has your site been hacked or are the adverts
intentional?
It’s probably worth remembering that Micheal predicted buoyant financial markets in the US as increasing liquidity headed that way due to the US continuing to be the consumer market of first and last choice for mechantilist economies. That part of his prediction is working out. Anyway he did not think things would reach a head until closer to the November elections. Turbo Timmy is being made to look a bit silly by China using Japan as a way to funnel capital to the US. China has been buying Yen forcing the Yen higher versus the dollar. Japan has been forced to intervene by doing China’s US dollar buying for them. What a laugh.
When is the US going to realize that having a capitalist elite with all the money is not same as having a strong economy. In a way its similar to thinking that living in a country with loads of gold in it’s vaults is the same as living in a rich country. A common error that Adam Smith helped to clear up. Our current crop of policy makers would be well advised to refer to his writings on a more regular basis.
Michael,
It is disturbing that you argue that positive figures are actually bad. Given that profit margins in China was wafer thin at 2% and there are more than 500 million unemployed or underemployed citizens living on subsistence income, why should the Chinese government behave like a despot and abandon its citizens by raising the yuan even 5% not to speak of the ridiculous unilateral calls for 20 to 40% appreciation by Americans. Is China destroys itself where is the growth for the world’s economy going to come from?
The relevant questions are that how much will America economy be hit if it does not export to China. I note that GM and other American firms are only surviving because of its growing sales and huge profits in China. How much will prices rise in America if it stops buying from China? Civil riots are likely to occur in America as affordable consumption goods disappear from shelves in the event of a trade war. Unlike China, America is heavily urbanised and the people in the cities have no other recourse.
The real problem is that America has a structural problem with its economy hence the deficits. Other than exporting weapons of mass destruction and occasionally bombing some poor nation to pieces in the name of ‘democracy’ at the behest of military-industrial vested interests, what has America really achieved? Intellectuals all over the globe are not fooled by the propaganda constantly being pushed out by the western media and view America as an erratic rogue and dangerous nation.
The current course of action by China of prudent steady change and growth is the optimum path for the world, America and China. Any other course will be disastrous. America on the other hand should start reducing its military expenditure and steer its industries towards peaceful economic activities. Its current course is frankly quite stupid!
The calls about China being a problem with respect global warming are at odds with the fears that China will dominate the future green industries and reflect the questionable mental frame of mind of America. So America, repent and heed this good advice or end up destroying yourself.
Wu Jian Long, this argument “why should China do anything that hurts its own economy” makes a lot of sense until you consider whether that China is not alone on this planet. “Why should the US allow China access to its markets if China’s exchange rate policies are costing US jobs through giving China an unfair advantage?” would be a simple counter-argument which illustrates the fallacy of yours.
As I think Prof Pettis. has pointed out before, the idea that the peg is great for all Chinese is stupidity. It effectively means that Chinese export companies (into which Chinese people put a lot of work) are exchanging goods for less value than they should really be worth, although doing it more in quantity terms than they otherwise could. An undervalued RMB effectively undervalues everything China produces that goes to international market. It also means China’s imports of Oil, Coal, Iron Ore, raw materials, Consumer products, agricultural inputs etc etc are more expensive to Chinese people than they otherwise should be. Although the export industry is important to China’s economy, it does not employ the majority of Chinese workers, so forcing the rest of the nation (who are net importers) to shoulder the burden of supporting some (as you admit) otherwise uncompetitive exporters through a currency peg is not necessariliy such a brilliant idea. Especially since it also damages China’s international standing (causing unemployment not just in the US, but even worse – in countries which are poorer than China), creates tensions with the most powerful nations / trade groups in the world (US, EU, JAPAN, BRAZIL etc), makes China look entirely self-interested (as much as the US, in many people’s opinions), and creates the situation whereby the PBOC is holding a load of assets which are overvalued in real terms, and liabilities which are undervalued.
China might soon need to admit that although the Shanghai Clique and the Princelings have a vested interest in carrying on with export heavy growth, it is beneficial neither for the rest of the world nor (increasingly) China itself. If Zero-sum games are the order of the day, then why shouldn’t the world treat China with a similar attitude?
Wu Jian Long,
US opening trade and investment has made China – question is NOW – Is the US the dog or the tail – China does have an advantage .. the American populace has been sold out my US politicians corporations and lobbyists. This is not a rant ..it is just a fact. If push comes to shove
My bet the US is still the dog wagging China as tail ..
As to your comments on the US as an erratic rogue – you might want to get a better grasp of history – pick your timeframe 10 25 50 100 years ..the US stacks up pretty well. The Western media has been anti US for a long time and probably the only reason you have the beliefs you do.
By the way ..Do you have any idea how much China has spent on it’s military in the last 10 years ?
brasil61
“So America, repent and heed this good advice or end up destroying yourself.”
This kind of thinking is why the rest of the world looks at China with fear and revulsion.
@WJL,
If China was being prudent and steady and changing then I would agree with you. But there is nothing prudent or steady about the way the imbalances in China’s own economy have built up over the years. I remember being thoroughly perplexed when I found I could purchase an angle grinder in our local hardware store for less than the cost of a simple file. All I wanted to do was sharpen an axe so I bought the grinder that was made in China. How does China do it? What is it that makes her so competitive? It’s not just hard work and intelligence when products are being sold retail for not much more than the value of the materials and energy that must have gone into it. In my mind the problem is similar to the American subprime loans issue were risk was being under priced. When governments provide ultra low cost loans to manufacturers and undertake currency intervention to ensure very low exchange rate volatility and provide a significant subsidy at the same time the market is distorted. It becomes acceptable to establish businesses that are very borderline. These businesses would not survive normally. Any slight turn against them and they go under. This is what happened in America with sub prime loans in the real estate industry. Risk was completely miss priced. Leverage was way to high. There was no ability to withstand even slight adversity and of course the house of cards came tumbling down.
