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 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.