Chinese Yuan
The economic headline this morning is that China has agreed to allow the yuan to appreciate.
The announcement is being credited with about a 1% higher opening for the stock market and numerous pundits are claiming this will make a significant difference.
But this has happened before and it had little impact. From 2004 to 2007 the yuan appreciated some 20%. But the net impact was about a 1% rise in the price index for US imports from China and essentially no impact on the US trade deficit with China.
So why should anyone expect a different reaction this time?
So why should anyone expect a different reaction this time?
hmm…prices should rise here because chinese labor has been making strides organizing for higher pay;
the trade deficit will be impacted by both those rising prices and the wealth effect on consumer spending; that could be a wash…
& if the euro stays cheap our exports will not increase appreciably : http://www.uschina.org/statistics/tradetable.html
Electrical machinery and equipment9.5-16.812Oil seeds and oleaginous fruits9.326.584Power generation equipment8.4-13.888Air and spacecraft5.34.539Plastics and articles thereof4.414.190Optics and medical equipment4.06.072, 73Iron and steel*3.5*6.947Pulp and paperboard2.59.429Organic chemicals2.415.187Vehicles, excluding railway1.92.3
& that all assumes that the announced floating exchange rate aint just a ploy to deflect criticism at the G20 meeting in toronto…
***So why should anyone expect a different reaction this time?***
Because they are delusional and have a rich fantasy life?
Of course, there are a wide variety of possible outcomes. I doubt that a great appreciation of the RMB relative to the dollar is one of them because the Chinese seem to have their economic act somewhat together. If they were going to diminish the value of their very large dollar holdings, they would surely have been quietly and systematically unloading dollars in favor of yen, oil reserves, or something else undollarish.
I can’t make head nor tail out of the thesis that revaluing the Renminbi is going to have any more affect on the US Current Account Deficit this time than it did last time. Frankly, I’m not even sure that many of the folks involved in pressuring China even know that there was a last time or what the outcome was. I’ve never seen one mention it or explain why things are different now.
current account + capital account = 0, as a matter of necessity.
Let the Chinese stop intervening in the capital account, and the current account will drift to its natural level — also by necessity.
As long as China intervenes in the capital account, the current account will not be at its natural level, period.
In terms of “The” Chinese having their act together, I’m not sure what you mean by that.
That is one hell of a generalization.
* China has cut the consumption share of GDP in half, bringing it down to about 1/3. Nothing like this has happened in to any nation in the industrial era. I think you need to go back to the Assyrian Empire to see that level of economic repression.
* Corporate profits in China account for 31% of GDP — about the same as the consumption share.
*Someone* has their “act together” in China — if by that you mean that they are managing to put their lips to national incomes and suck with magnificent force. But there is no need to be coy, we know who that someone is — Chinese local officials, as well as business leaders — mostly the same group of people.
Even the financial sector in the U.S. was, at it’s peak — able to squeeze only about 2-3% of GDP into corporate earnings — and that was at a cost of boosting consumption by an equivalent amount. Total corporate profits after tax didn’t break 7% of GDP in 2007 housing bubble peak.
But managing to grow the economy by 8%/year and have median consumption stagnate in real terms is a work of art, in the sense of Bosch.
That economy as a whole is far more out of balance and unsustainable then anything happening in the U.S.
In terms of what to expect once the export model peters out and the economic repression eases, it would be a painful rebalancing so that consumption rises to the 1/2 to 2/3 of GDP norm. That would take care of current account imbalances as well, but those Chinese with their “acts together” may not be happy with that outcome.
***Let the Chinese stop intervening in the capital account, and the current account will drift to its natural level — also by necessity***
That’s probably not going to happen because the Chinese claim to believe that the FX markets do not work the way you think they do. They claim to believe (and very likely actually believe) that allowing free flow of capital is what fueled the equity and real estate bubbles in Japan in the 1980s and they have no intention of letting similar bubbles build in China.
But in any case, the notion that eliminating the Chinese capital account deficit with the world would somehow have a great affect on the US current account deficit with the world, is very likely mostly nonsense. Isn’t it more likely that it’d just change who the US buys/borrows from? If we persuade our credit pusher to quit passing out credit, why do you think we won’t find other dealers. The Chinese aren’t the addicts. We are.
And as Spencer points out, this was tried in 2005 and the results were that the Yuan appreciated about 10% against the dollar and the US Current Account Deficit continued to soar.
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I’m going to skip the rest of your comments on China. I very much doubt that your analysis is correct and parts of it seem pretty strange. But what the hell this is a nutty country and you are free to think whatever you wish. BTW, real, per capita GDP growth in China over the past three decades has averaged around 7%. In the US about 2%. Further, essentially all the growth in the US has been sucked up by OUR elites. What exactly leads you to believe that the Chinese don’t have their act together? Comparatively at least.
There’s an interesting graph at this site. http://www.chinability.com/CurrentAccount.htm If it is correct, and I have a few reservations, it strongly suggests that unpegging the RMB from the dollar in 2005 not only did nothing to discourage China’s Current Account Surplus. It coincided with China’s Current Account Suprlus — which had previously been fairly modest — soaring.
If the exchange rate were the only factor in determining current account flows, then knowing that the US deficit with China grew while the yuan appreciated in the prior episode might be all we’d need to know. China’s economy has changed a great deal in the mean time. China’s policy goals have, as well. Chinese policy makers seem to agree with US policy makers that domestic consumption needs to be a bigger part of aggregate demand. The adjustment can be rapid, the next time the US stumbles, or it can be gradual. Gradual seems to be a quality that Chinese policy makers appreciate.
Perhaps a shift to Europe as a target for exports once seemed workable, but a weak euro and a weak European economy may have helped Chinese policy makers rethink the mix of exports vs domestic demand. The rest of the world is a good source of demand, over time, but not all that reliable from period to period. China seems to want more exposure to what will soon be the world’s largest economy – China.
Well, have you heard how the Chinese elite talk about their maids and factory workers ?
Now imagine them doling out a larger share of the pie. This isn’t about economics.
Over the long term, you are very likely dead on. China probably can’t reasonably continue to depend on export growth to fuel large annual GDP increases. And they surely know that. However, China — like Japan in the late 19th Century and again after WWII appears to be operating according to a plan. It seems to me unlikely that anyone who is following a plan would allow their currency to appreciate very much while simultaneously holding huge amounts of money denominated in a currency that will lose value relative to the RMB.
Let’s assume that the Chinese are not simply drifting before the wind confident that God and the free market will protect their interests. If so, I would guess that any serious moves to revalue the RMB upward are going to be happen only after the Chinese have transferred much of their savings out of dollar denominated assets.
That is to say, that China will turn to its internal economy and revalue the RMB significantly someday. But not just yet I think.
You all act like you own some multi-billion dollar company. What you ought to do is a little home work before you open your mouths and make such fools out of yourselves.
China has a plan and they are working there plan. We here in America dont even have a plan. The top 100 money men in the world, say China is so far ahead of us, it will be hard for us to ever catch up.
Last month they owned almost a trillion dollors of our debt, this month they only own 900 billion dollars worth. They own almost the same amount of our dollars, but there using our dollars to buy gold.
You all just keep running your mouths and not finding out the facts. Thats what they hope we keep doing
XYZ
One of your little news papers