Has China created a bubble in cheap manufactured exports like there was a bubble in housing in the US? My bet is yes. The question becomes can China defuse the situation. Or will it destroy itself.
Prof. Pettis,
I suspect that you may be planning an entry on the Japanese intervention anyway, but i thought I would ask you a few opinions about it anyway.
I suppose a basic narrative (as Tom Holland summarized today in the SCMP) is that China has been heavily buying Japanese assets, especially government bonds, over the last few months. The Yen has climbed dramatically. Meanwhile the Euro remains very very low since the Greek Debt Crisis (incidentally i just calculated that the Euro has depreciated 15% against the RMB since Dec 2nd 2009, the RMB has only climbed about 1.35% against the USD in the same period). The Japanese were forced to act (although their timing is a little odd) to devalue.
The Europeans and certain US officials are upset that the Japanese have acted “unilaterally” despite the fact that the US kept delaying any chance to organise any multi-lateral action (eg the G-20), and the EU went totally quiet on the global currency imbalances around the time the EURO dived earlier this year.
So, i suppose my questions are:
1 – Is this a rather brilliant move by China, having pushed some more of the burden of the undervalued RMB onto Japan, Japan has reacted, and now any US congress / Senate moves against only China (whilst Japan is intervening too) look a bit unfair and more like “China bashing” (whereas it would presumably be better to do “China + Japan Bashing” now).
2 – What are your reactions to the Japanese intervention in general? – After all, this does fit into your prediction of a worsening trade environment and tit for tat / beggar my neighbour trade policies escalating in the post-crises period.
3 – Do you think the rather obvious Chinese attempts to move the RMB since Sept 1st are going to be enough (given the tiny overall move in the RMB since June) to head off US pressure in in Congress and the Senate?
4- Given the RMB’s moves against the Euro, Yen, and USD this year, does anyone still seriously believe that the RMB’s value is reflecting a basket of currencies? (haha! this is not really a question i admit!)
” there are more than 500 million unemployed or underemployed citizens living on subsistence income, why should the Chinese government behave like a despot and abandon its citizens by raising the yuan even 5%?”
Boohoo.
There is also a very large amount of rich people, more than the rich in several Europeans countries combined. It is a VERY large amount of people, many of them relatives or connected to officials.
If the “Chinese government” does not want to “behave like a despot and abandon its citizens” they can do a lot of things, though no doubt much more difficult than just blaming the west.
Is it really necessary to go into details? They are well known to all.
@ Wu Jian Long
Your criticism of US, when rational, is valid. The US will undoubtedly suffer product price increases in order to balance. But it will be no more painful than any other adjustment that will hit the US. The US does have a structural problem, with chronic fiscal deficits even during healthy employment years.
But please, spare me the denial of reality. The US cannot tolerate being the consumer of the world by virtue of the fiscal stimulus. Tax payer indebtedness that purchases imports won’t be accepted any more. It just cannot happen any longer. Typically, currency exchange would adjust to create the trade balance. But the Chinese government won’t allow such an adjustment. And knock it off with the “prudent and steady change” stuff. That’s nonsense. This has been an issue dating back to 2001.
And, by the way, I doubt those 500 million of poor people would be so poor if China reformed its economy, creating shares of stock for each citizen for every SOE and emphasized corporate governance, stamped out corruption in the Party, created a fair playing field for SMEs, reformed hukou, respected property rights, developed a legal system that was transparent and impartial, reformed the banking system so banks would pay more than 1.7% on deposits, etc etc.
Tony, many of your questions about timing are really more political than economic, so I don’t have much to say about them. Over the next few weeks and months we will get a sense of what the political imperatives on trade in the US look like, and after 2012 we will get a sense of whether the new Chinese leadership feels sufficiently strong to begin a more aggressive adjustment process. As for your last point, I am generally more interested in understanding China’s development process than in making policy recommendations, largely because I have absolutely no say in the policy-making process and if I can contribute at all it will only be by trying to lay out the options and consequences as clearly as I can. In my next entry, for example, I plan to discuss the four ways Beijing can adjust, and who the winners and losers are in each case. Of course economic analysis does not provide any insight into how the decision will be made – that depends on the relative strengths and commitments of the various winning and losing constituencies, which is, once again, a political question.
Seatrus and Dave G, I agree that the fight in the US is between US workers on the one hand and large multinational corporations on the other, but high unemployment has a way of concentrating congressional minds. I can’t watch Fox here in China so I don’t know too much about them but I suspect that they are likely to support populist attacks on free trade if the populist right-wing shifts that way.
Litz, you are largely right that “there is always job opportunity if the price is right,” but remember that the fight over the currency is the fight over how the price becomes “right”, either through a painful downward adjustment of US wages or a depreciation of the dollar.
David, remember that the point of the fiscal deficit is to create jobs. As it expands, jobs are created commensurate with the expansion and depending on how the fiscal expansion occurs. However these jobs are not necessarily American jobs. The US fiscal deficit creates jobs both in and out of the US, and the amount of the job creation that goes abroad depends partly on the size of the trade deficit. This is why if the trade deficit expands, the US fiscal deficit will also have to expand to create the same number of US jobs.
