Is China currently rebalancing? The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging. Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share.
Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011. Here is their summary:
China’s economic growth has remained resilient as the macro stance moved towards normalization. Both fiscal and monetary policy contributed to the normalization. Consumption growth slowed in early 2011. But overall domestic demand held up well, supported by still strong investment growth. Real estate investment has so far remained robust to measures to contain housing prices—a policy focus. Reducing inflation is the other policy priority, after inflation rose to 5.4%, largely on higher food prices.
So what is going on? Isn’t China doing all the right things – raising wages, the exchange rate and interest rates – and, if so, why isn’t the economy rebalancing towards higher levels of household income and consumption?
The key, I think, is in distinguishing between real and nominal changes. On a nominal basis, for example, it is clear that the currency is appreciating, interest rates are rising, and wages are soaring, but it is not the nominal change that matters.
Take the currency. It has appreciated roughly 5% against the dollar since it began “floating” again last June, and on Friday broke RMB 6.5 to the dollar for the first time since the big 1993 devaluation. On an annualized basis that’s around 6% in currency appreciation since June.
But changes in a currency’s real value reflect more than just changes in its nominal value. They also depend crucially on inflation growth differentials and productivity growth differentials. To take the former, if inflation in China is higher than it is in the US, we can say that the RMB is appreciating in real terms even if its nominal exchange value hasn’t changed. Conversely if US inflation is higher than Chinese inflation, then the RMB is depreciating in real terms.
At first glance we might think that since CPI inflation in China has been higher recently than in the US, this would suggest that real RMB appreciation is even higher than nominal appreciation. Last month’s year-on-year CPI inflation in China, after all, came in at 5.3%, well above the 2.7% CPI inflation recorded by the US. A number of officials in Beijing and in the US Treasury Department have suggested that the combination of nominal appreciation and higher inflation in China means that the RMB is appreciating in real terms by a hefty 8-9% annually. If the RMB is undervalued by, say, 25%, three years of this would eliminate the undervaluation.
Figuring out real appreciation
But we need to be careful here – the analysis is wrong in many different ways. In the first place, even if the RMB is undervalued by 25%, and if it is appreciating by 8-9% a year in real terms, we can’t conclude therefore that in three years the RMB will be correctly valued. This would only be true if there were no difference in the productivity growth rates between the two countries. But since Chinese worker productivity is growing faster than American worker productivity, in three years the RMB would still be undervalued by the cumulative difference in productivity growth.
More importantly, in evaluating the real rate of appreciation what matters is not the difference in US and Chinese CPI inflation overall, but rather inflation in the price of inputs to the tradable goods sector. In China almost all the recorded CPI inflation has been in the food sector, not in the tradable goods sector.
It is pretty complicated to compare the appropriate numbers, but I would argue that since there has been relatively low inflation in the price of inputs to both the US and Chinese tradable goods sectors, the relevant inflation differential is quite small. In other words we can probably ignore the impact of inflation on real changes in the currency. So why do I bring it up? Mainly because a lot of commentators have argued that China’s relatively higher CPI inflation means that China’s pace of appreciation is not as low as it seems. It is higher, they say, by at least two or three percentage points. But they are wrong on that point.
The issue of productivity growth differentials, to which I have already alluded, is less ambiguous. Chinese worker productivity has been growing at least two or three percentage points faster than US worker productivity (and probably a lot more depending on how you measure it and what adjustments you make). This means consequently that the RMB should nominally appreciate by at least 2-3% annually just to keep from depreciating in real terms. Real appreciation, in other words, is less than nominal appreciation because of China’s more rapid productivity growth.
When you combine the impact of the inflation growth differential and productivity growth differential, it is not clear that there has been much real appreciation in the RMB against the dollar in the last twelve months. Some analysts actually argue in fact that the RMB has continued depreciating in real terms during this period, but my guess is that while this argument is not implausible, in fact there probably has been some real appreciation of the RMB against the dollar – just not very much.
Of course the dollar is not the only currency in the world that matters. The sharp depreciation of the dollar against the euro and other major currencies in recent months suggests that in trade-weighted terms it is very hard to argue that the RMB has appreciated at all, and probably depreciated, depending on which period you are looking at.
