Brad Setser

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Memo to Kirstof: China has some responsibility for global imbalances too

by Brad Setser
May 30, 2005

Nick Kristof accuses the US — Democrats in Congress in particular — of scapegoating China, and blaming China for global economic problems (more accurately, the risk of global economic problems) that fundamentally are made in America.

Alas, the U.S. is mostly to blame for this. And the biggest culprit of all is the demagoguery of some Democrats in Congress. There are plenty of legitimate reasons to be angry with China’s leaders, but its trade success and exchange rate policy are not among them. The country that is distorting global capital flows and destabilizing the world economy is not China but the U.S. American fiscal recklessness is a genuine international problem, while blaming Chinese for making shoes efficiently amounts to a protectionist assault on the global trade system.

(Emphasis added)

The structural US fiscal deficit certainly contributes to the imbalances that hang over the world economy. The fiscal deficit is falling a tad right now on the back of a real-estate induced boom in tax revenues (corporate tax revenue is also way up), but the same real estate boom also is making the US external deficit bigger. The kind of fiscal adjustment that will reduce the US external imbalance requires slowing US demand growth — not just riding the wave of revenue that comes with a real estate boom.

I don’t necessarily like the way the American policy makers, Republicans and Democrats alike, have gone about trying to change China’s peg. The Bush Administration certainly has been more willing to blame China for the US trade deficit than to look in the mirror.

But China also bears some responsibility for current global imbalances. For every bad borrower, there is a bad lender.

Specifically, I think China’s leadership can be criticized for:

1. China’s consumption deficit. Chinese household consumption has not been growing as fast as Chinese income. Less domestic demand means that more of China’s productive capacity is devoted toward exports. The absence of stronger consumption growth in China (and the associated rise in Chinese savings and growing Chinese savings surplus) is a global problem — and one that is not made in America. China’s consumption deficit (and the resulting savings surplus) is one reason why China’s 2005 current account surplus is likely to be around 8% of its GDP. China’s consumption deficit also is a potential problem for China: China is becoming dangerously dependent on continued growth in global demand to make up for a shortage of domestic demand.

2. Continuing to peg to the dollar after 2002, when the dollar started to decline v. range of other currencies. Up until 2002, a rising dollar meant a rising Chinese currency, which made sense given China’s rising productivity. After 2002, the dollar — generally speaking — has fallen. The result of a weaker dollar: a boom in Chinese exports to the world. After the dollar started to fall, China’s export growth rate accelerated to 30% annually. Goldman Sachs estimates the RMB has depreciated in real terms by about 15% since March 2002. And since the RMB — unlike most other currencies — has not appreciated against the dollar since 2002, China remains a very attractive location for production aimed at the US market. In 2003 and 2004, booming commodity imports (and rising commodity prices) kept China’s trade surplus for soaring. But now that the commodity boom has tapered off a bit and China has slowed credit growth to (perhaps) more sustainable levels, China has started to run a huge trade surplus. Jonathan Anderson of UBS estimates China’s trade surplus could reach $120b in 2005. It just doesn’t make sense for a country with a large trade surplus to peg to the currency of a country with a large trade deficit.

3. Imposing potentially large costs on China’s future taxpayers to subsidize current Chinese export growth. The US and the EU have long subsidized certain of their exports. Subsidized financing for purchasing commerical aircraft come to mind. If two rich countries compete by subsidizing a product that poor countries don’t produce, poor countries benefit, at least so long as they don’t run up too much debt (it is a bit more complicated if the poor country also produces the subsidized good). But a system where the taxpayers of poor countries subsidize consumers in rich countries is a bit perverse. Yet by rapidly building up its reserves, that is exactly what China is doing. Through its central bank, China’s government is lending to the US — call it “vendor financing” — on terms that virtually guarantee that China will lose money.

Coastal China’s export success does not stem entirely from the efficiency of its factories and the (unquestioned) drive of its people: China’s willingness to spend huge, right now truly huge, sums to keep its exchange rate from rising has something to do with it as well.

My core beef with Kirstof: US fiscal deficits are not entirely independent of China’s willingness to finance them. China, after all, has a certain amount of influence over US economic policy. It China’s leadership really wanted the US to reduce its fiscal deficit, I suspect it could bring about a change in the Treasury market that would make the ongoing US deficit a bit harder for politicians and market participants alike to ignore.

It is darn hard to generate political momentum to close the budget deficit when the emergence of $350-400 b (3.0-3.5% of GDP) fiscal deficits in GOOD times has not prevented (to say the least) a boom in the most interest sensitive sector of the economy. Higher mortgage rates are usually one way most Americans feel the “cost” of running large, sustained budget deficits. Thanks in no small part to financing from China’s central bank — and the central banks of a bunch of other countries, whether oil exporters or Asian consumer goods exporters — those fiscal deficits have coincided with low long-term rates. (See among others, Richard Duncan)

If China chooses to subsidize the US Treasury market (along with the Agency market, and probably the mortgage backed security market), doesn’t it also bear some responsibility for the resulting US recklessness? China’s 2005 reserve accumulation may not be that much smaller than the US 2005 fiscal deficit. That may explain why US policy makers talk more about a global savings glut than the hard choices required to close the fiscal deficit.

End note: Data on foreign demand for US Treasuries is found here — but be warned, the data almost certainly understate China’s role in US markets. Reported Chinese purchases of US securities of all kinds lag well behind China’s reserve accumulation. And for an amazing graph showing the close linkage between rising foreign holdings of Treasuries and the increase in the stock of Treasury debt outstanding, see p. 12 of this presentation. A final aside: I don’t agree with Amity Shlaes’ argument that the current peg creates constructive ties between the US and China. I don’t the surplus and deficit countries should have the same monetary policy or the same exchange rate. I also think she exaggerates the risks of a (small) 10% move in the renminbi. After all, the renminbi has moved by about 7% against the euro already this year. But she is right to note that the US policy of trying to manage its complicated relationship with China by keeping each bilateral issue in its own separate “lane” is bound to create some confusion.


  • Posted by Toni Straka

    The ongoing bullying of China will rather slow the process towards flexibilization as Chinese culture is very much about not losing one’s face. As the Chinese have the goods and the money they have no reason to give in to demands that will benefit the US but create an immediate huge loss on their forex holdings. They can’t insure a 600 billion dollar portfolio when it is clear which direction the Yuan will take, although it gets less clear with every day of pressure when this will happen. I may point out China to US: Stop bullying us here and now about the Chinese problems’ with their banking sector – overburdened with bad loans and looking for foreign investors – and the fact that the revaluation debate has not moved half an inch in the last two years.
    Please also note that the TIC-data you are referring to has been altered retroactively, Red Alert…, and lacks an explanation by the Treasury.

  • Posted by Movie Guy

    Before I discuss China’s “responsibility for current global imbalances”…

    “When countries such as China can perform tasks in which the U.S. previously had a clear edge, “comparative advantage cannot be counted on to create…net gains greater than the net losses,” Samuelson asserts in his new paper.” See Shaking Up Trade Theory.

    So much for the unbridled application of comparative advantage economic theory in U.S. bilateral and multilateral trade agreements.

  • Posted by Movie Guy

    Part of the U.S. role in global imbalances…


    The purpose of employing comparative advantage and absolute advantage economic theories in the preliminary supporting analysis of specific trade elements in proposed U.S. trade agreements is to offer reasonable assurance that the resulting bilateral or multilateral agreements will result in new opportunities and improved standards of living of U.S. citizens. New opportunities and improved standards of living represent the U.S. policy basis for bilateral and multilateral trade agreement participation.

    Whenever it becomes apparent that bilateral and multilateral agreements repeatedly fail to satisfy trade projections based on economic assumptions as employed in the development of such trade agreements and based on other economic performance data and factors in the U.S. economy, appropriate timely adjustments and proposals by Congressional oversight committee and the Office of the U.S. Trade Representative (USTR) should be required by law. This type of measured performance review should become a matter of routine exploration much in the manner that the WTO periodically reviews and reports on U.S. global trade participation. It appears that the present USTR testimony presentations to the U.S. Congress are inadequate.

    Verify the results.