Joshua, if the PBoC invested part of its money in commodity-linked paper, this would not show up as imports but as investment. If the PBoC asked a state entity to purchase commodities instead of its buying commodity-linked paper, nothing fundamental would have changed but Chinese imports will have risen and its increase in reserves will be commensurately lower. Investment and consumption should really be treated differently.
Mike, yes my site has indeed been hacked. My student who takes care of this managed to get all the Viagra ads off my site but he hasn’t been able to fix the RSS feed. He is working on it. For all this trouble I haven’t even gotten a free vial of Viagra.
Diego, the trade deficit countries of Europe have no choice but to see their deficits contract rapidly. This must happen if their capital account surpluses contract, which seems to be happening.
James, in my opinion financial repression is the single most important distortion driving the trade imbalance and the domestic imbalances in China.
TK, the reason I focus on Germany is because the trade deficits in Europe are correcting quickly as a consequence of their financing crisis, and the result will be a surge in the overall European trade surplus, most of which will consist of the German surplus. As Keynes pointed out in the 1930s, in a world of anemic global demand it is primarily the responsibility of the demand-deficient countries (the high-trade-surplus countries) to adjust by creating additional net demand.
Thanks Don. The NLR sometimes puts out brilliant analyses. Unfortunately I do not subscribe, so I cannot read the article.
Phil Hand, actually car sales are supposed to plummet in the second half of this year unless the subsidies are brought back. More to the point I wonder if you are reading my pieces for short-term investment advice. Please don’t. I have said many, many times that this game will almost certainly continue until 2012 and then it will only stop in 2012 if the new leadership feels sufficiently secure and there is consensus. This should not ever be taken to mean that copper prices will fall next week. The fact that China is growing “at a blistering pace” is not a refutation of my predictions. Fort two years I have been arguing that every time Beijing tries to rein in the excesses, growth will slow so sharply that Beijing will quickly step again on the accelerator (see, for example, my May 12 entry), and so growth will not slow down. So far that seems to me exactly what is happening. I argue that this is not sustainable, but unsustainable polices can go on for many years. The problem, as Japan showed us, is that the longer they go on, the more painful will the adjustment be. Please do not interpret “unsustainable” to mean “good for a few more weeks.”
Jeff, Buffet’s plan is a variation on the plan used by the Germans in the 1930s. They were running large deficits but could not devalue the mark to regain competitiveness, so they forced balanced trade by insisting that all imports were paid for in an accounting currency created by exports. This automatically balances trade, but my worry is that it is administratively very complex and hard to manage. What is more, the longer we maintain a system like that the harder it will be to give it up without causing huge disruptions, as the Germans discovered to their dismay.
Mark, as of yet I don’t see any evidence of rebalancing towards consumption. That has been one of my predictions over the last five years and I continue to believe that without addressing the currency, the interest rate, and the wage differential, consumption will never be able to rise quickly enough. As for whether they are buying commodities to stockpile or to restock, it makes no real difference to the accounting.
MMTFan, see my response to David above.
Hua Qiao, as I have written many times before, the idea that China can “dump” its holdings of UST bonds without causing major damage to itself (and minor short-term damage to the US along with US medium-term benefits) is silly. Foreigners cannot be net sellers of US dollar assets unless they are willing to destroy their export sectors.
James, there is a lot of intellectual laziness in your wanting the “pessimists” to explain why they have always been wrong. Which pessimists? I can only explain why I have been wrong, and you would need to tell me which specific prediction I made that turned out wrong. I have said that the China’s imbalances have been increasing, that they are unsustainable, that growth will continue for at least another two years, and that the adjustment process will be very difficult. Most people agree with the first and certainly Beijing seems to agree with the first two. The third and forth propositions might turn out to be wrong, but they certainly aren’t wrong yet. I also think you cheerleaders are too mistakenly prone to believe that “to date the Chinese have muddled through a lot better than their high powered Washington brain trust counterparts.” You can only say this because you assume that a problem in China must look exactly like a problem in the US, and so miss out where the Chinese problems are. I assume you are one of those who insist that the warnings a decade ago about the horrible problems in the banking system turned out to be wrong?
Wu Jianlong, I think your comments are part of why I am so pessimistic about trade relations. I hear them so often and it seems that we are engaging in a dialogue of the deaf. You say it makes sense for China to continue with policies that generate domestic employment growth at the expense of its trading partners, mainly the US, but you oppose policies by the US that would allow it to generate domestic employment growth at the expense of China. You say: “The real problem is that America has a structural problem with its economy hence the deficits. Other than exporting weapons of mass destruction and occasionally bombing some poor nation to pieces in the name of ‘democracy’ at the behest of military-industrial vested interests, what has America really achieved? Intellectuals all over the globe are not fooled by the propaganda constantly being pushed out by the western media and view America as an erratic rogue and dangerous nation.” The first sentence is so abstract that it is pretty clear you don’t understand what it means. Of course there is structural problem and one of the ways of addressing that structural problem is by addressing trade. The rest of your statement may very well be true but although it is the sort of silly grandstanding that someone from Singapore of Monaco might be able to get away with, it sounds a little hollow coming from a Chinese.