So what does it all mean? Just this: the claim that one of the key components of rebalancing – an appreciating currency – has been occurring may be vastly overstated or even simply wrong. There has been little or no real appreciation of the RMB and there may actually have been some depreciation.
And the net impact is?
But certainly interest rates have risen since October, so at least there has been rebalancing on this front, right? Again, no. On the contrary, although there have been four rate hikes since October, with lending rates having gone up by around 100 basis points, depending on maturity, these have been more than matched by an increase in inflation of at least 200-300 basis points, depending on how you construe the inflation index and on what components you focus.
Real interest rates, in other words have actually declined sharply. Borrowers can obtain financing at lower real costs than ever, and depositors are suffering a significant and growing real loss on the money they leave in the banks. This just increases the transfer of wealth from net depositors, who are households for the main part, to net borrowers, who are the state and corporate sector.
So not only has there been no rebalancing on the interest-rate front, but in fact the imbalances have been exacerbated. This leaves wage growth, and here the story is also unambiguous, but unambiguous in the other direction.
In the past year wages have been growing very quickly although, because of inflation, real wages have been growing much less quickly than nominal wages (and remember that the sectors seeing the highest wage growth suffer more from food-based inflation because they are poorer). Still, real wages have probably risen faster than productivity, in which case it is pretty clear that over the past year household wages have comprised a growing share of GDP.
I worry about the reasons for rising wages – I suspect that demand for workers is driven primarily by unsustainable and unhealthy increases in the past two years in real estate and infrastructure development, and so is itself unsustainable. But, regardless of the cause, this is unquestionably healthy for China’s rebalancing process. As long as it continues, one of the main causes of China’s economic imbalances – the lagging wage growth relative to productivity growth – has been eliminated and even reversed.
There are some interesting implications of this constellation of adjustment processes that are worth examining. To summarize, there are three important causes of the consumption imbalances that are plaguing long-term growth prospects in the Chinese economy. One of these, the undervalued exchange rate, hasn’t changed much in the past year and so has not contributed to rebalancing. The second, excessively low interest rates, has gotten significantly worse in the past year and so has exacerbated the imbalances. The third, lagging wage growth, has gotten much better and so has contributed to Chinese rebalancing.
What is the net effect of the three processed? Unfortunately there is no real way of comparing the impact of each variable, and so there is no real way of judging the net effect. All we can do is look at household consumption and its relationship to GDP growth, and infer the net impact from that.
If the World Bank analysis is correct, and if household consumption growth has been slowing, it suggests that because the imbalances are getting worse, not better, the adverse impact of declining real interest rates may be greater than the positive impact of rising wages. Or it may suggest that there is a lag in the impact and we will just have to wait out the end of 2011 before we can determine what has really happened.
Who pays for the adjustment?
But there is one thing we can say with a little more assurance. If wages are rising and interest rates are declining, then there should be transfers of wealth within the economy. Specifically, wealth is being transferred from corporates to households in the form of higher wages, and is also being transferred from households to corporates in the form of lower interest rates. This means that labor-intensive industries are bearing more than the full cost of the adjustment and capital-intensive industries are bearing a negative cost.
If this is the case, we should expect to see a shift in China from labor-intensive growth to capital-intensive growth as the former get squeezed out and the latter profit. Unfortunately that is exactly what seems to be happening. I am hearing from a lot of my friends and students (i.e. those who are sons and daughters of SME owners) that SMEs, who tend to be labor intensive, are raising wages as fast as they can and are still losing workers to SOEs, who tend to be capital intensive.
This makes a lot of sense to me. If wages are a significant share of your expenses, rising wages will squeeze you much more than if they are a small part of your expenses, especially if other expenses (namely the cost of borrowing) are declining. The fact that China’s economy is becoming even more capital intensive is almost certainly not a good thing. For one thing, it contradicts Ricardian comparative advantage. As an article last week in the Financial Times points out:
While the productivity of the average Chinese factory worker has increased tenfold in the past 20 years, it is still less than a third of the comparable figure in the US – offsetting the fact that Chinese wage costs are typically a tenth of those in America.
If Chinese wages are one-tenth those of the US while Chinese worker productivity is one-third, and if the (correctly priced) cost of capital in China is substantially higher, then clearly if you agree with the arithmetic of comparative advantage (and it is sort of hard not to agree), increasing capital intensivity in China is at best sub-optimal for the global economy.
