Exchange rates don’t matter. At not least not the RMB/ dollar …
Sometimes it seems that the larger China’s current account surplus – and the bigger the share of the US current account deficit financed by China’s government – the more insistent the Economist becomes that the RMB’s current value has nothing to do with the United States current account deficit. Its special report on US/ China trade argues:
“The biggest myth of all is that a revaluation of the yuan would greatly reduce America's trade deficit.”
Its leader goes further, arguing that neither China's surplus nor the US deficit is tied closely to the RMB/ dollar:
China's overall surplus and America's overall deficit have less to do with the value of the yuan than with Chinese saving and American profligacy.
The fact that a very credible Chinese-based economist now expects China’s current account surplus to reach $400b this year, or just under half the US current account deficit, doesn’t seem to have altered the basic view of the Economists’ brain trust.
The fact that China may add over $500b to its reserves and provide up to $400b in financing to the US – calculating the precise number is rather difficult since some of China’s reserve growth represents funds already in China that simply are appearing on the PBoC’s balance sheet, and because of a host of data problems that I have discussed previously at great length — also doesn't seem to have had much of an impact on the Economist's thinking.
I obviously disagree. The availability of a big credit line from China’s government makes it possible for the US to save far less than it invests. Absent such a credit line, the US would be forced to be less "profligate." It would need to save more and spend less. Savings and investment imbalances are not independent of the availability of financial flows, and right now no one is willing to provide the US with as much financing on as generous terms as the Chinese central bank.
Like the chairman of the US Federal Reserve, I no longer find the argument the US savings deficit is determined exclusively by US policies — and consequently would persist even in the absence of financing by China (and others) — all that convincing.
After all, right now the US current account deficit is mostly the product of a shortage of household savings – not a large fiscal deficit. The ability of US households to consume so much and save so little seems rather tied to availability of cheap credit from the rest of the world. Less credit = less profligate consumption.
The argument that the RMB’s depreciation from 2002 on has something to do with China’s huge surplus and its corresponding ability to finance the US isn’t all that complicated.
The graphs the Economist pulled together for its story kind of illustrate the basic point — and I'll add a couple more of my own later in the day.
The RMB tended to appreciate along with dollar from 1995 through 2002. During this period, China’s current account was in rough balance.
The RMB by contrast turned down in 2002 – and really depreciated in 2003. It remains about 10% lower that it was at the dollar’s peak in real terms. The fall in the RMB in turn correlates rather closely with the rise in China’s external surplus – once you take into account a lag. As the Economist special report recognizes, that lag is partially the product of policy: in 2003 and 2004, China led an unexpected surge in reserve growth trigger a huge surge in credit. The resulting investment boom pulled in imports – and drove up inflation. China looked set to follow the oil exporters. It then cracked down on lending. That slowed both inflation and imports. But not exports.
China's trade surplus soared, and the lending curbs meant that the banks were in a position to lend a lot of Chinese savings to the government, which then lent those funds to the "profligate" US.
The fact that China – an oil importer I might add – now runs a roughly 10% of GDP current account surplus might be considered a sign that its exchange rate is undervalued as well.
The fact that China’s surplus looks set to rise further — both absolutely and as a share of China's GDP — could be considered additional evidence.
The fact that China’s export growth has generally been close to 30% y/y in nominal terms (and over 20% y/y in real terms) after the RMB started to depreciate and has stayed there might be considered evidence as well.
The fact that China’s nominal exchange rate is very low relative to its PPP exchange rate – even taking into account the fact that poorer countries generally have nominal exchanges below their PPP exchange rate – is additional evidence.
McKinnon and Mundell, it is true, do not believe that China’s exchange rate is undervalued. At least they don’t believe China should let its currency float. Both are big believers in fixed exchange rates.
Cheung, Chinn and Fugii also didn’t find conclusive evidence that China’s exchange rate was undervalued. At least not in 2003. That was the last data point in their study, best I can tell. 2003 – incidentally — was well before China’s current account surplus had ballooned. China exported less than half as much then as it does now. And while China didn’t quite formally meet Chinn, Cheund and Fugii's test for “undervaluation” in 2003, it came pretty close. The key chart is found here. You can draw your own conclusions.
Detailed data on China comes out with a lag — and formal academic analysis tends to appear with an additional lag. A lot of the studies purporting to show that the RMB isn’t obviously undervalued are based on data through 2004. Since then China’s external surplus has increased dramatically. I suspect that will have an impact on the conclusions that emerge from future academic work.
The Economist did note — citing Dr. Roubini (I have also made this argument rather regularly) — that the evolution of China’s bilateral balance with Europe suggests that moves in the RMB do impact trade flows. It is hard to tease out how moves in the RMB impact trade flows by just looking at the RMB/ dollar, which hasn't moved much — especially in real terms, as Chinese inflation has generally been lower than US inflation. The RMB by contrast has moved wildly against the euro, the pound and other European currencies. And we know that the RMB's fall v European currencies led to an acceleration in the pace of growth in China's exports to Europe and the emergence of a large Chinese bilateral surplus came only after the RMB’s large depreciation against the euro, pound and other European currencies. Just look at the data in the IMF’s regional outlook (Box 1.2, p. 24).
But this argument didn’t sway the Economist. They counter the European data by arguing that the impact of any move in the RMB on US-Chinese trade flows will be small.
Don’t get me wrong. Even I don’t think that a change in the RMB will reduce the US bilateral deficit with China in the short-run. There are price as well as quantity effects. A certain amount of further deterioration is already in the pipeline. But over time, I would expect more RMB appreciation against the dollar to slow the pace of deterioration in the US bilateral deficit with China. Exchanges do matter. It will, though, likely take a large revaluation.
The Economist's special report also repeated a set of my least favorite arguments.
It argued that China’s surplus largely comes from a shift in production out of the rest of East Asia. That is no doubt true to a degree. But the overarching fact is that the US bilateral deficit with all of Asia, not just the US bilateral deficit with China, is rising. And for that matter Asia’s overall external surplus with the world is rising, not falling. I didn't pull the data in the links out of thin air — it comes straight from the BEA and the IMF's WEO.
The rise in China’s current account surplus hasn’t been offset by growing deficits elsewhere in Asia. It has instead been offset by a rise in the US deficit – at least in a broad global sense.
Moreover, the IMF recently noted — I think accurately — the China is "becoming less dependent on other Asian economies for inputs." Box 1.2 again.
The Economist argued that RMB appreciation wouldn’t have much impact on the US since the US doesn’t produce goods that compete with China. That used to be true. But by all accounts China is moving up market fast. I would think though that Economist's correspondants in the US Midwest would be agree that the US still makes some auto parts and cars. China now does too.
Over time, the overlap between China's production mix and the US production mix looks set to rise, not fall. China increasingly produces — and exports – capital intensive as well as labor intensive goods. Intel now plans to make chips in both China and the US.