Houhui, the purchase of yen and the response of Japan to those purchases is pretty much par for the course. Everyone is going to try to force the adjustment onto their trading partners and everyone else will resist. This is a game that always ends badly for the global trading system and most of all for the surplus countries, but since surplus countries always learn the hard way, there is almost no point citing the historic precedents. In every case (for example the US in the 1920s, Brazil in the 1970s, Japan in the 1980s, and of course China today) domestic idiots and their foreign friends always assured us that the surplus country in question is radically different from other countries and so is immune to historical precedent and “normal” economic behavior. I guess there is a reason why historians constantly bemoan our incapacity to learn from history.
Rumors that China is focusing on the Euro now, even while it lets the RMB rise against the dollar: http://online.wsj.com/article/BT-CO-20100916-706822.html
It really is hard to explain the Euro’s rise any other way. I don’t think consensus otherwise supports the rise, but what do I know?
Thanks for being so generous with your time, and answering the questions of so many. I learn so much from you.
I think there are some points that seem to fall by the way of our focus on present data, our short-term focus, and essentially the power of recent data, if not our general inability to see the potential detriments in a positive number, if not be fully cognizant of the underlying reasons for why those numbers exist. But clearly, despite our desire for the opposite, these things take time, something difficult, for we wedded to the internet, with our addiction to everything at the push of a button.
consumption has lessened over the previous decade, it will take longer to return to the very low number of a decade ago, and even longer to get to a number more on par with what is expected of an important global economy. This will need to occur before the RMB will ever be able to be converted on the open market, and long before it can be considered an important global currency. Which is why talk of an implosion of the dollar is ridiculous, in either the short or long-term, although it would be preferred to have it weaken over time both for domestic US and global growth, by my opinion. All currencies are fiat, and if they need to be, if we want to continue to develop countries and the global economy, especially if we want to be able to find a way to create and spend the 60 trillion in global infrastructure spending that we need to over the next 30 years, especially as 40% of Asia, home to 2/3 of the worlds population is expected to be water insecure, to speak nothing of energy, human capital development, social system development, ability to care for a global and rapidly aging world population as we are entering a world where robotics and other technologies might make the human irrelevant. So, it is an interesting world we are entering, one that will require levels of cooperation not well held in the present era, nor even for which much historical precendent has been recorded. A few years back there was much discussion of the “China: Old before Rich, or Rich before Old” referring to the demographic challenges facing the country, the real question involves this matter on a global level while factoring in the great technological leaps that are about to hit our economies, like tsunamis running across islands in the middle of the pacific. Michael is right to advise us not to forget historical precedent, the world would be wise not to look at the implications of some technologies just around the corner, coupled to differing levels of development, different demographic challenges, with a healthy dose of acknowledgment as to the importance of the expectations held by people globally, in developed and the developing world, and why new levels of global coordination need to trump parochialism, business as usual, and the rent seeking behaviour of global elites.
Michael,
Do you have any reaction to Stephen Roach’s comment to Bloomburg?
China may be using its exchange rate to handle the aftermath of the global crisis in ways that could help the U.S., said Stephen Roach, chairman of Morgan Stanley Asia, in an e- mail. He said China is moving cautiously while doing its “fair share” of righting lopsided global trade and investment flows.
‘Linchpin’
“In a fragile post-crisis era, there is nothing wrong with China relying on a currency anchor as a linchpin of financial stability,” Roach said. “As much as Washington politicians would want China to help the U.S. devalue its way back into economic prosperity, that approach is bound to fail in an era of huge budget deficits.”
Pettis: “Phil Hand, actually car sales are supposed to plummet in the second half of this year unless the subsidies are brought back. ”
Are they?
I have been amazed that you picked auto sales as an example as proof of what’s wrong with China’s stimulus policy or whatever is wrong with China’s economy. Couldn’t you pick a “better” example?!
Let’s see the fact.
Last year, China’s auto sales increased by almost 50% from just over 9 million in ’08 to 13.6 million, surpassing U.S. to be the world’s largest auto market.
What had caused the explosion of the auto sales last year? To be sure, the government had introduced a stimulus policy last year, reducing the purchase tax from 10% to 5% for small cars. Does the stimulus policy work? You bet. But was the increase in auto sales all due to the stimulus policy – we’re talking about a few thousands yuan here for most small cars for God’s sake.
This year, the stimulus has been reduced to 7.5% from last year’s 5% of purchase tax. Has auto sales “plummeted?” The sales has been over 10 million for the first eight months; most industry people expect this year’s total sales will be around 17 million based on the sales trend. Yes, the growth _rate_ will “plummet” to 25% from 50%. But do we seriously expect growth rate to be as high as last year, after China adds 4 million in increased sales, more than twice of India’s annual auto sales last year?
Next year, China’s auto sales will very likely return to the more “normal” growth rate of around 10%. Unlike the “cash-for-clunkers” type of stimulus policy, China’s auto sales will double during two years when the stimulus policy is in effect and will not “plummet” back to the level of two years ago. The cost of the stimulus policy is so small and it’s got to be the most effective stimulus policy in human history.
To be fair, I don’t think the explosion of the demands for auto sales is all due to the stimulus – it’s really just an excuse for the large pent-up demands out there. If you’re familiar with China’s domestic market in the last 30 years, you’ll understand this explosion of certain market is not limited to auto. In fact, television, refrigerator, cell phones, housing etc. had all displayed more or less similar patterns in the past.
Again, I think it’s OK to be “pessimistic” about China’s economy, but in order to be creditable we need to be objective and honest with our analysis.
