$136 billion here, $131b there and pretty soon you are talking about real money …
China announced that it added $130.6b to its reserves in the second quarter, only a bit smaller than the $135.7b it added in the first quarter. Most of the increase was real: if China had 5% of its portfolio in yen and 20-25% in euros and pounds, valuation gains only explain $2b of the increase; if China had fewer yen and more euros and pounds, valuation changes could account for maybe $5b of the $130b increase.
Combine strong q1 and q2 reserve growth with China's tendency to run a larger current account surplus in the second half of the year and Stephen Green's forecast that China will add $500b — if not a bit more — to its reserves this year looks pretty good.
Some of the growth in China's reserves in both q1 and q2 likely comes from the unwinding of some long-term swaps the PBoC did with Central Huijin as part of the bank recapitalization. Basically, some of the reserves that disappeared from the PBoC's balance sheet in 2003 and 2005 are returning. Logan Wright (Survived Sars) estimates that this explains $10-15b of reserve growth per quarter.
The unwinding of some short-term swaps and the repatriation of offshore bank IPO proceeds have also contributed to the very strong pace of reserve growth. Chinese residents bought about over $100b in foreign debt in 2006, and, as Denise Yam and Qing Wang note, this flow came from state institutions and likely came from state institutions playing with funds borrowed from the PBoC. Some of those loans — structured as swaps — may not have been rolled over.
Consequently the pace of China's foreign asset growth — properly defined — hasn't really doubled from 2006. But it has picked up. And it has reached truly unprecedented levels.
I doubt this quarters' data will change the minds of those who are convinced that the RMB isn't really undervalued. However, it should by now be clear that the current RMB -dollar exchange rate isn't a market outcome either.
Many are convinced that changes in the RMB/ $ won't have much of an impact on trade flows — not in the short or the long-term. But it now seems pretty clear — at least to me — that so long RMB's real value isn't allowed to change (yes, the RMB has appreciated against the dollar, but the dollar has depreciated against most other currencies) the best forecast is more of the same.
Here are a few things to mull over:
1/ China’s current account surplus, on current export and import growth trends, looks set to rise to around $370b in 2007 – up from $70b in 2004. It is rising by about $100b a year. Barring a change in Chinese policy, a recovery in the dollar that allows China’s currency to appreciate in real terms in the absence of a change in policy or a major "safety" induced backlash against Chinese products, it isn’t obvious that this will change. I used to think that China’s export growth would have to slow as the base got larger. But that is no longer obvious to me. China’s export growth actually accelerated at the end of 2006, after seeming to slow for a while. Unit labor costs in China are still falling; wages haven’t kept up with productivity growth. China is getting more cost competitive, not less — especially in Europe. And it is moving into new industries, like car parts and increasingly cars.
2/ Net exports contributed over 2% to China’s GDP growth in 2005, in 2006 and so far in 2007. Indeed, the World Bank estimates that they contributed over 3% to China’s GDP growth in the second half of 2006 and in q1 2007 (see Figure 1 in the World Bank quarterly). One influential magazine — the same one that doesn't think the RMB is undervalued — also doesn’t think exports have contributed all that much to China’s growth. But if had net exports contributed as much to US GDP growth over the past two and a half years as they contributed to Chinese GDP growth, the US wouldn’t have a trade deficit.
3/ Chinese reserve growth over the past four quarters is close to $400b. I usually do a lot of fancy adjustments to the data to account for swaps with the banks and similar things, but my adjustments for the second half of 2006 (when reserves were shifted to the state banks through swaps) basically offset my adjustments for the first half of 2007 (when various swaps were unwound). To keep a 70-75% dollar share in its portfolio over this period, China would have needed to buy close to $300b in US debt. To hold the share of U.S. Treasuries and Agencies in its portfolio constant, it would have needed to buy roughly $225b of US debt over this period. Because the US “flow” data tends to understate Chinese purchases (and overstate UK purchases) the full extent of Chinese financing of the US won’t become apparent until the survey data for mid-2007 is released next spring. If the trend of the first two months of q2 holds for June, the TIC data will only show $21b of net Chinese purchases of US assets in q2 — less than 20% of its reserve growth. That is way too low.