Moreover, if the US deficit is ever going to come down, the US is either going to have to make things now made in China or elsewhere in Asia (reducing US imports) or export an awful lot more to China, Asia and the Middle east.
The Economist argued that Americans shouldn’t complain about China's implicit export subsidy since they benefit immensely from cheap Chinese imports.
“Trade with China helps, not harms the average American. Thanks to imports from China, prices are lower and real incomes higher.”
I don’t think though that it makes sense to look at just those areas where China has lowered prices when looking at the complex question of how a weak RMB influences American welfare. Chinese assembly has made DVD players a lot cheaper, and Chinese exchange rate intervention makes them still cheaper. But not all prices are lower because of China, even if the price of those things that the US imports from China are lower.
China’s emergence, for example, has clearly put upward pressure on the price of a host of commodities — and on the price of things the US exports to China (See Dani Rodrik for an extraordinary discussion on this topic). The US doesn't export that many goods to China, but it does export a lot of bonds to the PBoC — so Chinese demand presumably has pushed the price of bonds – and things, like houses, that can be turned into bonds — up. That is good if you already owned a house (so long as it wasn’t located by a manufacturing plant that isn’t doing so well), but not so good if you don’t.
Finally, China's impact on the "average joe" hinges on trade with China has influenced wages, not just how it influenced prices. The enormous increase in China’s exports – they will basically go from $250b in 2001 to $1,250 in 2007 – hasn’t exactly coincided with strong growth in median real compensation in any of the major advanced economies. That I think should give anyone arguing that China’s policy of holding the RMB down is an unambiguous benefit to the median worker some pause.
China’s emergence by contrast clearly has been very good for the financial sector. Read that radical out in Newport Beach California. China doesn't buy many US goods, but it buys a ton of US debt. Lots of folks have made a lot of money selling debt to China’s central bank, selling complex financial products to investors who sold their treasuries and agencies to China’s central bank and are now looking for something that yields more and in some cases selling their skill at leveraging companies up to China's asset managers.
Those who made slightly more complex bets — bets that an unbalanced world would be a stable world — have also done very well. China’s central bank, along with a bunch of other central bank, have provided financing to the US when others haven’t been willing to do so, dampening volatility in host of markets.
The scale of the required financial flows from the world's central banks to the US have now gotten quite large. In the first quarter – by my calculations, which draw on the US data but try to adjust for some of its limitations – central banks provided about $175b in financing to the US. That is a lot. It works out to $700b a year. China alone probably provides about ½ of that.
Such large financial flows are a consequence, in large part, of China’s exchange rate regime. The flows from China, obviously. But also the flows from countries like Korea and Brazil that don't want their currencies to appreciate by more against the RMB.
I know the Economist likes counter-intuitive arguments – and arguing that China, not the US, has the most to gain from letting the RMB rise is both counter-intuitive and plausible. I agree with Eswar Prasad’s argument that the weak RMB is a constraint on financial sector reform in China. But given the size of China’s surplus and the share of the US deficit that China’s central bank finances, I also find it hard to accept that China hasn’t contributed in some way to the US external deficit.
Right now – whether because of the weak RMB or other factors – the US is clearly on trajectory where it increasingly depends on Chinese credit to sustain its deficit. I think everyone should be able to agree on that. And I personally think both parties – not just China – would benefit from starting to adjust now, not continue to avoid adjustment.
As Freud might have said, sometimes a cheap cigar (yuan) is just a cheap cigar, no matter how many counter- intuitive arguments The Economist throws at us.
Does today’s PBOC action change the calculus? I think at minimum it reflects well on Secretary Paulson’s approach.
Come on feel the noise! PBOC widened the band! So instead of a 0.3% band that was never used, now we’ll have a 0.5% band that is never used. The proximity of this announcement to the SED and the recent petitions coming out of the US Congress sure is an amazing coincidence…
The paramount concern for the Chinese State Council is the continued employment of the general population which is essential to maintain social stability. The rising rate of industrial productivity across the Chinese economy will mitigate some of the recent revaluation of the yuan, but Chinese policymakers need to be careful not to undermine labor intensive industrial sectors. The vast majority of the Chinese population either lives on the farm or is employed in rural labor intensive industries that would be severely impacted by a major revaluation advocated by Western pundits. The slow and steady revaluation policy is prudent to permit Chinese industries the time to adjust by modernization and productivity improvements. The United States is just one of many world trading partners of China; the Chinese State Council should absolutely not pander to the political wishes of Washington Consensus Neo-liberals.
Saudi Arabia Sabic to Buy GE Plastics for $11 Billion
http://www.bloomberg.com/apps/news?pid=20601103&sid=aEr1FcJpV0bU&refer=us
May 18 (Bloomberg) — Saudi Basic Industries Corp., the world’s biggest chemical company by market value, will buy General Electric Co.’s plastics unit for about $11 billion, two people familiar with the negotiations said.
U.S. Blames China As It Leads The World Into The Next Depression
by Darryl Robert Schoon
http://www.prudentbear.com/articles/show/2018
The US Congress, looking for someone to blame for America’s mounting economic problems—increasing trade deficits, loss of jobs, declining competitiveness, etc.—is now blaming China. And, once again, instead of protecting America’s economy, the US Congress is about to pull the lynchpin on the global economy.
The US has now chosen China to be its whipping boy, the reason for America’s economic troubles. So be it. Blaming China will play well in the US where R no longer stands for responsibility. It will also lead the world into economic chaos.
The Smoot-Hawley Tariff Act of 1930 played a critical role in causing the Great Depression in the 1930s; and, whatever Congressional action is enacted to “protect” American markets in 2007 will do the same.
America is in trouble and it’s looking for someone to blame. Last year it was illegal immigrants crossing its borders from Mexico. This year it’s the Chinese. But if America wants to know who’s responsible, it need look no further than into a mirror.
But America doesn’t want to know the cause of its problems. America wants someone to blame—and it wants to blame someone else.
well, China’s policy of holding the RMB down (and building up its reserves) pretty clearly is contributing to some of the United States problems. Not all, but some. It certainly hasn’t encouraged investment in tradables production in the US for example. It presumably is one reason why the $’s fall is leading to a rise in China’s trade surplus, not a fall in the us deficit. the dollar block is adjusting.
The “look in the mirror”/ “put your own house in order” arguments, at least in my view, don’t imply that the US should remain silent on the exchange rate issue.
The US can and should do more, obviously — though it isn’t obvious how government policy raises personal savings (tax breaks might just reward existing savers/ increase the deficit).
And in most respects, the uS and Europe have done what most thought they needed to do to bring about rebalancing. The US brought its fiscal deficit down. It can do more, but a 2% of GDP fiscal deficit isn’t huge on a global scale. Europe has grown on the back of domestic demand. EU growth now exceeds US growth. Asia though hasn’t done its part — exchange rate adjustment.
And that has consequences for the world, not just for Asia.
