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Other measures to increase the cost of producing tradable goods could be in the works. Scrapping export tax rebates would be the equivalent to a 3.5 percent revaluation of the yuan, the official China Securities Journal said last Wednesday.

Andrew Smithers of London consultancy Smithers and Co. said he suspected China’s imbalances, reflected in a record trade surplus and record reserves, would be addressed through higher inflation without much of a change in the nominal exchange rate.

But whichever route is taken will produce problems for the world economy, he said: if prices of Chinese exports rise, the inflation rates of domestic services in rich countries will have to fall for central banks to keep overall inflation in check.”"
REF: To inflate or appreciate, that’s China’s question
Source: Reuters, July 17th, http://www.reuters.com

Link: [quote]http://today.reuters.com/news/newsArticle.aspx?type=reutersEdge&storyID=2006-07-17T064857Z_01_PEK59098_RTRUKOC_0_US-ECONOMY-CHINA-INFLATION.xml&pageNumber=2&imageid=&cap=&sz=13&WTModLoc=NewsArt-C1-ArticlePage2[/quote]

“Particularly if it is systematically intervening to maintain an undervalued currency, and thereby artificially supporting a lot of industrial capacity … China’s impact on the global economy has grown to the point where it has some int. responsibilities. I realize that the US is not in a good position to lecture anyone about international responsibility. But China has been acting a bit like the US — we will do what we judge to be in our domestic interest, and the rest of the world can adapt. That didn’t matter when China was small. But it does now.”

In October 2004, China raised interest rates by 27bps. The economy promptly grew faster. In fact, the largest impact – and the first in history such an impact was felt in China – was on stock markets half way around the world.

In 1997-98, the rest of the world warned China not to devalue. She didn’t.

In 1994, the uninvited external economic advisers (UEEA) lectured China about the problems of duel exchange rates. She pegged to one.

In 1978, an earlier version of the UEEA demanded that China abandon core principles and adopt Western economic models. She did.

Result?
Greatest increase in standards of living for more people than at any time in the history of the world.

By way of . . .

More than half of exports by foreign-invested enterprises; imports, too.

No macroeconomic tools to speak of.

No track record in moving the economy gently.

Massive pressure from abroad to make huge moves.

China’s economy: better than an “E” ticket at Disneyland!

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and its precisely ass backwardslots of the time….
like east asia now

in a better system very often
the surplus states
would be the ones
forced to use ” policy tools”
to adjust and restore balance

In a surplus country there is more elbow room to stimulate demand. Witness Japan post bubble collapse. Yes it was mired in deflation for years, but the societal stress was surprisingly mild. On the other extreme you have Argentine where the stress from the loss of confidence of foreign creditors was severely punishing on the general populace. China is in the Japan camp on the surplus side, but it has the added “advantage” of being underdeveloped — so when the need arises the roads built will actually be driven on. (I am using roads as a metaphor. There are innumerable other things that can be further developed.)
My point is, if you fear a collapse, then by all means having a surplus is a good thing. It may mean the populace is not consuming at its full potential, but it does save for the rainy day.
I agree that there is a lot to be desired on the efficiency side with such a development model. But the macro picture is not dire — fx reserve acts as a buffer against loss of confidence.
I also agree that excessive surplus is undesirable — unncessary sacrifice for illusory security. But as you pointed out, the Chinese hasn’t learnt to use the macro lever to fine tune its economy.

Plus, I think some of the SOE reforms (to increase efficiency/ reduce the iron ricebowl) were starting to hit then (but am not sure about this) so the timing of the RMB’s big appreciation v. the rest of asia wasn’t great from that point of view.

What you have is a “socialist market economy with Chinese characteristics” which oddly enough is what the Chinese government calls it.

Anonymous: Over the last decade, the Chinese government has figured out a system for market allocations of resources within a context of central macroeconomic control. It’s important not to think of the Chinese economic as “transitional” or assume that the end state should or will look anything like the US economy.

The thing that makes me optimistic is that the lag time for macroeconomic control is much shorter. In 1996, the cycle time was something like 12 months. Right now, it is something like two or three.

Also China isn’t raising interest rates, but a whole flood of orders have come down from on high to stop investment. The one reason for the flood of investment is that the surviving SOE’s have become lean, mean money-making machines, and no one has any real clue about what to do with the money they are generating now they are profitable, so it gets reinvested. I don’t see how raising interest rates is going to change the dynamic.

One commonality between the US situation in Iraq, and SOE reform in China was that no one ever really asked the question “so what do we do if we succeed?”