That doesn’t mean it is necessarily sub-optimal for China (that depends on whether you believe investment is still heavily value-creating rather than neutral or value-destroying), but the more important the capital-intensive sector is to the economy, and the more addicted China becomes to cheap capital that can be flung into wasteful projects, the harder it will be to rebalance the economy. All that increasing wasted investment is likely to be made viable mainly by continued transfers from the household sector, whether in the form of depressed deposit rates or in the form of direct subsidies funded by taxes and “fees”. These transfers will make the rebalancing towards SMEs and household consumption all the more difficult.
China isn’t yet rebalancing. The way that its growth model works suggests that it cannot happen except with a sharp contraction in investment growth, something we are not seeing, and the empirical evidence so far seems to support the theory. It will probably take a couple of years of this kind of unbalanced growth before this point is more widely recognized, but I suspect that another year or two of stagnant consumption as a share of GDP is finally going to convince policymakers. Until then, expect more of the same, and with it rapidly rising debt levels.
This is an abbreviated version of the newsletter that went out last week. Academics, journalists, and government and NGO officials who want to subscribe to the newsletter should write to me atchinfinpettis@yahoo.com, stating your affiliation, please. Investors who are clients of Shenyin Wanguo Securities will already receive the newsletter. Investors who are not clients but who want to buy a subscription should write to me. also at that address.
hi, it is the second time I receive via RSS your articles with following content (see the title, and other portions of the fragments). it looks like your website management system in infected. :
“BUY Chloramphenicol ONLINE WITHOUT PRESCRIPTION
from China Financial Markets by Michael Pettis
Is China currently rebalancing? The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging. Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share. Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011. Here is their summary:
China’s economic growth has remained resilient as the macro stance moved towards ”
“Sale levitra: figuring out real appreciation But we need to be careful here – the analysis is wrong in many different ways. In the first place, even if the RMB is undervalued by 25%, and if it is appreciating by 8-9% a year in real terms, we can’t conclude therefore that in three years the RMB will be correctly valued. This would only be true if there were no difference in the productivity growth rates between the two countries. But since Chinese worker productivity is growing faster than American worker productivity, in three years the RMB would still be undervalued by the cumulative difference in productivity growth. More importantly, in evaluating the real rate of appreciation what matters is not the difference in US and Chinese CPI inflation overall, but rather inflation in the price of inputs to the tradable goods sector. In China almost all the recorded CPI inflation has been in the food sector, not in the tradable goods sector; sale levitra.”
Another great post, thank you.
Michael,
A few questions
1. Do you expect wage ‘give-back’ in China in the future if indeed home prices fall and input prices go down?
2. Do you feel that there is beginning to be growing acceptance among the mainstream economists and financiers/investors that China does have a “growth problem” and either growth must slow or the bubble must pop?
3. Do you think that the commodity markets a signalling anything about Chinese/world growth in the near future?
Thanks always a great read.
Wow… so well written… thank you.
You leave me with no questions to ask.
What is an economy if not the productivity of the workforce? If the problem facing us is that the currency appreciation has been outstripped by increasing productivity, then I can think of worse problems for a government to face. If productivity is rising as you say, doesn’t that actually somewhat vindicate the capital intensive development approach? If productivity isn’t rising, then the currency appreciation would be more substantial? Seems like a sort of circular argument to me.
Even if policymakers became more serious about rebalancing wouldn’t this have to take the form of positive real interest rates to properly price capita? I’m assuming that with negative real interest rates (like what the US experienced in the early 2000′s) there will be NPL’s embedded in the financial system. With such “a sharp contraction in investment growth” would this manifest as a financial crisis or
Japanese-style recession?
But for how much longer can this go on? Capital intensive investment has been working for 20 years now and except for the banking crisis that was cleaned up in the 90s there doesnt seem to have any noticeable negative effect. When is all of this malinvestment going to be recognized?
The measure of how much progress China is making on exchange rate adjustment is the rate of new reserve purchases. Those seem to be accelerating again.
Small exchange rate adjustments won’t do it. The longer the RMB remains undervalued, the longer the incentive will last to keep investing in export industries. As long as China has an export-oriented capital stock, the external imbalances will remain and the home market will stay undersupplied.