As most of you probably have gathered, I have not been persuaded by Paulson’s approach. At least initially he took the emphasis off the exchange rate and seemed to prioritize financial liberalization, and I think that was a mistake. More recently, he has put more emphasis on the exchange rate — perhaps because of pressure.
all in all though i don’t think there is much evidence that the approach the US adopts drives policy — soft talk from Taylor didn’t get a lot of results, tougher talk from Adams didn’t get a lot of results, and Paulson’s various approaches haven’t gotten many results.
In real terms, the rMB still hasn’t appreciated by much during Paulson’s tenure. And if a small band widening before the SED is all Paulson gets, well, that is rather disappointing.
China has a real dilemma — a fast predictable appreciation will pull in capital and cause internal problems (That seems to have happened in q1, after the faster appreciation in q4). I understand that. but trying to keep the pace of appreciation lower than the interest rate differentials has generated problems as well — not the least of which it has meant that the RMB generally has appreciated by less than the dollar has depreciated.
From Businessweek,
http://images.businessweek.com/ss/07/05/0517_china_money/source/11.htm
Revalued Yuan?
China abolished its dollar peg back in July of 2005, but has allowed only a modest appreciation of the yuan vs. the greenback and other foreign currencies. Beijing is loath to change its policy given that exporters and farmers would be hurt by a stronger currency and unemployment would likely result. The government recently estimated that a 5% to 10% appreciation of the yuan from present levels would eliminate 3.5 million export jobs and hurt 10 million farmers.
Frugal
Ordinary Chinese by and large are incredibly frugal. Household savings in China amount to more than $2 trillion and the savings rate is an astoundingly high 50%. The U.S. and other foreign governments want Beijing to encourage Chinese consumers to spend more, hoping China’s lopsided trade numbers will moderate. However Chinese families are worried about their retirements, health-care costs, and future educational expenses.
Corporate America risk-averse stock-buyback strategy is the new profit model
http://www.businessweek.com/magazine/content/07_22/b4036057.htm
With gas prices hitting record highs, Exxon Mobil (XOM ) Corp. ought to be drilling like mad and refining more of that black gold, right? As it turns out, the world’s largest oil producer thinks it is smarter to use more of its resources to buy back stock. The indirect result: increased pain at the pump for consumers.
Exxon is plowing a smaller percentage of its spare cash back into the business. Instead, Exxon is bingeing on buybacks to help boost profits, which also benefit from higher commodity prices. Repurchases have been part of Exxon’s strategy for decades, but they’ve exploded in recent years.
With Exxon’s stock handily beating the market and peers with a 15% annual return over the past decade, others in the oil patch are catching on to the strategy. “They don’t need to grow production in order to generate shareholder returns,” says energy consultant Richard Gordon.
“Economists tell us high prices should send the signal for Exxon to invest [in growing production],” says Tyson Slocum, director of the energy program at the consumer group Public Citizen. “But that’s not happening. They’re transferring that money from the wallets of consumers to shareholders.”
” Savings and investment imbalances are not independent of the availability of financial flows, and right now no one is willing to provide the US with as much financing on as generous terms as the Chinese central bank.”
I think the core issue is between the Roach-style consumer behavior argument on one side, and the China pricing behavior argument (including FX and other forms of subsidy) on the other side - rather than on financing per se. Granted, the concentration of vendor financing via official channels and toward low risk assets, lowers the cost of financing in terms of its reentry point into the US. But this is a function of the risk profile of the capital inflows. And the cost to the US of offering this risk profile is also a function of the Fed’s decision on U.S. monetary policy, which is an exogenous variable from China’s perspective. This risk profile on capital inflows, and its low cost, is really a derivative issue of China FX policy and US monetary policy in conjunction.
In terms of the first debate, is the horse really that distinguishable from the cart? China definitely stimulates US demand through its exchange rate and other forms of subsidy, which is an argument for bias in that direction. But vendor financing is not possible without buyer choice. The fact that this particular vendor cuts prices through various sources of subsidization doesn’t change the fact that this particular buyer is choosing to buy rather than save.
But in any event, this is really not the same as the financing availability argument. The US supplies the same dollars to China and ROW (through current account deficits) that China and ROW supply back to the US (through capital account/official account deficits). China has no choice but to make financial flows ‘available’ to somebody, somewhere, somehow if it runs a current account surplus. Global markets will steer ROW surpluses back to the US somehow, given that the dollars that create these ROW surpluses are only made possible with US current account origination.
China grants Blackstone $3B to invest abroad
http://money.cnn.com/2007/05/18/news/international/china_blackstone.reut/index.htm?postversion=2007051808
Move is first operation of new vehicle for China’s foreign exchange reserves and intended to improve returns and diversify risk.
SHANGHAI/BEIJING (Reuters) — China has placed $3 billion of the country’s huge foreign exchange reserves with U.S.-based private equity firm Blackstone Group to invest abroad, a newspaper said.
China announced in March that it is setting up a separate vehicle to help diversify part of its $1.202 trillion of foreign exchange reserves, the world’s largest, as a way of improving its returns and diversifying risk.
China absolutely should expand its social safety net and provide health insurance to any workers who lose their textile jobs as China goes upmarket and starts to produce cars, ships and chips. It shouldn’t take lessons from the uS on this. And if it financed that safety net with a fiscal deficit all the better!
I don’t think thought that China can set its exchange rate to keep its least competitive firms in business — not when its most competitive firms (or foreign firms using china as a platform) are growing China’s overall exports at the current pace. the global trading system wouldn’t work if everyone kept their least competitive, but job-intensives, sectors in business through exchange rate intervention.
I don’t think tho that the data — see Kuijs of the world bank — suggests a 50% household savings rate. Tis high, but if memory serves, not that high. Moreover, the household savings rate hasn’t increased — so with labor income falling in china has a share of GDP (Overall job creation hasn’t been that impressive; too much substitution of capital for labor in my humble opinion), household savings doens’t explain the RISE in China’s savings rate.
that comes from a rise in business savings, by almost all accounts (World Bank, Anderson, Jen). And it isn’t hard in my view to see how the RMB’s depreciation helped increase China’s business savings surplus.
From the post band widening StanChart take. An (embellished) high level meeting.
“Stock prices just seem to keep going up”, says the top man, as
he turns to the securities regulator. “Why does the market have
so much liquidity in it?” he asks. “It’s not just a stock market
issue”, says the chap from the China Securities Regulatory
Commission, “the liquidity problem is really a broader financial
sector issue”, turning to his colleague from the central bank. The
People’s Bank of China (PBoC) official then speaks: “Yes, it is a
broader problem, but it is not the result of our monetary policy”,
he claims. “It has been thrust on us by all the trade surpluses;
that’s where all the money is coming from”. All heads turn to the
chap from the Ministry of Commerce, who shifts in his seat and
opens his mouth: “Well, yes, we do have massive trade
surpluses”, he says, “and we’re doing our best to encourage
imports, but it is really hard. It is actually all to do with our basic
growth model.” He pauses. “We chose to maximise exports in
order to create jobs and attract foreign investment - and we grew
fast on the back of external demand. But all those exports create
revenues that enter the country, piles up and cannot be absorbed.
