True, Brad, and it’s a good point. But in China “the government” is almost identical to “people with serious money.” In one pocket, the government pocket, the people with money have RMB-denominated liabilities and dollar-denominated assets. But in the other pocket, the enterprises they control, they have RMB-denominated assets. So, if the dollar crashes, the government has an accounting problem. But the government ministers have more money to console themselves with as they work out how to deal with it.

The current development strategy has served China well, but now is going too far and is damaging the country. Remember the “Tale of two cities”…

China is on track for a $300-400b current account surplus (my guess is that it will be closer to $400b) b/c of the boom in machinery exports/ growing chinese value added in the electronics sector.

but also note that China’s export boom actually hasn’t been all that great in a lot of ways at creating “jobs” in part b/c China has relied too heavily on capital intensive investment in part b/c of low interest rates and the easy availability of capital. labor income is falling as a share of gdp. job creation hasn’t been all that impressive. that doesn’t suggest the current model is working all that well on its own terms — tho clearly lots of firms in the export sector/ lots on mncs that source from china are doing very well.

china cannot hold on too low-end textiles and challenge korea and japan and taiwan for high-end electronics component production/ increasingly auto assembly for export (tho china is doing both high and low end assembly)

Dave – Reply
Since there are really two China’s in the single Chinese nation, an underdeveloped rural sector and urban developed sector, it is perfectly rational to promote both high and low end economic development. Chinese government has little choice but to promote a high growth economy in every economic sphere; the existing socio-economic situation is inherently unstable with the vast gap in wealth bewtween coastal and interior provinces. Unless employment and living standards are raised, Chinese history has a long record of popular revolts and revolutions dating back centuries. Frankly, there are just too many people and mouths to feed in China. Chinese President Jiang Zemin told former President Bill Clinton in a private conversation at a Seattle forum, “If you think the Chinese government is doing such a shitty job, we would be more than happy to let 10% of China’s population emigrate to the United States. Let’s see how the US government can feed and clothe another 100 million people”. Perhaps wisely, Clinton didn’t retort to Jiang’s statement by taking the Chinese up on their offer.

that doesn’t mean all parts of the export sector are doing well — but i do think macroman has a point, china cannot hold on too low-end textiles and challenge korea and japan and taiwan for high-end electronics component production/ increasingly auto assembly for export (tho china is doing both high and low end assembly) … and to some extent, low textile margins are a product of competition among chinese firms, not competition between Chinese firms and other firms. a RMB revaluation that just shifts up the costs of all firms (in $) won’t have much of an impact if low profits are from competition among chinese firms.

in any case, China’s strong export growth numbers suggest that china can manage a bit of RMB appreciation. 30% y/y growth is unsustainable for much longer — economically and politically. China’s export base is now too big. Going from $250b to $1,000b in about six years is one thing. Going from $1,000b to $4,000b in quite another …

Unlike the homogenized US economy, there are really two China’s in the single Chinese nation. The urban developed cities of Shenzhen, Hong Kong, Shanghai and Beijing have infrastructure and industrial technology base comparable to many Western developed nations. The hinterlands of China due to transportation issues and rural cultures are a completely different story. While a middle class and urbanized segment of Chinese society has grown to perhaps 300 million, it would be totally irresponsible and reckless, leading to political instability, for the government to disregard the economic interests for the majority of the population. Labor intensive employment is an essential bedrock for the economic and political stability of the Chinese nation state.

Instead of simply scapegoating the Chinese for every US domestic economic issue, both nations need to find realistic and mutual solutions. For instance, the US “Cold War” restrictions on the export of civilian high-tech products to China are outdated and detrimental to mutual prosperity; why is the Washington Consensus so concerned with the supposed “military expansion strategic threat” from the Chinese to US global hegemony? In reality, Chinese diplomatic and political relations are the best in world history with most of its close neighbors including Vietnam, South Korea, Russia and India.

Profit margins tend to be very slim in China. A 2% profit margin in textile manufacturing is typical even with the average Chinese worker pay of $126 per month. A $20 shirt sold at Walmart is likely purchased for only $3 from the textile manufacturer. The bulk of the price markup is in the retailing, marketing, and distribution of the shirt. Thus the sale of a shirt made in China contributes more to the GDP of the US Economy than to the Chinese economy. Sourcing directly from China, Walmart’s global procurement headquarters is located in Shenzhen China.

A revaluation of 20 to 30 percent would be devastating for a lot of export manufacturers and the labor-intensive employment situation in China. It is prudent for the Chinese government to take gradual steps toward revaluating the yuan currency. The US government scapegoats the low paid Chinese workers rather than address the obscene profits by Walmart and other multinational corporations that promote the “race to the bottom” for global labor standards.