  • Posted by brad

    of course, every day China refuses to move to save face, China adds to reserve holdings and thus to its future losses — china cannot avoid taking losses on its existing reserves, tho it can choose at what point in time it wants to incur those losses. but it does not have to keep adding to its reserves, and adding to its losses — China’s reserves could hit $900 b this year (easily actually, if you include the reserves transferred to the banks), up from @ $650b (including the $45 recap) at the end of 04 — at that pace, “face” is costing the government of china a pretty penny. Face is part of Chinese culture, but not liking to lose money is part of most cultures too — tho it is complicated in this case by the face that the costs of “losses” on fx reserves are spread out widely and thus are diffuse, while some specific interest in china would lose in the event of any revaluation (exports = less profitable — tho one can debate how big the hit would be, given that the cost of imported components would fall).

  • Posted by Guest

    Richard Dunn, 31 May 2005:

    “The surging US current account deficit is creating numerous destabilizing imbalances in the global economy. The Fed seems to have only begun to understand the full implications of this now that the current account deficit has grown so large as to undermine their ability to control US interest rates.”

    “Their best hope of regaining control over the situation is for the United States to force a sharp devaluation of the dollar relative to all the Asian currencies in order to reduce the US current account deficit; the European economies are simply too weak for the Euro to bear any more of the burden of adjustment. The United States has now adopted – and begun to enforce – a Weak Dollar Policy. Asia must come to terms with this fact and recognize that this policy shift poses a grave threat to its export-led model of economic growth.”

  • Posted by MTC

    When I first read the piece I was furious at Kristof. The piece contained a pair of nauseating air kisses in the direction of the Beijing government and the Bush Administration. The damning use of the White House’s “some” gambit (“the demagoguery of some Democrats in Congress”) was beneath contempt.

    Having calmed down a bit, I realized he was probably in a bit of a pickle. He had authored a wry opinion on blogging’s contribution to the development of a civil society in China the week before. His effort to be both fair and informative was torpedoed by a helpful editor in New York who entitled the piece “Death by a 1,000 blogs”–and an even more helpful editor at the International Herald Tribune (“the world’s daily newspaper”) who entitled the piece “Blogs are strangling Chinese Communism.”

    “Yikes!” was probably not what issued from Kristof’s mouth when he opened up the IHT on the 25th. He had been in China for several weeks doing research for a huge special report and probably still had people to see and places to visit. I can imagine he had to think of something damn recondite, damn fast.

    Hence the grovel in the general direction of the Gate of Heavenly Peace…

    Someone else will have to supply the reason why I should forgive him for whitewashing the Bush Administration’s complicity in the current mess.

  • Posted by Movie Guy

    Everyone should note the Red Alert that Toni Straka posted above. And the further link to Rob Kirby’s article on the same subject.

    What’s up with this??

  • Posted by MTC

    On a related topic, does anyone have an opinion of Prasad and Wei’s working paper “The Chinese Approach to Capital Inflows: Patterns and Possible Explanations”?

    The tables at the back are too beautiful and complete (why do they not include the usual caveat about rounding?).

    Immediate apologies if I have missed prior comment on this work.

  • Posted by Stormy

    There are two possible avenues to even out the problems connected with outsourcing—both involve various kinds of taxation. Both would adjust the Ricardi model so that it actually starts to approximate reality. Assume that free trade, as the neo-capitalists define it—is either good or inevitable. Assume, also, that at some point enough data has been collected to know what the dislocations are. We want a win-win situation here. Assume also that a country can affect only its own multinationals (big assumption, for the true home port of any multinational will shortly disappear into the mists. As it does, a different solutions will have to be sought. And we haven’t even begun to think about intra-firm trade or how privatization is affecting military endeavors; now logistics, next?)

    1. Tax the imports of your own multinationals whose goods are being produced off-shore. Tariffs here have to be carefully adjusted so that the consumer gains as well as the firm.
    2. Tax the wealth that flows to the individuals that benefit most directly from off-shoring, usually upper management. Doing so will mute the growth of wealth bubbles that distort the economy, i.e , the housing bubble.

    The moneys from the taxation can be used for such things as health care, new training, investment in research for new technologies, etc. (Aside here: Toyota is putting a new plant in Canada, not the U.S., because Canada has universal health care.)

    The drive for money will always find new ways to squirm through any system of checks and balances. It is protean in its efforts. I can easily think of ways firms will avoid the above suggestions. The point is: A country should benefit from all its trade and all its activities everywhere. The life of all its populace should be enhanced.

    What surprises me—and I am new to this field—is how inexact and fuzzy it is and how much of it is on blind faith. Ideology is an idiot’s pursuit. I find the framing of the debate—on both sides—a bit silly.

  • Posted by Michael Robinson

    “1. China’s consumption deficit. Chinese household consumption has not been growing as fast as Chinese income.”

    What’s your solution, Brad? Other than trying to keep unemployment as low as possible, keep economic growth as high as possible, and provide easy access to efficient markets in consumer goods (consumable and durable), just what do you propose the Chinese government should do to get Chinese households to spend more?

    Should the government offer 0% financing on new homes and cars, or what, exactly?

    To put Chinese government policies with respect to household consumption on the same moral plane as current U.S. fiscal policies is really quite offensive.

  • Posted by brad

    MTC — Kristof’s drafting makes it sound like Democrat demagogues are somehow responsible for US fiscal recklessness. Yet fiscal policy is one area where the Democrats can hardly be accused of demagoguery in the Bob Rubin era. The republicans “you need a refund even tho the government now under- not over — charges you” position is much more populist …

  • Posted by brad

    michael — I wish i had a stronger sense why China’s savings has soared/ consumption has lagged, then I might have a better sense of the solution. But here are some ideas.

    a) make foreign goods cheaper. Revalue the currency. Chinese consumers might be more willing to buy american — or european — than we think. More likely, there is lots of business savings from high profits in the export sector — get rid of those excess profits and the savings rate might fall.
    b) end internal barriers to trade. i get a sense that it is hard to set up a national retail network in china b/c every province has its own retailers/ manufacturers and the local government gives local firms preference. in a similar vein — and i don’t have convinction on this because it is based on pure guess work — i wonder if the absence of protection for local retail firms from local copycats doesn’t inhibit certain investment in the retail sector. Create a chinese Gap — and someone will set up shop next door selling similar looking goods at a lower price … Not sure about this at all tho. I was expected a more varied retail “scene” in Beijing than I saw — but i also may not have lookedin the right places, or in the right city.
    c) unleash credit cards on the unsuspecting Chinese consumer — it worked (briefly) in korea … more broadly, more consumer financing, including US style home equity cash outs and less commercial lending (and yes, the banks have made some moves in this direction, particularly with the growth of mortgage lending). if this reduces the availability of credit for business, or drives up its price, all the better. right now credit in china is so cheap that it encourages the substitution of capital for labor —
    d) the classic — a bigger fiscal deficit. cutting us budget deficit = surest route to increasing national savings (see delong). reverse is probably true in China. China must have some unmet infrastructure needs …

    Bottom line — I don’t know, and am certainly open to ideas. But I am pretty sure that China’s savings surplus has made it a lot easier for us Americans to go along with fiscally reckless policies.

  • Posted by Simon


    You could replace the word China in your critique with the word Japan without any material difference. Japan’s currency has effectively been “fixed” through the BoJ’s intervention levels – at best its a closely managed float. This is not to excuse China but Japan has been just a large contributor to these imbalances yet the focus seems to remain solely on China. Why is that?

    Also on your points in the comment above. Korea’s credit card experiment ended disasterously. I don’t think that’s a good precedent. A better way to go would be to create trust in banks through a capped deposit insurance system. It’s part of the unwinding of the Chinese financial system mess.

  • Posted by brad

    Simon — given its demographics and the fact that it is already developed i don’t think it is all that surprising that Japan runs a current account surplus. Moreover, Japan has run a surplus since at least 97, and a large one — the big swing in the US current account deficit since 97 has not come b/c japan’s current account surplus has gotten wider so much as because emerging economies have swung from deficit to a substantial surplus. China has been at the heart of that process — hence my focus on China. I find it surprising that an economy going through a major investment boom, facing a big terms of trade shoch (commodity prices went way up) is seeing its savings rate and current account surplus surge — that seems to me to be more of a puzzle than Japan’s current account surplus.

    what has changed since 96? not Japan’s surplus. But in 96- first half of 97 that surplus was being lent out/ invested in emerging asia, and financing current account deficits there. in 2004 and 05? Japan’s surplus, like the surplus of almost all countries, is finding its way one way or another to the US.