So we need to change the growth model.” Hearing this phrase,
the top man points to the chap from the National Development
and Reform Commission (NDRC), the folk who design and then
tinker with the overall growth model. “So?” he asks, “what’s are
you doing?”. “Well, we’re trying sir”, comes the exasperated reply,
“but the problem is actually the local governments - we just can’t
control them”. Fortunately for them, there were no provincial
governors in the room.
brilliant (the standard chartered take). absolutely brilliant.
Standard Chartered research is fantastic. They’ve been all over Chinese developments this week. They are predicting a stock market fall next week, with a concomitant yuan jump. We’ll see. Stephen Jen with has interesting interpretation:
‘China’s C/A surplus reached 7.0% of GDP in 2006, and is likely to exceed 8.0% this year. To understand why Beijing and Capitol Hill don’t see eye-to-eye on the CNY and trade imbalances, we need to take a step back and try to understand each party’s perspective. I may be over-simplifying, but the US’ view could be characterized as the ‘traditional trade equation’ approach, whereby imbalances are driven by exchange rates and relative incomes. China’s view on imbalances, however, is quite different. It is based more on the savings-investment (S-I) gap approach. These distinct perspectives naturally lead to a currency-centric solution for the former and a non-currency-centric solution for the latter. This is at the core of the debate.
agree completely re: Standard chartered (note the link to Stephen Green’s biz week article with heading very credible China based economist).
Jen’s current account numbers seem off — $250b = 9 to 10% of China’s 06 gdp, and green’s estimates for 07 are around 12% of China’s GDP. I agree tho that China takes the Roach/ Jen line that the us savings deficit is something independent of China’s decision to finance it … i.e. in interprets the s-i outcome as evidence that Chinese policies haven’t contributed to the us deficit.
I am not quite sure how the Chinese tho can explain the rise in China’s own surplus from an S-I perspective. It isn’t as if investment has fallen … far from it. Tis rather a rise in savings — and notably a rise in biz and government savings.
SOE reform was part of it. So is the absence of dividends. But it seems at least to me that the biz savings point reinforces the exchange rate link. The fall in the RMB led to higher business profits, more retained earnings (biz savings) and higher levels of internally financed investment.
that has allowed china to invest more while freeing up household savings (mostly in the banks) to be lent to the PBoC/ and then onlent to the us.
that at least is a story that makes sense to me — I see lots of connections between the exchange rate, trade flows, capital flows and the s-i balance.
if someone has a different story, do tell.
Brad,
You say the US has brought its fiscal deficit down, but how much improvement was due to acceleration in growth in the last three or four years? In other words, is the cyclically-adjusted deficit satisfactory? Anyway, a 2% deficit may not be excessive on an international comparison, but it certainly does not preclude more state saving.
So how about increasing US energy taxes, which are comparatively low? Presumably this would most directly cut the US trade deficit with the oil producers, but the private sector might also spend less on non-oil consumption. Not to mention the contribution of energy tax to reducing carbon emissions and other forms of pollution, reducing the energy security challenge (eg in Iraq, Sudan, Nigeria, Russia etc) and encouraging the US to produce more exportable technology (eg cars).
I think there are answers unilaterally available to the US, but they lack the political cojones to broach them.
Brad : where is the surprise. THe economist has been backing the strong pound policy all along …
They are big advocators of deindustrialisation and proponents of “in the stock market we trust”.
It s easy in retrospect to spot that the UK lost their power not so much because of strong union but because of the strong pound and its choice of the stock market rather than the industry. The same happens to the US now. The same will happen to China if they are allowed to walk the same imperial path
df,
You must be joking! The UK tried repeatedly to devalue its way out of stagnation (eg Harold Wilson’s “pound in your pocket” in 1967). We also tried trade restriction (VRAs on cars) and state support for industry (DeLorean). We lost our way primarily because we refused to face reality; that the competition had overtaken us.
I think I see a similar attitude in the US today.
I do not understand why US is being blamed for the current account deficit with china. It is not that US has a fixed exchange rate. If china has its problem, so does US. If chinese leaders are looking for their well being and social stability of china, US leaders should be doing the same for US. That should reach an equilibrium where both party will see that it is no longer worth while to do anything more. If China does not let market mechanism to work, US by all means should use any and all bilateral mechanism that is at its disposal to open up chinese market and influence teh exchange rate. Congress is doing the right thing. Wall streat never cares about avaerage Joe, they care about themselves, and chinese have not started taking away wall street jobs yet, so it is for average Joe to take care of their problem, and hopefully the congress can see that after the current election. If competition is fair it is fine but the whole thing is rigged by china’s currency manipulation teh average joe does not stand a chance.
Barry,
The Europeans, Japanese, Koreans, Indians, Russians have mutually beneficial trade with the Chinese at current exchange rates. In fact, the Chinese run significant trade deficits with both Japan and South Korea. If the Chinese yuan were significantly undervalued, the rest of the world would be lodging trade complaints. In stark contrast to the CNOOC fiasco with Unocal and the incessant “China bashing” in the United States, the rest of the world is willing to engage the Chinese on a multi-tiered political and economic level. Americans should wake up and smell the coffee; the global economy is a competitive place.
Europe has moaned numerous times about Chinese mercantilism,including threatening WTO action (http://www.iht.com/articles/2006/10/24/business/trade.php) WWhen the Eurozone economy slows and unemployment starts tto rise, you can be pretty sure that these complaints will intensify.
I also seem to remember some less thatn cordial relations between China and Japan in the not too distant past… (http://www.msnbc.msn.com/id/7514819/)
Rebel — yes, most of the improvement is cyclical, with the proviso that the increase in corp. profits/ shift in income distribution to the top end/ rise in markets (capital gains taxes, but also income taxes on exercised options) has also helped given the still (somewhat) progressive structure of the tax system. The surplus in 00 also had a cyclical element. the imf publishes its cyclically adjusted fiscal estimates, which i should check — my guess is that some of the deterioration from 00-03 has been reversed, but no where near all.
I fully agree that an increase in us energy taxation makes great economic (tho not so great political) sense. the only political deal that might work is one that offsets a rise in gas taxes with a fall in other taxes.
that said, directionally the fiscal deficit has come down absolutely and i suspect even after adjusting for the cycle since 04. the current account hasn’t fallen. i don’t think that discredits the twin deficits thesis — it just means other factors (china’s peg and its effects on Chinese savings, the oil savings glut) overwhelmed the standard linkages.