Mr Pettis
One more Question. You did not mention the recent Chinese trade surplus that was larger than expected while exports from the US also fell. Do you expect imports into china to slow this coming year?
Alex, I know the problem. Sorry but my account was hacked and we have all been too busy to figure out how to fix it.
RS, 1)Yes, but not yet. It will take a decline in investment growth to reduce labor demand. 2)Yes, an increasing if still-minority number of economists now recognize that the growth model is unsustainable, although I am not sure all of them fully understand why it is unsustainable and the role of rising debt. For that reason, I think they misunderstand the nature and difficulty of the adjustment process. I suspect that after another year or two in which consumption growth continues to remain below GDP growth, there will be much greater awareness of how intractable the problems are. 3)This is hard to say, but a Chinese copper trader told me that the recent decline in copper prices was caused at least in part by the decision by the PBoC to go after the copper financing schemes.
Throatwarbler, if imbalances are irrelevant, then you are right. Rising productivity growth matched by no adjustment in the currency can simply be absorbed by the rest of the world absorbing ever-greater Chinese trade surpluses. But I am not sure I think this is likely or even possible. Anyway the purpose of rising productivity should not be to generate rising surpluses but rather to generate rising household income and consumption. By failing to adjust domestically, Chinese households don’t get the full benefit of their rising productivity.
Steven H., yes there is a long way to go before interest rates are anywhere near appropriate. My guess is that we are more likely to see a long slowdown than a sharp contraction.
Dennis, see my January 21 post. The banking crisis was not cleaned up with negligible damage. The banking crisis was cleaned up by the household sector and this was the cause of the collapse in the consumption share of GDP. There is almost no way they can use the same mechanism again to clean up the banking system.
Ken, talk of a one-off jump in the currency – say 10% — has surfaced again in the past few years but the export constituencies are dead set against it, and I don’t think it will happen. It is almost certainly the best solution to the currency problem, but the benefits are generalized while the costs highly concentrated, and in politics those kinds of adjustment are very hard to force through.
RS, I discuss the trade surplus in the current newsletter, which will come out next week on the blog. Yes I expect import growth to moderate especially as commodity imports slow. I think we can expect another big trade surplus this year.
I think the year-over-year percentage change in China REER supports the author’s view that there is not too much real appreciation of RMB.
Mr Pettis
Thank you for answering my questions. It is a sincere privilege to exchange ideas with someone of your stature.
You mentioned before that there are limits to capital driven economic growth. Does this include inflating the asset markets to seemingly create a “trickle down” effect? It seems as if many of the rises in stocks, commodities, and bonds have come at the cost of the general public via job losses due to mergers and acquisitions, rising food and input prices, and general overcapacity. Is this your opinion as well?
Thanks
Prof. Pettis,
So you are suggesting that the next time a 90′s style banking/malinvestment crisis erupts the Chinese will not be able to use financial repression of their population to dig themselves out of the hole?
Michael,
Very good! However, it could be worse. There could be productivity increases with higher levels of suppression and no nominal FX appreciation. I am increasingly curious about the real influence Beijing has over the market sector on the one hand and the state-owned/collective sector on the other hand. And if that influence is limited (in the sense that market-style economic policies (monetary & fiscal) do not work in similar ways as in a standard economy and state sector policies do not work at all due to political issues) maybe the leadership designs its policies to suit those limitations. The result may be ugly and apparently irrational, but it may be the best a benevolent non=democratic leadership can do..
Thank you, once again, for the continued insights. I am curious if anyone has a follow up to the great posting on July 20, 2009, “Notes on a real estate trip in China”. Are the identified buildings still sitting fallow? An answer to this would provide further empirical evidence of bad investments.
J.P.
http://www.roubini.com/emergingmarkets-monitor/260989/china_losing_competitiveness
Have you seen this:
http://www.roubini.com/emergingmarkets-monitor/260989/china_losing_competitiveness
Thoughts? Comments?
Dear Michael,
I’m hoping you can elaborate re: your higher inflation = higher appreciation model?
To me that is inherently counter-intuitive and I would think the opposite would be true….that relatively lower inflation rates = higher relative appreciation.
Quick Highly-Exaggerated Examples:
2010: 1 USD = 1 Coffee
2011: 1 USD = 1 Coffee
2010: 6.5 Yuan = 1 Coffee
2011: 6.5 Yuan = 0.5 Coffee
For model simplicity, assume the Exchange Rate is static.