    So to me, the interesting change comes in emerging asia rather than japan — obviously tho if japan were ever to reduce its current account surplus that would have implications for the world.

    MTC — interesting points.

  • Posted by Michael Robinson

    “a) make foreign goods cheaper. Revalue the currency. Chinese consumers might be more willing to buy american — or european — than we think.”

    Two big flaws with this argument:
    First, unless you revalue the currency enough to make American or European labor cheaper than Chinese labor (net of productivity), “buy American” or “buy European” means bulk commodities (agricultural and industrial) only. It makes no sense to pay Americans and Europeans to make anything for which there is a non-trivial consumer market in China.

    Take, for instance, my formerly favorite breakfast juice, which happens to be a South African product. They developed just enough of a local market (not much, really, but enough) that now it is produced by a local licencee (but with a localized formulation that really isn’t as good as the now-unavailable South African product).

    So, basically, by making the dollar cheaper relative to the RMB, you effectively propose to encourage increased expenditure of household savings on soybean products.

    Which brings us to the second big flaw: the question at issue is not the mix of foreign vs. local content in household expenditures, but the mix of savings versus expenditure in household income. Chinese don’t save because they lack an opportunity to spend. They save because it’s a deeply held cultural value going back thousands of years, strongly reinforced by a long series of very traumatic national experiences in the last 80 years, and, for a significant majority of the population–the under-educated, under-skilled rural poor, the bleak prospects for “retirement security” (it’s like a kind of sick joke to use the term in reference to their situation).

    A U.S.-style social security program would definitely help reduce the motivation for the high household savings rate, but A) the money isn’t there, and B) even if it were, Chinese have already had one “iron rice bowl” smashed in their lifetime, so trust in another wouldn’t be very deep.

  • Posted by Movie Guy

    Brad — Richard Dunn’s 31 May article (from your post) on the Fed dollar positioning is very good. His points are well taken. I believe that his conclusions make sense.

    MTC — Yes, Kristof wrote a lousy piece. Just blame the Democrats for all of life and be done with it. Good grief.

    Thanks for the excellent current report on China’s capital inflows. I smiled when I read about credit derivatives on page 35. China has a different view of them. Similarly, I noted the June 27 and December 1 entries on page 41. Interesting. Excellent FDI charts and other references in Appendix II. The TIC data explanation beginning on page 26 is best I have read. I believe it would be hard to beat this April 2005 report.

    Stormy — You had me smiling. I’d add Indonesian-style prison terms for offenders, too. That would get their attention.

    Michael — Some of the answers (or clues) may be in the contents of the report that MTC cited.

  • Posted by Joseph Wang

    The more I think about it, the more I believe that the “Brenton Woods II” folks and the global savings glut people are right after all.

    The argument that Brad has been presenting is that the world would be better off if the Chinese money that is being used to finance the US budget deficit stayed in China. After looking at his arguments, I’m becoming less and less convinced of that.

    Right now, the Chinese financial system has more money than it can handle. Throwing more money into the system is likely to led to all sorts of unproductive investments and bad things happening. Yes, the banking system is still a mess, but the whole point of banking reform was to get banks to lend according to profit and loss, and throwing money into the banking system just gets rid of the incentives to reform.

    So we can encourage the Chinese consumer to spend more right? I don’t think this is a good idea. The reason Chinese families are squirreling away money is because the social safety nets and social services are very rudimentary. The savings are people’s pensions, health savings accounts, and education savings account so that Young Chang has a future outside of the farm. I don’t thing it is wise policy to encourage people to take their retirement money, their kid’s college savings account and buy a new TV set. Keep in mind that both consumption and incomes are rising. It’s just that consumption is rising faster than incomes.

    In particular there are two things to keep in mind.

    1) The first is that you have a population that is going to be rapidly aging around 2015, and number of working people is going to go down sharply. The massive amount of savings now is partly to deal with China’s “social security” problem. One of the ironies is that while Bush is having problems putting through personal accounts for Americans, he has succeeded in creating a well-financed pension system for Chinese.

    2) The savings has some important social functions. Eventually, the Chinese economy is going to hit a rough patch, and if people have money in the bank, they are much less likely to riot, starve or both. Moreover, money in the bank is adds a lot of flexibility to the system. Suppose you have a wheat farmer that is out of work because of WTO. If he has money in the bank, he will be able to survive for a while, while he figures out what to do. If he is getting up in the years, he might just decide to retire.

    This also makes the farmer less opposed to economically disruptive policies. I suspect the reason that there is much less resistance to free trade or factory closings in China is that people in China have money in the bank and are not up to their eyeballs in credit card debt. This makes losing one’s job much less scary.

    So, Chinese people are saving. The Chinese financial system can’t deal with the money. Yes, it maybe that the Chinese consumer looses value in the deal, but I suspect that if you work things out that the amount of money lost through “vendor financing” is less bad than the alternatives. It may be that by sending money into the United States, the Chinese saver is going to take a 20-30% loss. By comparison, the money that went into propping up state owned enterprises in the early 1990’s went into a black hole and disappeared completely.

    This also has some major benefits to China beyond a place to park money. One way of thinking about it is that the US military has become a mercenary force to insure that China gets stable supplies of Mideast oil, and Chinese financing of US military operations also helps smooth things over so that China and the United States won’t go to war. This is not a small thing.

    Now it is true that the system leads to some protectionist calls in the United States, but I think those can be dealt with. What’s going to happen with textiles is that there will be some sort of limits that will be negotiated through
    WTO. For the US to do something really drastic would involve pulling out of WTO, and I don’t think that there is the political interest to do this.

    Besides, as someone once said, its a very good situation if the biggest dispute between the US and China involves the price of cotton underwear.

  • Posted by brad

    Joseph Wang — presume you meant “income” is rising faster than consumption.

    Michael — am a bit suspicious of deeply held cultural values type arguments as an explanation for the surge in China’s national savings rate from 2001 on, a surge which led to the emergence of china’s 05 (forecast) current account surplus in the face of a surge in investment. Same with the “social insecurity” type argument — what happened in the past few years that increased demand for precautionary savings? Iron ricebowl was going away before then — and the recent boom seems to have in many ways made China more confident in the power of the private sector?

    the explanation i find most persuasive in some ways is that incomes went up faster than expected, and consumption expectations have yet to adjust accordingly. unlike in the us — where income growth slowed but expectations stayed high, leading to a fall in the savings rate …

    Incidentally, growing assets in the form of (uninsured) deposits in the banking system have to be balanced against two kinds of implicit liabilities. The implicit liabilities associate with reserve based vendor financing (my standard central bank recapitalization for paper losses story — and yes, for steve, those losses partially takes the form of less seignorage revenue than otherwise would be the case as fx losses have to be netted out against interest income on the pboc assets held v. the growing money stock) and the implicit liabilities associated with expected NPLs on the 03-04 credit boom (and slower credit expansion now taking place). The losses may be smaller than the losses associated with lending to the SOEs in the 90s, but that is not saying much — those losses have not been fully realized even yet. Add it all up, and the “net worth” of the average chinese citizen is increasing by less that you might think. more assets — sure. but those assets pay little. and there are significant, partially offsetting liabilities.

    that said, i suspect you are right — some form of social insurance, given china’s aging population, may be necessary — even if paying for pay as you go social insurance in a one-child world is a bit of a demographic challenge.

  • Posted by Paul Denlinger

    There are very good reasons for Chinese consumers continuing to have high savings rates:
    1. The Chinese government is continuing to get rid of assets (such as previously free housing) and services (cradle to grave healthcare). Chinese are saving as much as they can because they do not know how much services, like healthcare, will cost when they get old and retire. (They know that they cannot count on pensions.)
    2. China’s education system is getting intensely competitive, and it is not unheard of for some of the best city schools to have “fees” running up to US$20,000 a year. If you want your only child to do well in life, you better save a lot!

    Now, for the Chinese government’s issues…

    1. The Chinese government is getting out of a lot of industries, which were previously state-owned. Most of these businesses were never profitable, and do not have a chance of becoming profitable under current management. Now, they have been cut loose by the government, and have effectively been told that they would not get any more “loans” (subsidies) from the Chinese state-owned banks, which are now transitioning to corporations which plan to go public.
    2. The portfilio size of these unrecoverable loans is not publicly known, but is estimated to be US$500-750 billion.
    3. Do you notice how the size of the bad loan portfolio is close to the size of the foreign currency reserves?