DC — careful saying “mutually beneficial trade” — some are usually helped and some are usually hurt, even if there are net gains. brazil’s commodity producers have done very well, brazil’s textile producers not so much. the same is true for africa. for the middle east it has been all gain (higher commodity prices), no pain (middle east doesn’t manufacture much) — but most other regions have a manufacturing sector that has portions that are feeling some heat.
Brad,
Brazil also manufacturers Embraer regional jets exported to China. This year, the Brazilian company delivered 18 aircraft to its four main Chinese customers - HNA Group, China Southern, China Eastern Jiangsu, China Eastern Wuhan - and expects to deliver a further three by December. The Chinese HNA Group also ordered another 100 regional jets in August of last year, making it the Brazilian company’s largest Asian customer.
In steel export to the Chinese market, Brazil’s iron ore producer, Companhia Vale de Rio Doce, ties up with China’s Baosteel for a $6.5 billion Steel factory located in the Amazon. Brazil’s economy booms from exports of grain, soybeans, steel, jets to the Chinese economy. And Petrobras Brazil has strategic joint venture with PetroChina for deep water energy exploration in Africa’s Angola.
To the Guest writting about ExxonMobil, as the the energy banker Jerome Guillet says:
Production (mboe/d) ExxonMobil Shell BP Chevron Total ConocoPhillips
Q1 2006 4.56 3.75 4.04 2.64 2.44 2.09
Q1 2007 4.44 3.51 3.91 2.64 2.43 2.01
That table tells us that none of the big oil companies has been able to increase its oil production over the past year - in fact, most have seen a decline in their production.
And, in fact, this is not a temporary blip: oil production for these companies has been flat or declining over the past 5 years.
The only company to enjoy a significant production increase is BP, and that was linked to the increase in the production in its 50% owned Russian subsidiary, TNK-BP, which has now also stalled.
So we have an incontestable trend here: Big Oil is unable to increase its oil&gas production. And this, after almost 8 years of almost non stop oil price increases.
What’s going on? Aren’t markets working? A price increase, especially such a longlasting and massive one, should be a signal to producers to produce more, and to consumers to consume less. As we know, consumers are burning more oil thanks to record economic growth in China and elsewhere, and demand appears to not be very sensitive to prices in both emerging economies and oil producing countries as the good times roll. Despite flatter consumption growth in the developed world, demand is going up overall, and drives prices up.
But supply should then have delivered. And indeed it has, as spare production capacity around the world has been put in service. But new capacity, in particular that developed by the oil majors, should have followed. And yet we see from the above numbers that it hasn’t. Again, BigOil has been unable to increase production in the past 5 years.
One thing is obvious - it’s not for lack of money. The companies are enjoying record income and profits, thanks precisely to those high oil prices. It’s just that this money has been used to a much larger extent to buy back shares (effectively handing the money back to shareholders) than to invest in oil&gas production.
BigOil is effectively telling the market that it thinks its shareholders can use their money more profitably in other sectors of the economy.
Despite the significant increases in their costs (everything has gone up: raw materials, rigs, qualified personnel, as well as tax rates in oil producing countries), the profits from those assets they have put in production are high enough to suggest that oil companies would invest if they could.
Thus it means that they can’t. Quite simply, they no longer have access to new reserves.
Many articles in the MSM lately have criticized oil producing countries for not opening their reserves to foreign investors, as well as for not investing enough themselves, via their national oil companies. Whether this is caused by incompetence, short-sighted politics (governments limiting investment to grab the cash), long term strategy (hoarding while enjoying the higher prices on current production) or geopolitical posturing (the “energy weapon”), or, as is likely, a combination of all of these, is fundamentally irrelevant.
What matters is that we have effectively lost control of oil supply (and by “we”, I mean Western oil companies whose goal is to bring as much oil as possible to the market to fulfill existing demand).
And that’s a pretty fucking big deal.
The good news, of course, is that there is something within our control: our demand. Lowering our demand would mean needing less supply and lower prices, all thing equal. and as we all know, a lot could be done on that front. The bad news, of course, is that our leaders are mostly oblivious to the issue, focusing exclusively on finding new or alternative sources of oil or energy (whether the highly problematic coal-to-liquids, the insane rush towards biofuels, the dirty oil sands in Canada, etc…).
Thus we have highly worrying underlying trends as to oil production and the extent to which it functions according to ‘our’ rules (i.e. profit driven), and largely clueless governments.
So why have prices remained so low?
The question might be put the other way, in fact. Considering that we’ve had an incredibly warm winter, which has significantly dulled winter demand, how come prices never really went down? As some of you have noted, gasoline prices are already quite high, early in the ‘driving season’. With drivers in the West already used to - and increasingly comfortable with - current price levels, and with demand continuing to sky rocket in China, Iran, Saudi Arabia, Russia, India, prices can only go one way.
And BigOil can cash in to some extent, but they are effectively no longer a decisive player.
Peter SChiff’s today comment:
Lipstick on a Pig
As Treasury Secretary Henry Paulson continues to drum up interest in direct investment in the United States, he will rely on a set of skills that only a long-time Wall Street pro can truly master. It is part of the investment banker’s playbook to perform financial makeovers on questionable companies that they are engaged to sell, a process commonly known as “putting lipstick on a pig.”
As the U.S. economy continues to slow, and non-U.S. markets consistently produce much better returns on invested capital, Paulson will need to pull off an unprecedented act of porcine cosmetology to keep the foreign funds flowing. In addition, the persistent weakness in the U.S. dollar practically assures that any takers will likely find that they are the ones being led to the slaughterhouse.
The Treasury Secretary has consistently extolled the importance of foreign investment to our economy. Paulson recently underscored these sentiments with a visit to a UK-based company that employs 1,500 Americans at several manufacturing and distribution facilities in several states. However, while investment of this sort is badly needed, it represents just a small fraction of the money that Americans borrow. Because the vast majority of foreign “investments” come to us in the form of consumer loans, a more appropriate venue for Paulson’s comments would have been a local Wal-Mart, Best Buy, or condo project. Whether in Treasury bills, mortgage-backed securities, or collateralized consumer debt, such loans do nothing to improve the long-term health of our economy. They merely serve to keep our necks above water until the financial tide eventually overwhelms us.
Legitimate foreign investment, in profitable businesses such as the one Paulson visited, are increasingly less attractive as other nations have superior infrastructures, better trained and educated workforces, lower taxes, and fewer regulations. If the Bush administration really wanted to attract more of this type of investment it would offer more than mere lip service. Serious reforms to both capital and labor regulation, and efforts to shore up the sagging greenback would be required for such an effort to bear fruit. Today’s announcement from the Bank of China that they will allow greater flexibility in the Yuan will only make Paulson’s job that much more difficult.
On Thursday, Ben Bernanke came to Paulson’s aid with a can of hairspray and some mascara. Speaking in Chicago, the Fed chairman gave his assurances that the meltdown in the sub-prime mortgage market would not affect the broad U.S. economy. Bernanke’s pronouncements come despite continued evidence of slowing retail sales, record high gasoline prices, escalating food prices, mounting inventories of unsold homes, and real estate auctions in which foreclosed homes sell for 30% -50% below their “appraised” values.