Professor Pettis:
Thank you for your reply to my question about pessimism.
I am one of those investors who got burned in the last financial crisis and would like to avoid making the same mistakes.
As to being a cheer leader for China’s recent performance, I seem to have a lot of company; citing e.g. the Executive Summary of the recently published OECD 2010 Survey:
“Since the OECD’s first Economic Survey of China in 2005, China has continued to expand rapidly. The economy is also weathering the global crisis remarkably well, not least thanks to prompt and vigorous macroeconomic policy action. Economic expansion is projected to continue over the medium run, and China’s share in the world economy is set to grow further.” Similar assessments have been made by the IMF/WB etc. Perhaps they are all wrong?
I have not looked at all your earlier postings, but recall that you were pretty sceptical of China’s fiscal package in response to the crisis, as not being new money — with big risks of capital wastage (I agree).
I wonder if your (inherent?) pessimism reflects the implicit assumption that shocks and fiscal policy in particular ends up being transitiory — as market economies inevitably revert back to equilibrium? This seems fine for OECD economies but I wonder if it holds for hybrid economies in transition — where economies of scale and imperfect information may be important?
As to not foreseeing the financial crisis — mea culpa, I was dumb enough to listen to my bank who assured me that the US sub-prime problem was “small beer” and there would be “no recession” ! Again I was unfortunately in good company, including Greenspan, Mervin King, etc., and other “opinion makers”.
What I really admire about your blog is your deep analytical insights on the key role of balance sheets versus flows in creating bubbles — and your stimulating challenges to conventional opinion.
The rub is that this approach leaves the timing of the ultimate day or reckoning — frustratingly hard to predict for mere mortals. Many thanks again, regards James
Michael,
I read that there are 3 million jobs vacancies in America that employers are unable to fill for lack of qualified applicants. Can you really balance trade in a sustainable way by forcing China to bankrupt its companies by a shock 20% increase in the exchange rate of the yuan. This has been tried before in Japan twenty years ago and we all watch with interest the current Japan’s current situation. You still have not replied in a clear way how trade is going to grow if steady wealth creation in China is destroyed.
You neglect the current rebalancing in China in boosting domestic consumption. 15% retail growth for the last three to five years is definitely serious rebalancing however you wish to manipulate the facts. The surging sales in China and profits of American companies are also testament that calls for a trade war are stupid. Both sides will be hurt and empty bravado counts for little when the tsunami comes and engulf America. America needs to work with China, not against China to prosper!!! Thinly disguised, unilateral threats do not endear America to anyone in the world.
The biggest ballyhoo that you do not mention is the privileged position of the US dollar in being used to settle international trade. This is a 2 edged sword as Americans willingly avoided financial rigor and discipline on their expenditure. Mis-allocation of resources occured on a vast scale, resulting in structural issues in its economy during the last three decades. It was always the intention that America can inflate away its international obligations and idiotic statements that it is the bondholders problem were routinely thrown around with glee by Americans in the years before the financial crisis.
For your information I do not live in China, studied in UK, a master degree holder in environmental science and a consultant engineer for the last thirty years involved in large infrastructure projects in Asia. Your bland dismissive statements do not do you credit and is typical of western mentality – you cannot accept criticism with humility and maturity.
Back to the sacred U$1 trillion military budget, it is more than the total of the military budgets of the rest of the world. If that is not a structural issue, what is a structural economic issue. The irony is that the vested military industrial interests in America are also exploiting ordinary American and commandeering scarce tax dollars that can be used to balance their budget deficits. How can an economy depending upon 70% consumption ever going to reduce its deficits?
Asians note that the so-called Asian currency crisis was created by western financial institutions to beggar vulnerable Asian nations with open financial systems. This same process is now going on in Europe and there are calls for legislation and regulation. Why the double standard and pressures on China to fully open its financial markets before the proper institutions are established
to ensure stability. It would have been much worse for the world id China had been paralysed by the financial crisis.
So in conclusion to Americans, heal yourself first. The fear is that you take us down with you on a dead end path. The world will not stew with you, subsidise your profiligate ways nor bend to your threats. WE SHALL resist you all the way as we seek to survive and prosper.
I was wondering if you follow Andy Xie’s commentary? I was curious about his inflation/deflation post, where his view is that US monetary policy will first cause inflation in emerging markets.
My question is how will PBoC counter this inflation. From one of your earlier posts you mentioned that increasing interest rates in China, increases spending for Chinese consumers but has the downside of making some Chinese export businesses less competitve, and as many are already marginal they will go bust.
Is it possible for inflation to get out of hand in this way, in that increasing rates will increase consumption, while at the same time reducing the availability of goods?
Glenn, Jorg Bibow, someone I respect a great deal (as I do Steven Roach) has said much the same thing in his most recent piece for the Levy Institute. However I think they are both wrong. If the purpose of RMB policy is to generate stability in a world of excessive dollar volatility, pegging the RMB to the dollar does not reduce currency instability except of course against the dollar, which in this context is meaningless. More broadly it actually increases volatility by forcing dollar volatility onto the RMB. In addition Roach says that devaluing the dollar won’t work because “that approach is bound to fail in an era of huge budget deficits.” He thinks that US savings rate and fiscal deficits are totally independent and have nothing to do with the currency. I tried to address the former point in my April 28 entry, and as for the latter I have argued many times (as have many others, including Paul Krugman) that the fiscal deficit has to be large because so much of its economic effect leaks abroad through the trade deficit. Devaluing the dollar will cause both US savings rate to rise and the US fiscal deficit to decline. It cannot be a coincidence that countries with undervalued currencies and repressed interest rates always have low fiscal deficits (until they inevitably surge because of contingent liabilities in the banking system) and high savings rates.