    The point is that it’s easy for some to think that China is very secure, and should adjust to thinking in terms of low US-style savings rates. Right now, even though the Chinese economy is growing at a fast rate, the Chinese government and people are not convinced that everything is going to be smooth sailing.
    That is why they are saving for a rainy day, just in case. History has taught them that that is always the wisest strategy.

  • Posted by Joseph Wang

    Just to add some notes….

    c) without things like credit rating agencies, credit cards and consumer credit are highly dangerous since they lead to perverse incentives as they encourage both stupid borrowers and lenders. There is also the major problem that China doesn’t have much of the legal infrastructure needed for consumer credit (i.e. bankruptcy laws, laws on repossession, consumer dispute laws). This is part of a much larger problem of lack of institutional support for the financial system.

    d) Government spending. It’s clear that China could use more support for rural areas, but I suspect that more government spending is likely to just lead to a new Mercedes-Benz for the county magistrate rather than anything useful. One good thing about having personal education accounts is that it increases the chances that the money actually goes into “something useful.”

    Some other issues…..

    I don’t have the figures but my suspicion is that poor Chinese save a larger fraction of their income than rich Chinese, which means that efforts to penalize saving is likely to be regressive. Not good in a country which is facing increasing divisions between have’s and have not’s.

    Also, there are “values” issues. It’s hard to articulate this, but I suspect that you just run into long term problems if you start valuing consumption over frugality, even if it is necessary in the short term. Again, its hard to put my finger on this, but I do suspect that encouraging consumption is going to aggravate social tension as the rich big-spender whose income comes from dubious sources gets labelled “good” and the peasant that is scraping together enough money for his retirement and his kid’s education gets labelled “bad.”

  • Posted by Movie Guy

    China has a social security insurance program. I put up an article about it a few days ago in the China news post. Sure, it could use more funding, but the funds are available to do that.

  • Posted by PC

    I find it fascinating how some economists seem so confident that China should revalue the Yuan and that would help in resolving the current imbalances in the world. The reasons and all the statistics cited are very impressive and convincing.

    Yet other economists with equal if not more credibility seem dead set against a Yuan revaluation (see article on Nobel Laureate Robert Mundell below). They can cite equally impressive data and evidence.

    So who is correct? Does anyone dare say with “certainty” that a Yuan revaluation is the answer and that it will do China no harm and only good? Anyone who can come to a definitive conclusion is in my opinion either very “bias” or “overly confident” (a matter of perspective).

    No wonder they call Economics a “dismal science”. I never use it in my trading or investment decisions.

    South China Morning Post
    Tuesday, May 31, 2005
    Nobel laureate insists the yuan-dollar peg is a win-win for all
    The yuan’s peg to the US dollar has worked well and changing the currency regime will not help narrow the trade gap with the US, Nobel laureate Robert Mundell said in Beijing yesterday.

    Speaking at the Nobel Laureates’ Beijing Forum, the Columbia University professor, who won the Nobel Prize for economics in 1999, said prices on the mainland had been remarkably stable during the 10 years of the peg and that if stability was the objective, Beijing should keep its foreign exchange regime unchanged.

    “The best strategy for China is not to change anything,” he said.

    Professor Mundell, who has advocated a fixed exchange rate for China since 1994, quoted US Federal Reserve chairman Alan Greenspan as saying a stronger yuan would not help the US current account deficit because the US would shift to imports from elsewhere.

    The mainland’s gross domestic product, of about US$1.7 trillion, ranked the yuan as the world’s fifth most important currency, behind the US dollar, the euro, the Japanese yen and the British pound.

    If the mainland became a new currency block, with a floating exchange rate, it would destabilise the world currency market and bring more uncertainty to world trade, Professor Mundell said.

    The US GDP was about US$12 trillion, compared to US$10.5 trillion for the euro zone, and competition between the two currency blocks was heating up, he said. Given the fast growth rate of the mainland economy, it would be in America’s interest to keep the yuan anchored to the US dollar.

    “I don’t understand why the US wants the renminbi to move away,” he said.

    The US would be “shooting itself in the foot” by driving the yuan to the euro block, the Canadian-born economist said.

    Professor Mundell said the goal for Beijing to pursue was to continue moving to full convertibility and he scoffed at the flip-flopping of the International Monetary Fund, which wanted China to devalue during the Asian financial crisis in 1997-98 but was now backing an appreciation of the yuan.

    Never in the history of the IMF had an unconvertible currency been forced to move up, he said.

    The Nobel Laureates’ Beijing Forum brought together seven economists who have won the prize as well as five other renowned economists.

    The idea was inspired by a similar forum in Moscow in late 2003 and it was Professor Mundell who persuaded mainland officials to stage a similar event.

    Vice-Premier Zeng Peiyan invited the glittering group to offer advice as the mainland searched for economic growth to attain “harmony and development”.

    In his welcoming address, Beijing Mayor Wang Qishan used the occasion to promote the 2008 Olympics, spelling out his vision of a “new Beijing” as the city prepares for the 29th running of the international summer Games.

    Among the world-class economic pundits was the mathematician-turned-economist John Forbes Nash.

    A short film clip introducing Mr Nash showed footage from the movie A Beautiful Mind, portraying his tormented struggle against schizophrenia.

  • Posted by Movie Guy


    Good article.

    Note Richard Duncan’s 31 May explanation for why the U.S. is pushing for a revaluation of the yuan.

    Regardless of who is at fault (the U.S., of course), what’s the solution?

  • Posted by Movie Guy

    This may offer a better explanation of why the yuan shouldn’t be devalued:

    China in for ‘rude shock’ over asset bubble

    This really brings into question what will happen in China if the yuan is devaled, and what will happen in the U.S. if the yuan isnt’ devalued (Richard Duncan’s article).

  • Posted by Movie Guy

    Joseph Wang: Great posts tonight.

    Paul Denlinger: Great post, too.

    Two articles of interest:

    China steps up poverty reduction

    Stop abusing public educationa resources

    One point should be obvious. The people of China will never be the poor savers of the USA. No one else can be that irresponsible. I would hope not. Americans are headed for a massive disaster. Sixty to eighty percent of an entire generation may drop through the floor.

  • Posted by PC

    Movie Guy,

    You asked “What’s the solution”? The solution to correcting the present credit induced imbalances is a deep and nasty recession to puge the excesses and restore balance. This will not just be a US recession but a global one.

    After all, it’s the actions of the interventionists – central bankers and economists alike – who got us here in the first place. They wanted to avoid the inevitable pain and think they can play god and “manage a soft landing”

    Events just got out of their control and the longer they avoid the inevitable bust, the worse it will become.


  • Posted by Movie Guy

    devaled, devalued…er, revalued

  • Posted by Movie Guy

    Ludwig von Mises…

    The Ludwig von Mises Institute is located adjacent to Auburn University. War Damn Eagle, Ludwig!

    Yeah, we’re toast. Need to lock the door.

  • Posted by MTC

    PC –

    Please read Paul Krugman’s bare bones refutation of the Austrian business cycle argument:

    “The Hangover Theory: Are recessions the inevitable payback for good times?”

    Krugman has not remained entirely immune to the attraction of the model, as is pointed out at Dr. Brad DeLong’s blog:

    in the posts:

    “Paul Krugman Gets in Touch with His Inner Friedrich Hayek”


    “Modelling without a License”

    Re: China in for ‘rude shock’ over asset bubble

    “China is repeating Japan’s worst mistakes in the asset bubble of the 1980s and could soon come down to earth with a “rude shock”, a top Japanese official has warned.

    Hiroshi Watanabe, head of international affairs at Japan’s finance ministry, said…’We have an old Asian proverb: the higher the mountain, the deeper the valley…’ ”

    This remind me of another old Asian proverb: the bigger the turkey, the more likely it is that he will justify his flatulent, incoherent nonsense with old Asian proverbs.

    Wait a minute…

  • Posted by PC


    Who’s to say that Krugman has the last word on Austrian Economics?

    As I have said, it’s easy to to “refute” with facts and theories in economics and who is to say that Krugman is right for sure.

    That’s why economics is great for academic discussions. As for practical usefulness…………

    Well that’s a matter of opinion.