Even so, total recorded Chinese holdings of US debt in the data now are close to $855b, and China's real holdings are likely close to $1 trillion. Remember the TIC data has understated Chinese purchases for close to $90b for each of the last two years, and Chinese reserve growth was far stronger over the last four quarters than it was from mid-2004 to mid-2005 or mid-2005 to mid-2006. The annual revisions show up clearly in the following graph.
4/ If China’s currency is undervalued by between 25% and 50% against a basket of euros and dollars (and right now, it is probably more undervalued against the euro than against the dollar), China’s taxpayers are subsidizing – through China’s central bank – Chinese exporters, American and European consumers and the American financial system costs Chinese taxpayers between $100b and $200b over the past year – or between 3% and 6% of Chinese GDP. China’s subsidy of US consumption and the US financial sector – assuming $300b in Chinese purchases of US debt with an expected loss of between 25% and 50% — is between $75 and $150b, or between 0.6% and 1.2% of US GDP. That kind of subsidy is certainly influencing the composition of US output – favoring those sectors that generate the debt that is sold to China while penalizing those sectors that produce goods that compete with China – as well as the composition of US employment.
5/ Those who defend China's current exchange rate policies are essentially defending a world where China's government — whether SAFE, the CIC, or banks conducting "policy-led capital outflows" –will control a substantial share of the world's total savings, one where China's government will be the largest single player in the fx market, the US bond market and potentially the equity market. I don't see any particularly strong reason to think that China's foreign asset growth will fall from its current level of around $500b unless something changes.
6/ China has been far more successful at keeping its rapid reserve growth from spilling over into rapid money growth – and the kind of inflation that say the Gulf is experiencing – that I ever expected. The 2004 paper I wrote with Nouriel clearly underestimated China’s capacity for sterilization. But there are now signs that China’s rapid money growth – and rapid asset price inflation — is starting to spill over into consumer price inflation.
7/ China has been able to limit inflationary pressures by increasing government savings – Jon Anderson reports that a large unspent fiscal surplus deposited at the central bank has been the primary vehicle for sterilizing China’s May and June reserve growth – and by restricting bank lending and forcing the banks to buy sterilization bills at low interest rates. Yu Yongding – a former member of China’s monetary policy committee – notes that such a policy has a cost: low yielding sterilization bills account for a larger and larger share of bank assets. The costs of sterilization have been held down by holding down bank profits – and holding down (heavily controlled) interest rates on deposits, and thus the real return on a lot of Chinese savings. There may be another cost as well: Dr. Yu thinks Chinese banks are also trying to offset the lack of income on their sterilization bill portfolio by taking more risks on their lending portfolio – including by lending for stock market speculation. Artificially low deposit rates also give firms an incentive to put their free cash into the stock market …
8/ Some still argue that if China’s capital controls were loosened, the RMB would fall. I am pretty sure we will never know. China isn’t about to lift its controls, stop intervening and see what happens. But we do know that China is continually tightening controls on inflows while loosening controls on outflows. The surrender requirement on export proceeds was recently dropped, for example. However, loosening controls on outflows doesn’t seem to have made much of a difference: right now, Chinese savers want appreciating RMB not depreciating dollars. Moreover, with a $350-400b current account surplus (on current trends) and $50b or so in net FDI inflows, there would need to be a $400-450b annual private capital outflow from China right now just to keep the RMB from rising. A 10% of GDP capital outflow (think $300b) would lead to a financial crisis in most emerging economies. In China, it wouldn’t be enough to prevent the RMB from rising in the absence of central bank intervention.
Many argue that China’s savings surplus – and thus its trade surplus – is structural. That seems to me to be an increasingly difficult argument to make. I can see a structural explanation for China’s comparatively high rate of household savings (though China’s household savings rate is no higher than India’s). But I have a hard time finding a structural explanation for the recent rise in Chinese savings – a rise that has to be large enough to cover a major increase in China’s savings (i.e. current account) surplus at a time when Chinese investment is rising strongly. I also find it hard to square “structural” explanations for China’s trade surplus with the enormous, ongoing changes in the structure of China’s trade. China used to run a surplus with the US that was largely offset by a deficit with the rest of Asia. Now it runs a large surplus with both the EU and the US, and its deficit with Asia – at least Asia ex Japan – is falling.