Greg, I discussed auto sales in my August 10 entry. I thin it is pretty clear that the surge in sales is explained by the subsidy and, to a lesser extent, by government purchases. The key problem I think is to confuse a rough proxy for consumption with consumption. The point is that aggregate household consumption must rise. If the government temporarily subsidizes certain goods, even if their consumption rises, if this rise comes at the expense of other consumption and of future consumption, then there has been no rebalancing. Most of the evidence suggests that consumption growth in the aggregate this year is still lower than GDP growth and consumption will not be a higher share of GDP in 2010 than it was in 2008, before the subsidies were introduced. In fact it will probably be lower.
James, yes, there are a lot of cheerleaders out there, but then every bull market has a lot of cheerleaders, whether or not it is on the verge of exhaustion. I don’t know if this is a good thing or a bad thing, but outside of China there were very few skeptics a few years ago and I got a lot of attention for being the only one. Now It seems the field is getting a little crowded. Let’s see what happens.
Wu Jian long, too many points to address, but as briefly as I can:
1. There is no evidence that household consumption is growing as a share of Chinese GDP and in fact 2010’s number might turn out to be the worst ever recorded. Do not look at retail sales. For reasons which I (and many other analysts) have explained many times, they are not a good proxy for consumption.
2. The idea that the US dollar’s reserve position benefits the US more than it hurts it is slowly dying a well-deserved death. I am not sure why you cite this as the “biggest ballyhoo” I do not mention since in fact I have mentioned it many times.
3. I am also not sure why you bring up the US military budget. First, I have always said it was a huge problem for the US. Second, it is largely irrelevant to this discussion. Third, most commentators believe that if correctly counted Chinese military spending may be a higher share of China’s GDP, and yet China nonetheless runs a trade surplus.
4. You say that “Asians note that the so-called Asian currency crisis was created by western financial institutions to beggar vulnerable Asian nations with open financial systems.” Which Asians? I believe that the readers of “Currency Wars” believe that. Of course they also believe that there is a secret Jewish conspiracy led by the Rothschild’s to undermine China, and that among other things they direct the actions of the Fed, so I am not sure how seriously I take them. I would suggest that an awful lot of economically literate Asians actually believe that your claim is nonsense. If the Asian crisis (I am not sure why you call it “so-called”) were not remarkably similar to a hundreds of financial crisis that have afflicted many countries over recorded history, I might be convinced that it was the result of some kind of Western plot, but this seems an unnecessary, albeit exciting, hypothesis. I suppose I could respond by citing some plot that the more moronic of Americans ascribe to secret Chinese machinations, but it is hard to see why anyone should take these claims seriously.
5. You are right that the US does need to heal itself, but since healing itself requires among other things a rebalancing of trade, it is inconsistent to argue that steps aimed at rebalancing trade are misguided.
James,
I wouldn’t put much faith in the forecasting of the OECD, IMF, etc., they were completely blindsided by the events of 2007-9. They didn’t see it coming even six months after it arrived. And Wall Street wasn’t much better. I remember in late 2007, when the seers told us there was a 10-15% chance of a recession, but the U.S. public started saying we were in one.
It tells you something when the guy in Peoria, interrupted from watching reruns of the Simpsons for his opinion, can out-forecast the economists at the OECD.
Hi Dr. P,
I thought you & your readers might enjoy this
http://www.newsweek.com/2010/09/16/our-best-economic-minds-are-failing-us.html
And I agree with David Merkel, thank you so much for patiently sharing your time & knowledge with us.
Michel, I largely agree with your argument that the RMB should revaluate. I sincerely hope that the Chinese government can do the necessary adjustment. The problem is that the issue is too politicized domestically. It has been more about national pride than the real economic facts. The nationalist populist sentiment make government officials impossible to take the responsibility that may risk their own political career.
But I don’t think the trade retaliation is a helpful instrument to address the imbalance. The protection will foremost benefit those bad firms that are most inefficient within the US economy. It will distort the relative price among US economies and save most inefficient jobs. I do believe the failure of firms like GM is within its self. And US should use the crisis to promote reform.
The Chinese government will unlikely response to the trade sanction threat with a currency adjustment. There will more likely result in a tit for tat trade war that will hurt the US export.
One question, do you think the a repeat of Plaza Accord would be possible. China may agree with a revaluation if other economies (especially the emerging economies) do the same. US may need a one-off devaluation against the rest of the world. This could be a topic for the G20.