  • Posted by Michael Robinson

    “am a bit suspicious of deeply held cultural values type arguments as an explanation for the surge in China’s national savings rate from 2001 on, a surge which led to the emergence of china’s 05 (forecast) current account surplus in the face of a surge in investment.”

    I imagine the answer to your conundrum is the same as the answer to the surge in private automobile sales since 2001, namely a greater discretionary percentage of the marginal RMB. Economic growth has brought large parts of the Chinese population to the point where they (for the first time in many cases) have to decide between putting away money for a rainy day, or buying something they don’t really need.

    (P.S. I’d like to strongly second all of Joseph Wang’s spot-on comments above.)

  • Posted by MTC

    PC –

    I just suggested you “read” the Krugman refutation. I had no illusions about you liking it.

    May your trades bring you good fortune.

  • Posted by Michael Robinson

    P.S. “I was expected a more varied retail “scene” in Beijing than I saw — but i also may not have lookedin the right places”

    You definitely have to visit the Beijing IKEA on a Sunday, next time you’re here.

  • Posted by Edward Hugh

    “When countries such as China can perform tasks in which the U.S. previously had a clear edge, “comparative advantage cannot be counted on to create…net gains greater than the net losses,” Samuelson asserts in his new paper.”

    Yes, but remember Samuelson was talking primarily about India, which is a topic we have yet to get round to. Otherwise, iteresting discussion everyone.

  • Posted by Edward Hugh
  • Posted by PC


    My apologies for my “defensive” attitude. It was uncalled for and unconstructive.

  • Posted by john jansen

    doesnt this all end very ugly here in the states with repricing of assets and a stiff recession ?

  • Posted by steve kyle

    yes, ugly. theorize all you like, but history bears out the notion that countries that borrow 6% (and rising) of GDP and take no corrective action before crisis hits do indeed eventually have a crisis. and that means living within your means when the creditors get tired of your IOU’s. And that means a recession. And that means lower asset prices. This isnt theory so much as arithmetic.

  • Posted by jm

    Movie Guy: What does “War Damn Eagle, Ludwig!” mean???

  • Posted by Edward Hugh

    “incomes went up faster than expected, and consumption expectations have yet to adjust accordingly”

    Yes, but Brad, if we’re telling them that this is being paid for by a US trade deficit, and this deficit is deeply unstable, or that China might have a hard landing, aren’t they right to maintain their saving adjustments. There is a thing called prudence. Equally if you are right that the US consumer is just slow in adjusting, then when they do adjust, the deficit problem will be solved.

    Actually I don’t accept these expectations type arguments, at least not the way they are used by people like Woodford and Svennson, but this is another story, for another day.

  • Posted by Edward Hugh

    The story we are going to have to contend with now, is a strengthening dollar one. Some sound words from Andy Xie:

    Some factors are emerging to suggest that the trade cycle would correct beyond the mean reversion. The immediate headwind is a strengthening dollar. Weak dollar trade and the subsequent Rmb revaluation trade flooded emerging economies with liquidity, pushing China’s investment cycle to an unprecedented height and lifting the commodity CRB index to the highest level since the Iran-Iraq War two decades ago. The surging CRB index gave many emerging economies (e.g., Russia and Brazil) the revenues to import. The commodity boom or bubble has been the main accelerator in this trade cycle. As the dollar strengthens, the CRB index could turn down from here.

    The dollar strength comes from the rising Federal funds rate, the political crisis in Europe, and Japan’s weak economic performance. The factor that triggered the dollar weakness — the twin US deficits — remains. Thus, this wave of dollar strength will not be as pronounced as in 1995, in our view. Nevertheless, a strengthening dollar is likely to deflate the commodity bubble and decrease global trade temporarily.”

  • Posted by Stormy

    Interesting links for education in China:

    Yale-China collaboration: Note comment on basic science. I have some reservations with this picture. World class science requires real freedom to flourish.

    An economic picture of Chinese education:

    Another overview of Chinese education:

    “Second, developing a cost sharing and cost recovery system. The Chinese higher education system charged students no tuition before. It also provided free dormitory and stipend for food and other allowance for students, which amounted to about 20% of the total recurrent expenditure. Along with the economic transition, Chinese universities started to charge tuition and fees as one of the strategies to address the current financial difficulties. It is gradually institutionalized that the costs of higher education are shared by and recovered partially from the beneficiaries, and student loan and scholarship programs have been set up for students from needy families at the same time.

    “At present, about one fourth of total operational budget of Chinese higher education institutions comes from tuition. ”

    Poverty areas and cost to families (a bit dated)

    And next, some comments about privatization. Note: The definition of a private school in China is not always what we think. Such schools have special support from the community at large, land and resources. See

    “While privatization is growing it is not leading the growth and change
    that is occurring. Rather, government at the local level, counties, townships and village
    enterprises are acting as the real entrepreneurs and change agents.

    “The government still avoids the use of the term “private” when discussing these
    schools and generally uses the term “non-state run” or “minban” to describe what are
    essentially private schools. Mok (1997) notes that it is difficult to differentiate precisely
    between minban (run by citizens) and private. In the former, funds are provided by
    communities or collectives and in the latter by individuals or enterprises.
    distinction between them and government schools, however, is that these private
    initiatives are basically self-supporting utilizing a variety of funding mechanisms (tuition,
    overseas Chinese support, enterprises, debentures, etc.) and as we shall see, are able to
    deviate from the state curriculum.

    “Among the problems identified by educational officials are that many of these [private] schools are only for the rich, they deviate excessively from the approved state curriculum, school administrators do not follow the approved regulations, there is too much emphasis on turning a profit and they follow a “patriarchal” management style (i.e. tyrannical) (Inside Mainland China, 1998, p. 3). However, the worst problem noted is the aging teaching force. Interviews that were conducted in Jiangsu province and Nanjing City revealed that principals and teachers of private schools are primarily retired personnel. Most of them were over 60 years old and while older might mean more experienced it is argued that these teachers are hopelessly out of date with respect to teaching methods and new technologies.”

    And finally, China’s priorities:

    I tried unsuccessfully to determine the general cost of an undergraduate or graduate education. And how, exactly, meritocracy works financially in Chinese education.

    I seriously question Joseph Wang’s assertion that quality schools are charging $20,000 for an education. I would like to see evidence of the assertion, especially in light of the World Bank’s comments.

  • Posted by aeolius

    You said “Face is part of Chinese culture, but not liking to lose money is part of most cultures too”

    I admit that my knowledge of things Chinese is second-hand but I suggest that any Chinese person who allowed himself to bargin face for money would be treated with contempt by the majority of other Chinese.
    Most posts on this board (joseph excluded) try to understand China from a Western perspective which is futile (as was committing a similar ethnocentric error in Iraq).
    I myself would love to see a truly knowledgable person look at the underlying values of the Chinese culture which might give us a better understanding of the rationality of their economic behavior within their system.
    Perhaps with your connections you might provide us with such a column.
    The universality of your economic models should actually be an hypothesis not the axiom it seems to be.

  • Posted by aeolius

    A lovely column at
    Reintroduced white-tailed sea eagles flourish in Scotland

  • Posted by Michael Robinson

    “World class science requires real freedom to flourish.”

    No it doesn’t.

    “I admit that my knowledge of things Chinese is second-hand but I suggest that any Chinese person who allowed himself to bargin face for money would be treated with contempt by the majority of other Chinese.”

    Don’t feel bad, but your view here is charmingly naive.

  • Posted by js

    Movie Guy:
    “Everyone should note the Red Alert that Toni Straka posted above. And the further link to Rob Kirby’s article on the same subject.

    What’s up with this??”

    Does anyone have an explanation for these disparities in the TIC data (other than the cynical interpretation)? So China has not been accumulating in 2005 at all? Japan is reducing its position, and offshore money and UK are picking up the slack?

  • Posted by Paul Denlinger

    Replying to Stormy’s post about costing $20,000 for school, that was my post, not Joseph Wang’s.

    1. That was a special example, but if you go to the best bilingual schools in Shanghai, Beijing, Chongqing, Chengdu, etc., it is easy to find tuitions of more than $10K annually. Some companies, like SMIC in Shanghai, have set up their own company-owned bilingual schools to keep tuition and school costs lower for their employees, many of whom come to China via Taiwan and post-grad education in the US. For this group of key employees, bilingual education at a reasonable price for their children is a very important attraction.