In this case, it is the USD that is appreciating relative to the Yuan in terms of purchasing power, specifically because nominal inflation in China is higher than in the United States. And it is the higher inflation in China that is devaluing its relative purchasing power.
Many thanks in advance for the elaboration….
Cheers, Matthew.
The price-wage spiral in China indicates that new productive resources and the productivity of existing resources is reaching some limit. This would mean that GDP-growth is reaching some limit.
Consumer goods will increasingly stay on the Chinese market, instead of being exported. Initially export goods’ prices rise, subsequently volumes fall and production moves abroad.
USD/CNY will ultimately be pushed upwards (not downwards) and selling pressure on Treasuries and Chinese real estate will ensue, I think.
“The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging”
Real wages or.. inflation? I’ve always thought China’s domestic policy was towards maximum employment (because they want to avoid domestic riots/protests, etc). That’s why Chinese Retail Stores often have excess workers…5 people (low wage) doing the job of one efficient (eg. higher wage) worker.
Is there any speculation on whcih countries will be winners and losers from the shift to capital-intensive growth? It looks like Germany might be on the losing side. It makes one wonder if having the PIIGS in the ECM is to be maintained because the have value in supressing the value of tthe Euro (maybe that explains why China has been purchasing JPN yen).
Another article twisting the facts and arguing for bad economic policies. Facts are yuan appreciating 5% a year, wages going up 15% a year, productivity increasing rapidly, imports (tonnages and values) increasing by leaps and bounds, cities going up, retails sales up by 18% annually, strategic investment being made in fast train, hydroelectricity schemes and alternative energy technologies/ industries decreasing future dependence on oil, meat consumption increasing, massive investment in western regions to alleviate poverty, lifespan increasing, the list goes on forever. The economy is being managed brilliantly and a humanistic government.
For example if inflation is mainly caused by a rise in vegetable prices, correct response is to increase local supply since vegetables is not exported by IOUSA in any significant quantity and not to chinese tastes. Why then the calls for yuan appreciation to control inflation. No doubt you will come up with a twisted arguement and supported by your cell of supporters. Who pays these group by the way?
Why all the twisted arguments, negative comments, Michael? What is your and your cell of fake supporters’ real agenda? With your brilliant insight and analytical powers, IOUSA needs your invaluable services. Why not return to where the fire is raging and where your heart lies?
I just started to wander about the parallel between the USSR and China.
The USSR finished the agricultural resource re-allocation around the end of the 70′s ,and after that the economy started the stagnation, later blowed up.
So, is it a cause -effect correlation?The quick run up is easy if you have an “unlimited” source of agricultural workers,because if you give to them any job that will increase the productivity of the overall economy.However, after that point the previous resource management is not good any more, so there is the time to change.
Prof Pettis,
There is one point I find baffling. You say that input prices for tradeable goods have seen no real inflation in China. But commodity prices have seen big rises over the year both against the dollar and other currencies. There is a similar claim that inflation is quite benign in the US. How does this work – big rises in mineral and agricultural commodities and low inflation? Have wage costs reducing to compensate or margins shrinking or productivity growth absorbing the differential?
Wow, Wu Jian Lung, I think your telling Pettis to stop thinking skeptically about economic issues, and to accept uncritically anything the government says, is stupid in normal times, but to make that argument now is just crazy. There is a huge debate going on about the Three Gorges Dam, how it is turning out to be an ecological disaster and even an economic disaster. Almost everyone has pointed out that critics and skeptics when the damn was being designed were punished, silenced and jailed, and this is why the whole thing was done so badly. The debate is even starting to appear in the Chinese press, which shows you how serious it is. Now here you are saying exactly the same kind of things that were said back then. You want people to stop expressing skepticism, to accept uncritically something that may be a real problem, and just stick their heads in the sand and ignore what is happening around them. How many times does this refusal to accept debate have to fail before people like you realize how stupid it is? You probably think you are a Chinese patriot, but the guys who insist that stupidity should remain unchecked by debate are not helping China. They are destroying it. The ones who try to understand the strengths and weaknesses and risks of government policy are the only ones helping. Closing your eyes is not a smart strategy for advancing intelligently, even if it allows you momentary comfort.