Very interesting testimony today…….
http://waysandmeans.house.gov/media/pdf/111/2010Sep15_Magnus_Testimony.pdf
The system is interesting, the use of thoughts, images, beliefs and similar often amusing, the problem is that people actually believe them. For example, when one country gets into a growth pattern, it will need to validate the continuation of such, to its people, to its investors, to other countries hopeful of similar, and it MUST continue to provide similar statistics to maintain appearances. Similarly, an economy hits a wall, it’s economy had become, over a short period of time too dependent upon one or two segments of an economy, finance and housing for example, then a downturn, and a seeking for a solution, an identifying of bogeyman. Frankly, in both cases, and likely averting the global downturn by moderating the excesses of all globally who contributed to the present downturn, although some can barely see past their parochial interests, and blame the likely culprits, foreigners on the one hand, the government on the other, yet, truly, it would have been ideal to slowly start to decelerate the growth phase in about 2005. This would have mitigated the structural problems that are accumulating in places that need to maintain face as to the validity of their model both domestically and globally (ie blame the foreigners) and would have lessened the impact of asset devaluations on the other, and structural alterations to composition of the economy on the other (its the governments fault, not my own, after all my mortgage broker told me…). Regardless, had the yuan started to rise, then the detrimental structural impediments wouldn’t have accumulated (marginal companies, making marginal profits, surviving on loans from banks, or government transfers to SOEs and their subsidiaries from the household sector as stakeholder interests have entrenched themselves, as they gained more powerful voices during the unvirtous cycle). This is to point to two countries, but similarly for Spain and Germany, for the commodity producers who budgeted oil at $100 USD a barrel for government budgetary purposes, and where oil is too expensive at present levels for the market, most likely leading to an excess of development of supply which will likely lead to an eventual crash in prices, which points similarly to commodity producers at some point, unless, as I suspect there will be a global focus toward infrastructure development on a global scale, eventually, and over an extended period of time, to account for excessive consumption having hit a wall. The question is, can it. Does China have 30% debt levels, or 200%. Will investors force bond yields higher? Can we get global taxpayers to understand the need for spending, after having spent so much previously in efficient ways, to people understand the ramifications upon globol growth, especially for developing nations, the global consumers of the projected future, of following an EU type perspective relative to currency, ie within ranges, then growth similarly within ranges, unless its fine to confine your own, while growing off of the unconfined. An interesting future, re-evaluate all of your assumptions, especially those postulated during the previous era of high global growth. At least a decade of sup-par growth, possibly more, under the best of circumstances.
Michael,
A betaled comment: we are now witnessing Japanese FX intervention (large scale, lots of publicity and especially, lots of BoJ/MOF credibility at stake) following fairly indiscrete (and apparently not discussed with the Japanese authorities) but small scale (much too small to have an effect by itself) Chinese quasi intervention in the USD/JPY. We have always assumed that China had a portion of its reserves in JPY, as it has in EUR. The portions are undisclosed, but the consensus seems to be that at least 60% is in USD. Probably the remainder is mainly in EUR (say 25%) with JPY, GBP and maybe a few commodity currencies (CAD, AUD) combined at say 15% (or roughly USD 350 bn). This assumes that something like a consolidated PRC-state position is actually kept (that may be technically difficult).
China’s portfolio shifts (caused by either changes in preferences, responding to market value (relative to a target basket), fresh inflow, investment run-offs) can have causes that range from the routine to the hostile, and so China’s own broadcasting of those changes.
What would be useful to know is to what extent the State Council (or its political counterpart) is involved in FX policy and how authority is delegated. Take for instance the autonomously shifting from one currency to another, and/or the publicity/lack thereof around that shift. It would be naive to assume that SAFE etc make these decisions independently, and equally naive to assume that there are not a lot of strategic players within the State’s own empire (compare the commodities stockpilers etc) further complicating and already fluid stream of market challenges. That means that the State Council’s role must be a compromise between bureaucratic “planning-style” control and pragmatic responding to that constant stream of challenges, some of which are interna and may involve intra-party indiscretionsl. That in turn raises questions as to where the relevant expertise resides on the monitoring (i.e. non PoBC) side. Is there anything that can shed light on these issues?
“The protection will foremost benefit those bad firms that are most inefficient within the US economy.”
Why? It should benefit smaller local firms at the expense of large multinationals. It also has the advantage of getting our economy more prepared for higher energy prices, which should be particularly useful in the absence of a carbon/energy tax/tariff.
Hi Dr. Pettis,
Thank you for your reply (and for taking the time to respond to all these posts).
I look forward to your next post as always.
Wu Jianlong,
If I had to make a guess about your personal circumstances, I would assume that having been educated in the West, you are suffering from an inferiority complex of some sort. If you had been educated within China, you would “argue” more respectfully. While Dr. Pettis probably doesn’t mind being called by his first name, he is a professor and not your friend. He owes you, nor anyone else an explanation. In this regard, you have something to learn from the Chinese education system and culture, especially as it relates to education and educators.
Dr. Pettis does not represent America, and you do not represent China. He speaks for himself as do you. As he pointed out, much of what you write sounds very hollow coming from a Chinese. Hollow mean hypocritical and lacking merit. Get it?
What have the Chinese given the world in the last 600 years? I cannot think of one single innovation. NOT ONE! Economic growth is easy when you’re not the pioneer. There is a reason Chinese students flood foreign schools and universities and not vice-versa.
The US (and the West) has pretty much invented everything that you use today, save the four inventions of ancient China (which are obsolete anyway). Until China actually adds value to the world, other than by reproducing what other countries do already for cheaper, your anti-West, anti-US, anti-non-Chinese attacks are just nationalism, the last refuge of scoundrels and sour grapes.
This board is a place for civil people to discuss and engage in debate over important issues respectfully. If I wanted to read abusive or disrespectful abuse by angry nationalistic youths, I would read the comments section of China Daily, Tianya and the like.
Show some decorum and respect in future would you and stop attacking the host.
Bob_in_MA
You are right about not believing consensus forecasts. But what do you propose as an alternative?