    2. Many of the new rich Chinese want to get the best educations they can for their kids. The reason? Many of them missed an opportunity for good education because of the Cultural Revolution, and they see education as being very important for their child’s future. These are the people who are spending very high tuitions to get their child, what is in their opinion, the best education.

    3. Many of the education fees do not show up in what the school will charge you. Any parent in the US, Taiwan or China, knows what they need to do to when they get a call to help the school “raise funds for a new project”. Underlying it all is the implicit threat that if they don’t, somehow their child will not get the best teacher, and miss the best opportunity for something which may adversely affect their child’s future. The result? The parents cough up the money themselves. Add it all up, and you can very easily have $20K, even though it does not show up in an invoice.

    4. The Chinese education system is a pyramid. All along the way, there are exams which will determine each child’s opportunities and future. Think of it as a marathon with hurdles, with the exams being the hurdles. Miss one, and your child is out of the game. All along the way, there are teachers, and cram schools, and schools, which improve your child’s chances to go over the next hurdle. Every single one charges money to help your child to cross over the next hurdle. Some more, some less. You have only one child in a fiercely competitive race, the most competitive educational system in the world. What do you do? You spend money, but because it is your child’s life and future, you see it as an investment.
    That’s what it’s all about.

  • Posted by Guest

    “1. China’s consumption deficit. Chinese household consumption has not been growing as fast as Chinese income.”

    Yo, Brad. I find mystifying the faith economists have in markets when important, perhaps the most important, variables are controlled by the political process.

    Wages sufficient to support a consumer lifestyle are associated with citizen/consumer *political* power, through free unions, free press, elections, and the like. Corporations don’t grant high wages unless they *have to*. Some of the pressures forcing them to grant high wages are related to competition but the context is set by the political process.

    China’s ‘consumption deficit’ is related to its *freedom deficit*. Change is not in sight. Until there is such a change (which may be very destabilizing) China’s domestic demand will lag.

  • Posted by camille roy

    “1. China’s consumption deficit. Chinese household consumption has not been growing as fast as Chinese income.”

    Yo, Brad. I find mystifying the faith economists have in markets when important, perhaps the most important, variables are controlled by the political process.

    Wages sufficient to support a consumer lifestyle are associated with citizen/consumer *political* power, through free unions, free press, elections, and the like. Corporations don’t grant high wages unless they *have to*. Some of the pressures forcing them to grant high wages are related to competition but the context is set by the political process.

    China’s ‘consumption deficit’ is related to its *freedom deficit*. Change is not in sight. Until there is such a change (which may be very destabilizing) China’s domestic demand will lag.

  • Posted by Movie Guy


    It was Paul Denlinger, not Joseph Wang, who posted the remarks on some city school fees in China.

    “2. China’s education system is getting intensely competitive, and it is not unheard of for some of the best city schools to have “fees” running up to US$20,000 a year. If you want your only child to do well in life, you better save a lot!” — Posted by: Paul Denlinger, May 31, 2005

    Related news articles: One, Two, Three, Four, Five, Six

  • Posted by Movie Guy

    Sorry, Paul. I didn’t see your post.

  • Posted by aeolius

    You said “Don’t feel bad, but your view here is charmingly naive.”
    I would be happy to have you wise me up.

    Chinese do like to make money No doubt -and are quite good at it.Nor am I talking of a reluctance to make money extra-lawfully.
    Nor do I deny that there are many Chinese D.Trumps
    with much money and high status within their circle.

    But these are not face. Nor is power.
    What are your thoughts about face?

  • Posted by DF

    Camille though I kind of agree with you on many points, I would add that the communist party could enforce rising wages, (minimum wage, higher prices for agricultural products which would lead to lower pressure from farmers moving to towns and higher survival wage).

    The problem here is that China has chosen a path advocated in the washington consensus : export led growth.
    It might be, and it sure looks as if, there is a huge path dependancy. ONce you export 30% of GDP with exports growing 30% annually, it’s hard to organise a decent move towards 10% only of GDP is exported.
    It’s hard to raise wages.

    Most of all, it’s hard to raise agricultural prices because you are part of WTO, and WTO will forbid you to raise taxes on agricultural imports for example.

  • Posted by Guest


    That was lovely :) I am so pleased.

  • Posted by anne


    “I admit that my knowledge of things Chinese is second-hand but I suggest that any Chinese person who allowed himself to bargain face for money would be treated with contempt by the majority of other Chinese.

    “Most posts on this board (Joseph excluded) try to understand China from a Western perspective which is futile (as was committing a similar ethnocentric error in Iraq).

    “I myself would love to see a truly knowledgable person look at the underlying values of the Chinese culture which might give us a better understanding of the rationality of their economic behavior within their system.”

    Agreed completely.

  • Posted by anne

    Curiously, I would say that we are awfully concerned with face in American culture and I wonder how much of what we claim in face for Asians is a reflection of our lack of security. When the Chinese lost a plane and pilot in a collision with an American survelliance craft along the Chinese coast, were the Chinese worried about face or simply determined to teach us that they were to be dealt with respectfully?

  • Posted by anne

    Aeolius, the thank you was from me but the name was lost in some manner :)

  • Posted by Jabotinsky

    “When the Chinese lost a plane and pilot in a collision with an American survelliance craft along the Chinese coast, were the Chinese worried about face or simply determined to teach us that they were to be dealt with respectfully?”

    Perhaps that respect would be a little bit more forthcoming if it weren’t for the ongoing massive human rights abuses in China.

    There is something more than vaguely immoral in divorcing economics *totally* from the social reality on the ground. An occasional thought please for the nation of Tibet, and also the many millions of individuals throughout China whose fundamental rights and freedoms have been trampled on and extinguished.

  • Posted by Stormy

    Thanks, Paul, Movieguy…sorry, Joseph :)

  • Posted by anne

    Absolutely, Jabotinsky, I quite agree. There is much to be done, but much has been done to better the lives of hundreds of millions of Chinese. I am decidedly hopeful for far more liberality to come.

  • Posted by gillies

    face saving means sticking to your position. maybe that is why the successful investors are offshore and faceless.

    china saves face. bush saves face. maybe there is a global face savings glut.

    “The United States has now adopted – and begun to enforce – a Weak Dollar Policy.” (posted above somewheere.) so can a fiat currency in a globalised low inflation swamp reinflate unilaterally and if so why does japan not get on with it ?

    i think DF said reinflating might not be that easy.

    and as for the dollar going down in the long term – (a) will it ? he who knows everything about the future has more to learn. (b) while you are waiting for it – surf the wave, you can’t surf the tide.

    brad. go on, cash in the 50 renminbi. don’t save face. go with the flow.

  • Posted by Paul Denlinger

    With the current textile dispute, we are in a very ironic situation. The Chinese government, which is ruled by the Communist Party (but is really Marxist in name only) is pushing for free trade and exports.

    However, the EU and US, which were the main drivers of globalization and free trade, are now invoking measures to limit Chinese textile exports.

    Ironic, isn’t it?

    If you are interested in my take, go here:

  • Posted by brad

    js — i have my views on the TIC data (as you no doubt know).

    Japan is the real mystery — i think the japanese held off buying til the new year, i.e. april. But we shall see.

    China’s reserves grew by $60b (valuation adjusted) in q1. Those reserves had to be invested somewhere. The TIC stock data shows no increase as at all, the TIC flow data showed strong purchases in Febr but not Jan or March. Those funds are somewhere — whether in dollar bank accounts offshore, disguised purchase of dollar securities, or euros/ loonies/ aussie dollar. my bet is that 20-30% are not in $, but the rest are in $, just invested in ways that don’t show up as a chinese purchases, let alone a chinese official purchase.

    London/ offshore financing is in part coming from the dollar surplus of the oil exporters.

    Look at the global current account — and figure out how the surplus countries are financing the deficit countries — whether directly (purchase of US assets), indirectly (deposits in london eurodollar market that are lent out to hedge funds that buy us securities) or very indirectly (buying euros, driving up euro to the point where europeans buy $) …

  • Posted by brad

    Mundell is a fixer, and a supply-sider.

    Roubini is a floater, and not a supply-sider but rather a “deficits-matter” Rubin Democrat.