That, incidentally, is my critique of the latest BOE paper, which is being spun as evidence that yuan revaluation will cut into the rest of Asia's exports to China, and thus slow their growth — mitigating the overall impact of yuan revaluation. But the latest data points in the study seem to be 2003 and 2004 — which is just before the structure of Asia's trade with China started to change. The correlation between Chinese exports to the world and Asian exports to China started to change in 2005, as both the World Bank (see p. 9) and the IMF have noted. Chinese made parts have already displaced Asian-made parts in a lot of China's exports. The RMB isn't just undervalued against the dollar. It is also undervalued against much of the rest of Asia …
Federal Reserve “cheap money” monetary policy responsible for weak US Dollar and Global Imbalances
http://www.sirchartsalot.com/article.php?id=62
It’s not surprising, because since Bernanke took over the helm of the Federal Reserve, the growth rate of the US M3 money supply has expanded rapidly to a 13% annualized clip, just shy of a 30-year high, and up from 8% in March 2006. Much like the ECB, the Fed is expanding the M3 money supply to immunize the US economy and stock market from sharply higher prices of crude oil.
The rapid expansion of the US money supply has sent the US dollar to its lowest level in 26-years against the British pound, an 18-year low against the Australian dollar, a 30-year low against the Canadian dollar, and an all-time low against the Euro. So oil exporters are quick to dump the US dollar and convert into appreciating currencies after initially accepting payment in the greenback.
A weaker US dollar, double-digit growth of the money supply, and sharply higher oil and food prices is a prescription for higher inflation. Most folks would probably agree with that. According to the IMF, food prices are 23% higher around the globe than 18-months ago, largely due to stronger demand for agricultural commodities to make ethanol and other bio-fuel substitutes for crude oil.
Of course, Bernanke’s sleight of hand is backed up heavily doctored inflation statistics, conjured up by government apparatchniks. The mainstream media relays the inflation propaganda to the public, with a stamp of approval from Wall Street economists. But with a hyper inflating stock market in the background, savers in the US bond markets are the big losers from Bernanke’s money printing operations.
Arab oil exporters are paid in heavily inflated US dollars, which are losing their purchasing power against the Euro and British pound. Arab oil kingdoms are keeping a tight lid on the oil supply to buoy prices, to offset the Fed’s devaluation of the US currency. It’s a vicious cycle that doesn’t end, until Helicopter Ben tightens up on the money supply.
It is total BS that the Chinese are manipulating their currency for economic advantage. In fact, China ended a strict peg to the dollar in July 2005, and the yuan’s valuation based on a currency basket has significantly risen by 8.6 percent against the U.S. currency. Considering that most low value added, labor intensive industries live with razor thin profit margins of 3-5 percent or less, the revaluation of the yuan will severely damage the export competitiveness of Chinese textile manufacturers that employ millions of workers. Walmart and other US multinational corporations will do more of their shopping in Vietnam, India, Cambodia, and Pakistan to fill their store counters.
Gee Dave, or whoever you are that posts this stuff everywhere, don’t you realize that US M2 (which is an actualy statistic, as opposed to the M3 “data” available from the economic equivalent of the Drudge Report) is growing 3% p.a. less than the equivalent aggregate in Europe (and 1/3 of the Chinese equivalent)? If currency values were determined by money supply, the buck would be one of the stronger currencies going.
Yes, Chinese taxpayers subsidized the “shorts” I bougth yesterday for just 4,00€.
Does TIC data pick up PBOC treasury purchases in London or other centers outside the US? If not, how can it be a reliable indicator?