Perhaps the most important take from the current “Invest in the U.S.” campaign is the fact that the U.S. needs to pass the hat in the first place. How can a nation that fancies itself the leader of the free world be so dependant on foreign capital? The fact that we do not generate sufficient domestic savings to satisfy these needs ourselves should be extremely troubling. The fact that so few on Wall Street even appreciate the significance of this fact is even more so.
Brad, could you please write more about Russia’s
foreign reserves…they increased 14bln last week!
http://cbr.ru/eng/pw.asp?file=eng\press\070517_114239eng_res.htm
Perhaps, to the final end, Big Oil Companies (the Boss) would be the “true global economic equalizer” making gasoline prices the same throughout the world (bringing US price on par with ROW) and thereby rendering exchange rates and Fx markets, especially carry trades obsolete and no more “trade imbalance bashing” comments and worrying about which country’s export surplus is financing US trade deficits - oh how I wish that would be the day!!
Peace My Fellows
Dave,
As for China’s ‘mutually benficial trade’; do you think Korean currency intervention or Thai capital controls are completely unrelated to Chinese export strength/ currency regime? The US is simply going to bat over the yuan issue for everyone, including the Europeans, Mexico and most of Asia.
i also noticed the $14b number for russia (reserve growth for the most recent week). oil gives you $2b a week, max. probably less. valuation wasn’t a factor. necessarily there were lots of inflows. are they still yukos-asset sale related? my guess is no — but beyond that, i don’t have any real insights …
help is always appreciated.
Beijing to take $3bn gamble on Blackstone
“I agree tho that China takes the Roach/ Jen line that the us savings deficit is something independent of China’s decision to finance it … i.e. in interprets the s-i outcome as evidence that Chinese policies haven’t contributed to the us deficit.
I am not quite sure how the Chinese tho can explain the rise in China’s own surplus from an S-I perspective. It isn’t as if investment has fallen … far from it. Tis rather a rise in savings — and notably a rise in biz and government savings.”
If savings (S-I balances) are always determined domestically, then China’s current account surplus must by that reasoning also be caused by Chinese decisions.
You can’t blame the USA for its ‘choice’ of having lower savings than investment while you also blame them for your own higher savings than investment.
–
As for China having mutually beneficial trade … even Germany only exports less than half as much to China as it imports despite its overall CA surplus, not to mention Spain and other EU deficit countries.
—
“The vast majority of the Chinese population either lives on the farm or is employed in rural labor intensive industries that would be severely impacted by a major revaluation advocated by Western pundits. The slow and steady revaluation policy is prudent to permit Chinese industries the time to adjust by modernization and productivity improvements.”
This is basically mercantilism clothed in a socialist raiment. Trying to keep every type of industry inside your country while increasing production to satisfy foreign demand (that you are financing with your profits) naturally leads to a trade surplus.
If the employment of workers in labor intensive sectors will not be profitable after a revaluation and the revaluation is inevitable, then slowing down the revaluation (or actually going in the other direction from the perspective of a European) will not lead to an adjustment.
Adjustments happen when they are a necessity, not when they inevitable (Of course, this also applies to the global imbalances). Chinese businesses aren’t immune to the “next quarter is what counts” view. Chinese are, after all, just as human as Americans.
I sincerely wish that the article from The Economist were circulated to all congressmen in the China-Bashing camp. I don’t know if you, Brad, can do that with the help of your staff.
Ernst
Ernst — there is no way that i could do so if I wanted to do so.
And to be honest I am not sure I want to. I tried not to oversimplify, but I thought it was rather clear that I didn’t find the Economist’s argument that the link betweeen the rmb/$ (and associated interventoin in the fx market) and the US trade deficit was a “myth” all that persuasive.
I understand arguing against sanctioning China, and I understand the arguments against imposing tariffs on Chinese goods. China rather clearly doesn’t like the tougher talk now coming out of dc (see tomorrow’s washington post). But I also don’t think there is a strong intellectual case for arguing that China’s peg has had essentially no impact on either China’s surplus or the US deficit. Yet that is the case the Economist tries to make. I had a hard time getting past that element of the economist’s argument.
Brad,
Thanks for a stimulating column.
The RMB probably matters for China’s exports. However, as one who travels often between East Asia and the U.S. I think that there is another problem.
The quality of service that Asian firms offer their customers is high. When I return to America I sense the contrast immediately. While flying back business class on a U.S. airlines I was offered two choices for lunch. I said that I wanted the first one. The man came back to me two minutes later and said that he could not give that one to me because I was a low priority. When moving my things with a U.S. moving company I asked that a receipt be faxed to me so that I could get reimbursed after spending thousands of dollars. For months they did not send me a receipt. I could give many more stories like these.
At first I thought that I was imagining this difference in service between firms in the U.S. and firms in countries like Japan. I don’t think so anymore.
If U.S. consumers are given a choice, we will tend to choose the companies that serve our needs better. Many of these companies are now located in Asia. This contributes to imbalances between the U.S. and East Asia. An appreciation of the RMB alone will solve this problem.
A recognition that there is something wrong in the U.S. would also make policy makers in Asia much more willing to listen to U.S. demands that Asia change its policies
rebel economist I was not refering to the late actions taken in the 60’s when the old british empire was dead
but about those taken post WWI when GB tried to restore the pound gold parity
Guest,
No one in this world owes Chinese workers a living, or vice versa. For the record, the Chinese have never requested nor received one cent in foreign aid from the United States taxpayers. The monetary and currency policies of the China PBoC are none of any other nations’ damn business. United Nations charter strictly prohibits political or economic interference in the internal affairs of other sovereign nations. The same reason why you never should interfere in the internal family affairs of your next door neighbor is the same logic why the Western powers should never interfere in the internal affairs of any other of the world’s civilizations that includes China, Russia, Japan, India, Iran, Eqypt, etc. For better or worse, the Chinese people will make their own decisions for their collective economic future.
Willem –
US airlines definately don’t put the best face of American business forward. I have had my own difficulties there, thankfully mostly on domestic flights.
I fully realize that Asia doesn’t like criticism coming from the US — and especially doesn’t like criticism coming from a US that seems to be blaming others for its problems. The United States energy intensive economy — for example — isn’t Asia’s fault, even if competition with Asia for energy has increased the price of operating that energy intensive economy. The uS tax system also tends to encourage — for any given level of interest rates — investment in residential homes (b/c of the tax treatment of mortgage interest). The US government’s decision not move from a budget that basically balanced over the cycle (Clinton term 2) to one that has a 1.5-2% deficit over the cycle also is a purely US choice.
I used to work harder to show a high level of balance — i.e. balancing arguments that ASia was resisting adjustment by noting that the US government itself wasn’t adjusting.