    I’ll let you in on a little secret. International economists disagree on the merits of fixing v. floating. To paraphrase Larry Summers (who no doubt was paraphrasing someone else), some, like Mundell, view the currency’s value as a promise, and promises are not to be broken. Others, like say Roubini, view the currency as a price, and prices need to change.

    Mundell did not think Argentina needed to devalue either …

    It is not hard to find an economist who believes in the peg. The real question is whether you all find the arguments of the fixers or the floaters more persuasive.

  • Posted by brad

    Paul — there are no shortage of interest groups in china that benefit from an undervalued currency, just as there are interest groups here in the states that lose out from competition with china. Some lose out no matter what happens to the RMB. Some lose if the RMB is at 8.28 but not if it is at 5.

    No matter how you think the world should work, politics does get in the way of trade, at least some of the time. And it is safe to say that so long as China is intervening like mad to keep its currency from appreciating v. the dollar, there will be a proliferation of restrictions on us (and EU) trade with China. The politics of this are pretty clear. Read Bergsten or Roach. China has a choice — a change in the peg, and fewer ad hoc restrictions on trade (and some risk of an across the board us tariff) or adjust the peg and fewer ad hoc restrictions. that, i think, is the political reality here in the states.

    the current global norm is for a major economy — and since China exports about 3/4s the goods the US or Germany exports, China is now a major economy, do not intervene this massively to keep their currency from appreciating (relative to its GDP, China’s 04/05 intervention will dwarf Japan’s 03/04 intervention, and China, unlike Japan, is not currently caught in a deflationary spiral or not growing). The global relativel free trade in goods (but not in agriculture) norm among the major economies is backed by an assumption that the major economies won’t block currency adjustment among themselves. China is now big enough — and its currency is sufficiently out of line — that it either has to play by current rules of big economies, or the rules governing the big economies de facto have to change …

  • Posted by Joseph Wang

    When I was commenting about education, I didn’t have in mind urban private schools, but rather something a bit different. Basically, rural governments are flat broke, and have resorted to charging fees for elementary and secondary education. These may seem small, but are huge for a peasant that makes $1000/year if they are lucky. One thing that the government wants to do is to end elementary and secondary school fees in the next three to five years.

    Also, I generally don’t put much credence in arguments that invoke “national characteristics.” For example, I think describing Chinese actions in terms of “face” needlessly complicates the situation, and misses the fact that its unlikely that the United States or any other nation would take kindly to pressure to redo its currency policy. Chinese also do not save because of cultural traits, but rather in response to rational adaptations to their environment, and I very much doubt that the next generation of Chinese will save nearly as much, for the same reasons that people who lived through the Great Depression just act differently than people who didn’t.

    Also, China has deviated from the Washington Consensus in a number of ways, most notably that it maintains capital controls and has been very, very slow to privatize industry.

    I also don’t think that raising minimal wage is feasible. Minimal wage and labor laws are routinely flouted because the government doesn’t have anywhere near the power to enforce them.

    It’s actually looking at China that gives me some hesitation at the efforts by economic conservatives in the United States to create an “ownership society.” On the one hand, China has had enormous amounts of economic growth which has benefit pretty much everyone.

    On the other hand, you do wonder sometimes about issues of fairness and social justice. Chinese society is very, very harsh against the rural poor, who work harder, save more, but get far fewer benefits than urban dwellers. The one saving grace is that things are improving, and that the system is so manifestly unfair that unlike the United States, no one seriously blames the poor for their own poverty.

  • Posted by anne

    Aeolius, I find no difference from your kind cites in face here and face there. Students and friends have never led me to believe otherwise, but I am going to ask about the matter.

  • Posted by anne

    Joseph Wang

    Your comments are superb.

  • Posted by Alexis

    Stormy, agree regarding taxing imports of your own multi-nationals manufacturing out of the country to sell here … and tax the booty of management to whom those huge profits flow.

  • Posted by Stormy

    Thanks, Alexis…but I know I am blowing smoke for this crowd. Chuckle. It is just not on any one’s radar as a possibility. But hey, it maintains the idea of free trade! Kind of an outsourcing tax, if you will.

  • Posted by DOR

    I’ll back up Paul Denlinger on US$20,000 education in China. It is real, it isn’t typical, but it exists. Further, if that $20k is compared to an expat’s all-in $500k compensation, and that ratio is applied to the typical household, the resulting US$150 or so for annual urban schooling is fairly typical. I never liked PPP, but in this case . . .

    * * *

    camille roy doesn’t seem to realize that the political context – unprecedented liberalization over 25 years – is the reason why competition exists in China. Pre-1978, there wasn’t any.

    * * *


    IF the tit-for-tat trade friction continues,

    o In July, the US Senate passes a bill imposing a 27.5% import duty on all purchases from China, unless the PRC revalues by at least 10%. The House follows suit sometime later
    o In September, the remaining US manufacturers begin filing anti-dumping and surge protection complaints, so that the results – in the fourth quarter – will be quotas for the entire 2006 year
    o US inflation surges
    o The Fed tightens longer, faster or further than planned
    o US consumers switch some portion of their spending into debt reduction
    o The US housing bubble bursts
    o China politely declines to participate in one or more US Treasury auctions
    o The US has a nasty recession in 2006

    * * *

    aeolius, “Face” isn’t strictly a Chinese characteristic. No one likes to be put down, but the Chinese developed an interesting name for it and so we are led to believe it is a more important attribute in China than elsewhere.

    * * *

    Problem 1. The US has a serious savings shortfall
    Problem 2. The PRC has a serious savings surplus.
    Solution A: Surplus savings from the PRC are used to help temporarily cover US shortfall, until the US adjusts.

    Problem 3. The US doesn’t want to adjust
    Solution B: The US attacks China for funding the US savings shortfall.

    * * *

    brad You can count me as an economist who believes in the peg. I lived through the high inflation pre-peg, and much prefer the high-growth / low-inflation alternative.

  • Posted by Stormy

    Paul ,

    While I do know a great deal about private education in the states…perhaps more than anyone in this blog, to be frank…I would not presume to know how it works in China.

    Your descriptions I treat as anecdotal at best—and anecdotal only for the very rich. I was interested in what role the state plays and how meritocracy in effect works financially—scholarships, loans, etc., if indeed those are instruments employed. How the bill is actually footed? How does the system work? I assume it is a meritocracy; how then does it achieve its aims? How does it work financially?

    “That” is what I was after. Did you read my implied question? I repeat it.

    “I tried unsuccessfully to determine the general cost of an undergraduate or graduate education. How, exactly, meritocracy works financially in Chinese education.”

    Joseph ,

    Thanks for your reply.

    I am aware that for poor communities it is a struggle even with the 6-3 system and that the government had shifted some of the costs to the communities and to the individuals, somewhere around 20 yuan, I believe, which is a significant sum for the poor. I have a very poor sense of how these schools or schools in general work or how they lead to higher education. You do understand that I mean more that “lots of tests and pressure”?

    Apparently, no one bothered to read my links prior to my question at the end.

  • Posted by Jabotinsky

    “There is much to be done, but much has been done to better the lives of hundreds of millions of Chinese. I am decidedly hopeful for far more liberality to come.”

    One thing has got absolutely nothing to do with the other. That is rather like praising the Nazis for improving economic conditions in the 1930s in Germany, and then suggesting that there is more to be done on the human rights front. Indeed, those who visit China and do not hear the screams of the government’s countless victims are little different to those who attended the 1936 Berlin Olympics and came away with nothing but praise for German efficiency and the grand spectacle.

  • Posted by Jabotinsky

    “Also, I generally don’t put much credence in arguments that invoke “national characteristics.”

    To deny the influence of culture is to deny reality.

  • Posted by Toni

    agreed, I am cynical in my interpretation of the TIC data. But what is the White House when spokesman Scott Mc Clellan says the US are in Iraq and Afghanistan “by invitation”??

    the trend in TIC data for China may be flat, but which set of data is to be believed, especially in the case of the UK figures? I may note that preliminary government data seems to come in on the positive side recently, smoothing out anything that could upset Mr. Markets, while revisions then don’t look that nice anymore (exception latest GDP reading). And privately collected data (ISM, NAPM) meanwhile paint an entirely different picture. therefore I agree with

    who sees a face savings glut.
    I am just sad that nothing less than the global economy is at stake and the key player does nothing than creating resentments against himself on every front.

  • Posted by gillies

    no lian. no mianzi. political capital spent. quote : ‘that’s my style.’