RS, I think the real cost of overinvestment shows up as rising debt levels. In the short term it creates jobs and growth in the same way that consumer-financed consumption growth in the US did, but ultimately it reduces growth.
Dennis, no. Financial repression is simply one way to distribute the costs of bad debt, but since it means wealth transfers from the household sector, it means that household consumption cannot grow fast enough to replace investment as the driver of growth.
Rien, I wouldn’t want to make too sharp a distinction between the central leadership and the SOE sector since there is a lot of overlap and alliances across both groups. But you are right, the policy choice is usually driven by political considerations within the economic constraints.
Matthew, both nominal appreciation and relatively higher inflation raise the cost of domestic products relative to foreign products, and so have broadly the same impact. That is why inflation differentials are usually considered in measuring real appreciation.
Michael, it is not always clear because China is a large and complex economy, but in the past year real wages seem to have risen substantially.
Glen, my guess is that capital intensive industries, especially in Asia, will have real trouble competing.
Wu Jian Lung, since I don’t have your depth of knowledge I might not be twisting facts so much as simply getting them wrong, but if my fake cell of supporters have a secret agenda I don’t know what it is. I can say that if they really are being paid by some secret and nefarious agent, I will be more than a little miffed. As their leader I think I should get paid too.
Kivalur, some input prices have indeed risen, but if they have, and RMB export prices are unchanged, then either profit margins would have been squeezed, which doesn’t seem to have happened, or other input prices declined. The improvement in logistics, infrastructure, costs of capital, and other non-commodity inputs probably account for reduced input prices.
very witty response to that blah blah guy, Michael. pity the poor thing so deeply.
Michael, many people appreciate your thought process regarding developments in China and I am one of those invisible many. I have been reading your posts for well over a year now and I wanted to extend my appreciation for a job well done. Keep thinking and keep writing.
Prof Pettis
Agree in general but as usual have my reservations on the “evils” of capital investment for China, reservations that continue to grow every time golden weeks and other holidays wreck havoc with transportation systems and when articles such as these surface. http://www.nytimes.com/2011/05/25/business/energy-environment/25coal.html?pagewanted=2&_r=1&ref=asia
There are 2 main points in that article that seem to contradict at least a couple of your points:
1) The government seems to recognise the negative effects of rising inflation and prices on household consumption and the need to placate and protect the consuming public seems to have taken precedence over industry.
2) Slowing growth (and capital investment projects) on the part of china is having a nasty spillover on countries that have (grudgingly) taken China on as bedfellows.
last;y, what seems to be left unsaid 3) the prospect of imported inflation from China to countries that are important trade partners.
Is it too early to say be careful what you wish for?
Michael, you may be able to solve the hacking problem by a simple change of password – to something more complex than PBOC!
Three questions:
first, if you argue that the impacts of inflation on calculating real exchange rate is overstated because inflation occurs mainly in food not in tradeables, then why not consider sectoral differences in productivity growth as well? If we consider real effective exchange rate, i.e. nominal effective exchange rate discounted by unit labor cost, then your argument that wage growth is less than productivity growth would make unit labor cost to fall, which would produce a large real appreciation of the yuan.
second, I am not sure whether raising interest rate on deposits is an effective way of increasing household income. If interest rate rises, investment falls and unemployment rises, this would reduce income and hence savings (because the amount saved is reduced, so even if interest rate rises, the total interest income may fall).
third, you are right that rinsing investment share would reduce consumption share but investment growth seems necessary to generate jobs and income, and note that rising investment does not necessarily increase investment share of GDP. I think the key is to rebalance shares of profits and wages.
Basic argument is to not count inflation, but count productivity, arrive at zero real appreciation. Problem is, boots on the ground, housing, food and wages are way up over last year. In the US, wages are flat, houses are cheaper, food is up. Tradable inflation is mostly wages, we know wages are up. Tradable productivity has not improved 5% over last year. Wages, oil, coal, electricity, land prices are all up. What inputs have gone down? China is more commodity intensive economy, so if anything, commodity inflation should be double counted for the real exchange rate.
As a sanity check, a US person buying an apartment or one person-year in China would pay more this year than last. On the other hand, a China person buying a house or one person-year in US would pay less or the same amount. There is real appreciation, at least for last year.