But i think some things have changed — as discussed earlier, the US fiscal deficit has come down. Sure, it is partially cyclical, but in term one of the bush administration the first cyclical recovery in revenues prompted another round of tax cuts. And the Fed has moved away from its low interest rate post stock market bubble rates — US rates are now higher than rates in other big economies.
Partially as a result, the US economy has slowed relative to the rest of the world.
But the overall adjustment in the US external balance to date has been small. basically, the world economy tried combining Asian and US depreciation with a modest slowdown in the US. The result has been a rise in Asia’s surplus, not a fall in the US deficit.
And I do think the US
Put differently, bad service usually sells at a discount. But not for the US. Its competitors in some sense intervene to keep the price of US goods and services up.
That is where I strongly disagree with the Chinese argument that the RMB/ $ XR is their business alone. The RMB/ $ isn’t juts China’s exchange rate. It is also the United STates’ exchange rate.
That is legitimately a concern of the US. And right now China (and others) are intervening massively to hold the US exchange rate up …
here’s another attempt to widen out the argument. this debate suggests in manichaean for-us-or-against-us style that the global imbalances are either the fault of the u.s., or the fault of china. that gives us a choice of two versions of the story, either one of which versions is itself unbalanced.
the ancient egyptians had a concept of ma’at, perfect moral and physical balance, without which the universe would collapse into chaos.
correction of global imbalances might require some ma’at, equal and balanced measures from the parties with the greatest surpluses / deficits.
if egyptian religion is too far out for this topic - try some basic marriage counselling principles. first we gently persuade both parties to go easy on the blaming of the other for everything in the partnership not working out . . . . until we can do that we are going nowhere.
Brad, i think you’ve made a mistake calculating the impact of oil, it should be higher, urals is priced relative to brent and is at all time high, contrary to wti.
Besides we have not only oil exports but also metals, and a lot, which prices have skyrocketed in last years.
Not to mention gas exports by Gazprom, which are effectivly linked to oil.
Also we have speculative inflows in debt instruments, betting on continuing Rouble appreciation.
I think that the 8 billlion IPO of VTB + Yukos were also contributors.
Suppose some of the “acting responsibly” might include long-term strategic planning to avoid exporting high-value civilian production?
And what if, indeed, this involved tariffs?
The monetary and currency policies of the China PBoC are none of any other nations’ damn business.
That’s just preposterous.
If China was a US state, currency and balance of payments wouldn’t be issues. The main issue would be how rapid growth and industrialization in the “state” of China influences the optimal path of US monetary policy overall.
The positive supply shock from the “state” of China may keep goods and services prices in check, at least on the short term, but we’ve seen persistent and widespread liquidity driven increases in asset prices. This is almost certainly causing resource misallocations and mispricing of risk throughout Chinamerica, just as it would if the liquidity was chasing goods rather than assets.
It seems to me that the core problem is monetary policy in Chinamerica has been too loose. That China isn’t a US state just deflects thinking away from the core problem, and increases the risks and consequences of continued excess liquidity.
I’m sorry, Brad, for bring some news with a lot of noise that are off the topic, but I consider it’s important.
I know that the housing bubble in Spain is much bigger that in USA, and our CA deficit is much bigger than the worried USA’s.
But it’s important to clear some misinformation from “yellowish” media.
The main reason is that honest people like you make the “pale” the mainstream media (i.e. you leave all them in the trash, not being so polite). Thanks to the work of some brave bloggers, the mainstream media is loosing “leverage” and correcting their bias from time to time.
Thanks for your blog and your wise and polite answers, and above all to your hard work.
After reading the article on the telegraph by Ambrose Evans-Pritchard, I went to Banco de España (Spain Central Bank) to have a look to their statistics.
You get the data here:
http://www.bde.es/infoest/e0708.pdf
Here is total reserves data clip, by years:
01 38 865
02 38 431
03 21 229
04 14 505
05 Nov 14 694
Dec 14 601 7
06 Jan 14 970
Feb 15 005
Mar 15 377
Apr 15 255
May 14 910
Jun 14 605
Jul 14 918
Aug 14 915
Sep 14 972
Oct 14 809
Nov 14 750
Dec 14 685
07 Jan 14 893
Feb 14 800
Mar 14 045
Apr 13 232
What a surprise! The great depression of reserves happened from year 2002 to 2004. Do you remember the great president of Spain at the time? One with a mustache and talking in a worldwide fame english, who after meeting Bush in his ranch became famous for his U.S. accent while speaking spanish?
He was the spanish emperor of our time, called Jose MarÃa Aznar (the very shame of half Spain), who now gets meetings with Putin to get some advice to get the last blood of spanish energy groups’ wars. After being Georgetown university talking about morons…
After reading the data, I googled Ambrose Evans-Pritchard.
Here goes the info from wikipedia:
Ambrose Evans-Pritchard is an investigative reporter for the London Daily Telegraph.
During his time as the Telegraph’s Washington bureau chief, Evans-Pritchard became known for his stories about President Clinton, the 1993 death of Vincent Foster, and the 1995 Oklahoma City bombing. He is the author of The Secret Life of Bill Clinton (1997)
Humm! Things start to fit.
This investigative reporter could well have written about The Public Secret of George Bush or something alike.
If you watch to the data of the PDF of spanish central bank under monetary gold, you’ll see that he is just selling shit.
Don’t forget that spanish minister of economics since the 2004 government change was the european minister of economics. His new reforms, although lowering taxes (or maybe because of that), has make correct the Economic’s Forecast about Spain to the Economist. A very suspicious move from a socialist minister of economics (after Aznar emperor moves).
I’m not used to go to official statistics (this is Brad’s hard work), but internet makes us to share the same great and bad tools.
PS: I’d like to have Brad (or, as a second choice, his french friend. Sorry I forgot his name), spend a bit of time interpreting spanish economic data. But I know this is too much. Long life to this blog. It will be the best for a long time!
i’ll see if charles gottlieb wants to do a guest post!
re: Russia — the 06 CAS was around $110b i think, and that included very high oil in the summer/ lots of gas. imports have been trending up and not all the oil/ gas revenues goes to the state/ into the oil fund and even less of metals goes directly to the state, so i would guess $2b a week ($104b a year) is a bit on the high side even with super high brent/ urals off brent (didn’t know that — thanks). imports were clearly growing very strongly, so CAS is falling.
debt/ speculative inflows do seem to have picked up.
Matthew Kennel,
“The monetary and currency policies of the China PBoC are none of any other nations’ damn business.” - DC
That’s just preposterous.- MK
Dave C - Reply
The Chinese economy is the recipient of an extremely loose monetary regime under the Federal Reserve. Broad M-3 money supply growth is exploding at an annualized rate of 12 percent. Until I stop receiving an average of 3 credit card offers at zero percent interest in the mail each and every day, it is very hard to otherwise argue that money isn’t cheap. The US Economist community to date, has refused to acknowledge that the Federal Reserve bears primary responsibility for the numerous asset bubbles in the United States which has massively misallocated capital in the US Economy. Instead we are told an almost laughable narrative that the Chinese PBoC has somehow forced Americans to overconsume on gas-guzzler SUV’s and million dollar McMansions from coast to coast. The Chinese PBoC has been trying to mop up excess US dollar liquidity without any cooperation from irresponsible US monetary authorities. The loss of US global competitiveness from massive capital misallocation is certainly not the fault of the Chinese. Period.