  • Posted by Movie Guy

    Economic Development Conference in China
    Nobel Laureates Beijing Forum 2005
    Forum Agenda
    Forum News and Events

    List of key economists who attended the Nobel Laureates Beijing Forum 2005

    Note 1: Name–bio–vida–publications China/Asia B/P/A–All B/P/A–University–News
    Note 2: B/P/A = Year 2000-2005 books/papers/articles (researched quantities inserted)
    Note 3: Click on any info for direct url links.

    Alberto Alesinabiovitapubs C/A 0/0/0–All 4/21/18Harvard University, USANews
    Robert Barrobiovitapubs C/A 0/0/1–All 4/15/7Harvard University, USANews
    Robert W. Fogelbiovitapubs C/A 0/1/1–All 3/8/1University of Chicago, USANews
    Clive W.J. Grangerbiovitapubs C/A 0/0/1–All 1/12/35University of California, USANews
    James A. Mirrleesbiovitapubs C/A 0/0/0–All 0/1/0University of Cambridge, UKNews
    Robert A. Mundellbiovitapubs C/A 1/1/3–All 4/12/4Columbia University, USACanadian is a permanent resident of ChinaNews
    John F. Nash 1, 2pubs C/A 0/0/0–All 1/0/notesPrinceton University, USANews
    Edmund Phelpsbio 1, 2vitapubs C/A 0/5/0–All 3/23/20Colombia University, USANews
    Edward C. Prescottbio 1, 2vita 1, 2pubs C/A 0/1/1All 1/17/9Arizona State University, USANews
    Xavier Sala-i-Martinbiovitapubs C/A 0/0/0–All 4/33/TBDColombia University, USANews
    Klaus Schwabbio 1, 2, 3pubs C/A 313 documentsAll extensiveWorld Economic Forum, SwitzerlandNews
    Vernon L. Smithbiovitapubs C/A 0/0/0–All 1/4/11–28 pubsGeorge Mason University, USANews
    Joseph E. Stiglitzbiovitapubs C/A 0/4/6–All 10/6/15Columbia University, USANews
    Michael Woodfordbiovitapubs C/A 0/0/0–All 3/20/15Colombia University, USANews

    The latest published news regarding the economists above is available by clicking on the News links shown with each of their names. The News links provide up-to-date Google news articles for each economist. No typing required. Just click, relax, and read.

  • Posted by Movie Guy

    Chinese currency valuation: Governments of China and USA

    China’s Commerce Minister Bo Xilai says China will consider the needs of its domestic economy ahead of anything else before it considers appreciating its currency. The minister said before the Chinese government makes any major decisions, it will first consider the needs and possibility of China’s economic development.” And, “Central Bank Governor Zhou Xiaochuan said last week China’s exchange rate reform is a “slow business”.

    Meanwhile, on Tuesday, US Treasury Department issued a report, calling on China’s move to greater flexibility in its exchange rate system, and to do so now. But in response, head of China’s central bank, Zhou Xiaochuan made it clear China is in no hurry for RMB exchange rate reform.”

  • Posted by Movie Guy

    China: Economist Robert A. Mundell

    Nobel Prize winners back booming China.“Robert A. Mundell said China should ignore outside pressure and keep the yuan exchange rate stable. If the Chinese currency were revalued, overseas direct investment will decrease and lead to more unemployment, affecting even the rest of East Asia, he said.”

    Mundell’s further guidance to China’s leadership On the issue of Chinese currency exchange rate, he said it would be “extremely damaging for China to change its fundamental policy” on its exchange rate. “China should keep its current policy forever — as long as the (US) dollar remains stable.” By saying “forever,” he said he was talking about 5 to 10 years. But Mundall, now a permanent resident of China, added, If the dollar becomes unstable, as it had in the past 200 years four periods of instability, then China would have to put an end to its policy of pegging its currency to the US dollar, he said.

    This is such nonsense.

    “Premier Wen Jiabao told the laureates China attaches importance to listening to global advice and opinion.”

    Yes, the Western economists are providing perfect cover for future decisions by China’s communist leadership.

  • Posted by Movie Guy

    If China and its western economic advisors are so concerned over a 5% to 10% valuation change in the yuan, imagine their concerns later on when the USA and European economies grind down.

    Apparently, key economists supporting the continued peg of the yuan don’t get it.

  • Posted by Movie Guy

    Hope China can grow without increasing consumer support from the USA and Europe. It’s only a matter of time…

    The USA will be left with few marketable and tradable global advantages for its 300 million population to concentrate on without changes in U.S. trade policy and outsourcing regulations, other than direct community level required work applications. The corporations, particularly transnationals, will benefit significantly, but the majority of the U.S. citizens will be left with lower standards of living.

    While the consumer benefit of cheaper imported goods and services is obvious, the U.S. employment and wage/salary pictures must be weighed similarly as does the ratio and financial measurement of U.S. exports to U.S. imports in trade and current account analysis.

    “There’s little doubt that globalization is likely to continue to cut into the country’s 14.5 million factory hands. Add in 57 million white-collar workers suddenly facing global competition, too, and more than half the U.S. workforce of 130 million could feel the impact.”

    “Already, some 14 million white-collar jobs involve work that can be shipped electronically and thus in theory could be moved offshore, according to a study by economists Ashok D. Bardhan and Cynthia A. Kroll at the University of California at Berkeley’s Haas School of Business.”

    “Forrester analyst John C. McCarthy identified 242 service jobs as likely to be affected among the 500-plus major occupations tracked by the Bureau of Labor Statistics (BLS).”

    “But even if the incomes of more U.S. workers fall, won’t the rest of American consumers benefit from the lower-priced goods and services globalization brings? Not necessarily, some economists now believe.”

    “If blue- and white-collar employees alike are thrown into the global labor pool, a majority of workers could end up losing more than they gain in lower prices. Then the benefits of increased trade would go primarily to employers.”

    Shaking Up Trade Theory

    Same story developing in western Europe.

  • Posted by sun bin

    great article.

    it seems RMB valuation needs to be changed sooner or later. the problem is how?

    i wonder what you think about the commodity-peg idea? as in my short notes

  • Posted by brad

    i think commodity pegs make more sense for commodity exporters — i think one makes sense for a country like ecuador for example — than for commodity importers like china. the commodity peg works ok for importers if commodity prices are rising b/c of strong demand, but not if prices are rising b/c of an interruption in supply.

    the link to your blog did not work by the way.


  • Posted by sun bin

    thanks for your comments. it makes a lot of sense to me.

    the commodity idea came from a chinese essay in HK (not available in the the web, so i tried to recap it in my blog) by a local economist Stephen Cheung. i guess the peg is better defined by a portfolio of majoy trade (import) goods. commodity is just a convenience choice with well defined price. ideally for china it should probably include price index of things like machineries from germany, but it is hard to implement.

    i also noticed that difference between a peg to import vs export goods. if the currency is defined by export goods, the currency price is automatically regulated by market demand, hence no currency board is needed. (e.g. for Ecuador its currency floats with the commodity it exports because its trading partners need to convert into the currency to buy the commodities).
    If the currency is defined by importe goods, a currency board will be needed. the situation is then analogous to a commodity-reserve/backing mechanism almost like the gold standard, in which gold importers will purchase enough gold to back up its currency. (except that now gold is replaced by the commodities in demand)

    p.s. i think the link changed when a hyphen was removed. this one should work (or my url)

  • Posted by sun bin

    one point i would like to add:
    your points about “Chinese leaders could be criticized” are also reasons for “why it is to China’s interest to adjust the exchange rate policy”
    your arguments here are equally applicable if one argues for the interests of China as a country and of the Chinese people.

    what this shows is how bad a salesman the Bush goverment is.
    instead of telling China what is in it for you, they were saying what is in it for “me”?
    why would china care about your own domestic political agenda? china might have wanted to unpeg the RMB themselves for the reasons you listed above. they might just have changed their mind because of the way bush government bullied them.
    wait, maybe Bush’s real intention is for China to maintain the peg and hence hoping that would ‘contain’ china? so they acted as if they wanted china to remove the peg? good move, LOL.

  • Posted by Anonymous

    Well, to shed some light on all the China discussions, here is an exciting and educational book: China’s global reach: markets, multinationals, and globalization by george zhibin gu. It offers vast cutting-edge ideas on China and current global affairs.