The world seems to be increasingly dominated by bankers and big business who manipulate their financial statements to meet market expectations with exotic accounting tricks, juxtaposed onto a 24/7 media looking for the next big story. In short, it is unsurprising that hard work, long-term investment and creating a better world for our kids seems to get so little priority these days via the attractions of making a “quick buck”. regards James
Just as the US plays world policeman, now it must be the world spokesman to face down China’s mercantilist ways. All the coat tail riders will benefit and maintain a deferential approach with China so they can maximize exports to the mainland while the US fights the political battle. Germany is just loving it.
All:
Right now the issues are: seeming strength in China, ongoing weakness in US, and mixed results as to where you reside in the EU, moderate strength among the commodity producers, signs of inflation across some emerging markets, and similar. The discussion should be, how do we get to a system that can equitably develop the 5 participants currently in the system, where there were but 3.4 a decade ago, and perhaps only 1 decade previously. This 1 to 5 is based upon the coming togethor of the world economy under a system that is based upon Free Trade Areas, Bi-Lateral Treaties, the ongoing development of a variety of trade unions across the world and similarly. Certainly, those reluctant to change, to alter what has worked, or those benefting from the excesses of others rarely discuss the true issues facing the system. All seem to be in a mode where they are protecting what they deem to be in their interest; the question remains not if their perspectives are true, mostly they are not, but whether or not they are even in their interests.
For one, it is the weakness of the dollar, which is entirely intellectually dishonest, especially where your currency is tied to the dollar, and you grew from a policy of devaluation of your currency, then you would seemingly want to weaken the dollar, if not in deed then at least in word. It’s not the financial repression system, its the USD, we need to move to an SDR (then we can purchase the bonds of the countries whose currencies who compose it without altering course). Or another, all of a sudden it is X countries currency that is the problem, not that two large of a percentage of the economy was recently devoted to only a couple sectors of the economy, or that the gov’t, and people went on a spending binge while cutting investment taxes, leading to a vast pace of growth in the country, and even faster pace globally that is unlikely to be repeated for decades, I argue. Or in another, let us keep ourselves within ranges while growing off the profligacy of others, finally our unemployment numbers are off, to hell with our neighbors to the south, lets pretend our country is a business, and our neighbors are poor businessmen while we force our capital upon them as recent seeming success of our system has put off the structural reform to pension and welfare systems that would have enabled our fiscal solvency in the future. Or in other places, hoping to atttract some capital, even to succeed at creating the purported explosion in middle class growth dynamics that is expected to eventuate over the next several decades but where opportunities are limited by the sheer ability of some large competitors to manipulate their economy to the interests of large SOEs which seems little more than an attempt to entrench entrenched. So anyway as nations come to terms with these issues, they willo resort to criticising whichever bogeyman their political elites and intellectual classes have encouraged them to do so. There will be calls for scrapping this or that institution. What we really need is to alter current structures to adapt to the very many new players in the system or there will be a reversion to previous centuries of political cum economic strucutres to the detriment of those most in need of development by my estimation. But the sexy thing will be to move to call for totally new strucutures in hope of avoiding the painful medicine required, this is why I expect at least a decade of at least sup par growth, if we can manage to muddle through, even lessened opportunities thereafter without taking the required steps to strengthen that which so many entrants are bound to. Build anew, and need to create the legacies and institutional cultures that have served the world so well previously. IOt should be interesting to see how this plays out over the next 3 or 4 years as people and nations come to term with it, before they even start to lay the steps of what to do.
Hi, HI
I think the trade remedy will come in a form of sector specific import restriction (antidumping, countervailing duties, safeguard). It will be applied to those most uncompetitive sectors in US. Indeed, steel, chemical, and other big manufacture industries will be most likely to profit from the trade remedy law. Political well organized groups, like the trade union, will be the most efficient player in demanding protection. It will postpone the structure adjustment of those industries.
James,
I totally agree with what you said. I think here, in the U.S., a real big share of the problem is the distribution of income/wealth. I think when it get’s too far out of skew, markets/rewards are become distorted and even the rich ultimately do worse. Look at the U.S. in 1776, all the really rich people were in Virgina. After 80 years of slavery, not only was the working class of the North better off, but the rich had gotten much richer.
Here’s an interesting paper fron the BIS on the subject:
http://www.bis.org/publ/bppdf/bispap46i.pdf?noframes=1
…check out graph 5, really amazing. And it doesn’t bode well for the U.S. during a period of household deleveraging. If the bottom 60% of France fared as poorly as they do here, they’d make 1968 look like a love-fest. Someday people here will wake up.
Hua Qiao,
You may be right, but look how quickly Japan moved to the restrain-China camp. What happens when Korean exporters find themselves competing with Chinese companies?
Dump your dollars, US debt, Uncle Sam getting ready to screw you. Won’t even kiss you first. US is a nation ran by sociopaths, they eat their own young
Wu Jian Long, not only would actually understanding issues from a neutral standpoint help your arguments, but I think toning down the rousing rhetoric might do so too! Although personally i find it quite refreshing to come across revolutionary sentiment, it might just be more appropriate somewhere else, as it makes your already misinformed economic arguments seem even less serious (if more entertaining!)
I would consider China’s weak-yuan policy to make sense as long as they are seeking to buy oil in international markets which are perforce priced in dollars.
Accumulating USD acts as a hedge against energy price rises.
Parking the funds in UST is IMO a partly political act but also has the effect of providing liquidity to the export market.
In essence, China sells it’s output to the US in exchange for future Energy imports…