Brad, I was using the term “we” since i’m a russian citizen:)
The finance ministry in Russia expects around 40B of inflows this year. Sberbank and VTB IPOs attracted something around 7-8 billion from abroad.
The inflows have an interesting pattern - equity managers underweight Russia and debt managers are mooving in, betting on rouble appreciation. This created an interesting situation were rates on quality corporate bonds are 6-8% in roubles with even official inflation above 10% last year, and this hold for several years already.
As for oil revenues - the state ownership in oil/gas is gradually increasing from around 20% before Yukos case to > 50% now, it will trend more in Norwegian direction, after the state will take control of Surgetneftegaz, Rusneft, and half of TNK PB (almost none doubts this here it’s just a question of time). By the way, some companies are increasing production, Lukoil posted good production numbers this week, but the incrases were likely ouside of Russia.
The metals are ofcourse largely out of state control and much lower taxed, but that’s also going to change, i believe. State owned rosneft and gazprom are heavily in debt and any meaningful increases in oil taxation is off the table. Mean while Russia has problem with pension fund and the task to rebuild infrastructure. Gas is another story but increases in taxes will be substituted with increases in local prices.
Nevertheless the country is flooded with cash right now, with M2 posting 50+% annual gains in USD. Property prices went throw the roof last year, as well as the stockmarket, but the valuations here are not high, so i expect another chineese-style rally to start soon, for now the market is being depressed with political news.
That’s it for the local color:)
And surprisingly - few signs of dutch disease, industrial production was up 8,4% YoY in first quater 2007, though imports are insreasing rapidly.
Brad,
The global trading system wouldn’t work if everyone kept their least competitive, but job-intensive, sectors in business through exchange rate intervention.
The Japanese have used exchange rate intervention, along with every other form of protection known to man, to keep their agricultural sector in business for maybe 50 years now.
I am bewildered by how the trade theme du jour is China China China, when Japan with 15% of the Chinese population has roughly equivalent Foreign Exchange Reserves and Current Account Surplus, and is keeping the Yen from appreciating at all against the US Dollar rather than just the ‘not fast enough’ appreciation of the RMB.
ozajh
koteli, you are right about big oil, but that’s what was one of the reasons for Iraq war.
If saudi arabia is really in decline, as those peak oil theorists tell us, then the only easy oil left is Iraq and Iran. Btw, Britain turned to be net importer of oil this year…
Hussein granted drilling right to Russian and Chineese companies. The new puppet goverment gas already transfered those rights to big oil. The only question left is that US and Britain might not be able to colonize Iraq.
If big oil gets Iraq it’s once again will be a decisive player for shure…
“I am bewildered by how the trade theme du jour is China China China, when Japan with 15% of the Chinese population has roughly equivalent Foreign Exchange Reserves and Current Account Surplus, and is keeping the Yen from appreciating at all against the US Dollar rather than just the ‘not fast enough’ appreciation of the RMB.” - ozajh
It is simple. In the words of Defense Secretary Donald Rumsfeld, the Chinese are considered “a strategic threat to the United States”, whereas Japan is a strategic ally since they host numerous US military bases with operational expenses paid by the Japanese taxpayer. Wall Street Hedge Funds also heavily profit from the Japan yen carry trade. The narrow special economic interests are exclusively pandered to by the Washington elite. For better or worse, the Chinese attempt to manage their own collective futures without the advise of self-serving U.S. economist pundits. This is the primary reason the Chinese are repeatedly bashed in the United States without any justification.
Koteli,
I would not read too much into the decline in Spanish foreign exchange reserves - the Daily Telegraph (aka “Torygraph”) is a relatively conservative, eurosceptic newspaper. In fact, a better question might be why some of the other EMU countries have not reduced their national reserves.
Since foreign exchange intervention is one the principal reasons for holding reserves, and in EMU this becomes the responsibility of the ECB, EMU members ought to have reduced their reduced their national reserves since its inception. Running down reserves would make even more sense for Spain if its reserves were to some extent borrowed, such as through fx swaps. Moreover, given that Spain’s participation in EMU seems set to be increasingly painful, acquiring foreign exchange reserves now might send an even worse signal - that Spain was making contingency preparations to leave! Anyway, the proceeds of the reserves sold are presumably being used to reduce government borrowing, and if much of EMU remains buoyant as Spain slumps so that monetary policy does not respond, it will be useful to the Spanish government to have room for fiscal easing.
As for selling gold in particular, that is not unreasonable, given that gold pays practically no interest and its price has gone up so much in recent years. Other EMU members - eg the Netherlands - sold a lot of gold at much lower prices than prevail now.
flipper — thanks. interesting. didn’t realize m2 growth in russia was so strong. real int. rates are very negative and money growth is very strong in all the oil exporters tho — tis a general trend. real appreciaiton is coming from higher inflation; presumably that happens with russia too.
your numbers on the yukos related inflows are helpful as well — they clearly cannot account for all the recent acceleration in capital flows into russia.
I am sympathetic to a Japanese or Korean style solution to china’s desire to protect its peasants from foreign competition. Let the XR appreciate (Japan and Korea did allow real appreciation for a very long time, that is what brought Japanese/ Korean pay up to US/ European levels — with some of the initial real appreciation coming from higher inflation than in the us not nominal appreciation), and keep the domestic price of rice up with tariffs.
Sure, it generates some inefficiencies — but it basically is a transfer from urban china to rural china (social policy) conducted through trade policy (a tariff that raises the itnernal price of rice). and i think it generates fewer global distortions than an exchange rate set at a level that keeps rural China competitive.
I am not very doctrinaire on this — I expect China to eventually join Switzerland, Norway, Sweden, Korea and Japan (along with Europe) in protecting its smallish farmers and effectively trying to create an internal terms of trade that slows the out-migration from the countryside.
Not to forget US farm support, Brad. The US was at least half responsible for the stalemate of the Doha round, and being in a similar climatic zone to China, subsidises production of many of the crops grown by Chinese peasants - eg wheat, rice, cotton, corn etc.
I am sympathetic to a Japanese or Korean style solution to china’s desire to protect its peasants from foreign competition.
I’m not sure what you’re talking about here. China’s labor force is very competitive even on a PPP-adjusted basis.
I don’t buy the notion that RMB is undervalued, but then exchange rate imbalances are not sustainable anyway. Whether the rebalancing occurs by nominal revaluation or inflationary tendencies is immaterial.