Even the 3 percent increase in M2 money supply by the Federal Reserve printing press represents a significant injection of “high powered fiat money”. High-power money injected into the banking system enables banks to create more bank money through multiple credit-recycling, lending repeatedly the same funds minus the amount of required bank reserves at each turn. For instance, at 10% reserve requirement, $12 billion of new high power money could generate in theory up to $120 billions of new bank money in the form of recycled bank loans from new deposits from borrowers. Currently, the irresponsible Federal Reserve maintains a less than a 1% reserve requirement permitting the M3 money supply to explode to a 13% annualized clip, just shy of a 30-year high.
guest - -the TIC is a reliable indicator of total foreign demand for us assets. it is not a reliable indicator of the split between official and private demand, or of the extent of Chinese/ Russian/ Gulf demand for us assets for the reason you mention. a lot of central bank/ sovereign wealth fund activity through london registers as the purchase of us securities by a private actor (who either then sells to a central bank or is acting as an agent of a central bank), and thus the TIC data tends to overstate private purchases and uk demand, while understating official purchases. it also had understated chinese demand by about $100b in the last two survey periods — see the jumps every june in chinese holdings in the graph i posted. that corresponds with the revisions to the tic data based on the annual survey, which does a better job of picking up chinese purchases.
I second macroman’s point as well.
DC — it is pretty hard to see any evidence that the 8.6% move in the rmb (and why by the way is the move in the rmb always reported as a cumulative move while other currencies data is reported annually?) is hurting chinese exporters, given that export growth has accelerated. moreover, as china moves into parts production — both electronic components and auto parts and the like — some low-end manufacturing shoudl move either inland or to another country. that is the price of success — as korea moved upmarket, others moved into textiles. c’est la vie, so to speak. yes, there is an adjustment problem, but the solution is stronger domestic demand growth in china — it is stunning that very strong overall growth in china hasn’t generated very strong job growth.
Brad,
Have you ever considered that foreign political pressure on the Chinese to significantly revalue the yuan currency is forcing their manufacturers to move upmarket into higher value added products? The Pearl River Delta is rapidly becoming too expensive for textile production, and clothing manufacturers moving inland into China are facing huge logistical problems with the Chinese railway network stretched to its absolute limits, and currently meeting only 60% of current freight demand. Moreover, China isn’t little South Korea with a 40 million population. In order to maintain political stability in a population of 1.6 billion people, the Chinese government needs to find 60-70 million new jobs every year including labor intensive textile jobs for low educated rural migrant workers. Sorry Brad, but globalization now means that China’s employment problems are the world’s employment problems. If the US has no reasonable answers to providing more jobs for the Chinese people, then leave any solutions to the Chinese government to solve; that means not interfering in the internal affairs of other sovereign nations.
You mean like determining the level of its exchange and interest rates through hegemonic domninance of erstwhile private sector markets?
Macroman,
With US Dollar hegemony and the Federal Reserve’s control over the cost of money, the US government is the biggest currency manipulator in world history. The Chinese government has a sovereign right to prevent Wall Street Hedge Funds in cahoots with certain US Treasury Department officials from turning the Chinese economy into an economic wasteland, like was done to the Indonesian economy in the 1997 Asian Economic Crisis. It is an open secret that Wall Street Hedge Funds with very close political connections to the Clinton-Rubin administration were involved in the speculative currency attacks on the Indonesian economy that resulted in 100 million people impoverished. To date, not a single penny of the 10 billion dollars in “blood profits” has been repatriated to the Indonesian people.
My understanding of M3 versus M2 (and even M1) is that the Fed does not control M3 directly. Thus, it cannot consciously expand M3 to immunize the US economy and stock market from higher oil prices, as guest said.
Indeed, statistics show, like Macroman said, that the Fed is increasing M2, M1, and currency in circulation at lower rates than most central banks. So where is this much talked about liquidity coming from? And with US M2 increasing so slowly, how is M3 rising so fast? What mechanism is at work causing this discrepancy? If anyone could explain this to me, bringing China into the picture, I would be grateful.
I always find it funny when conservatives say that all the foreign money flooding into the U.S. is because they see the U.S. as a ‘good investment opportunity.’ When in reality, most (if not all) of the U.S. Current Account deficit is being financed by foreign central banks, who are only interested in managing their currencies in order to facilitate trade.
Brad - Given your warnings, I’d think you should delete Guest on 2007-07-18 09:41:36 as it is not only double posted (see: Guest on 2007-07-18 08:36:13) but also by someone who appears to be continuing to use the guest moniker as at least one additional identity. See if you get a verifiable email protest from anyone when you delete it. You put a lot of work into your posts and too bad to see someone insist on breaking your limited rules. Afterall, ‘intelligent debate’ is part of the brand’s promise - yes? If you clamp down on what appears to be DC’s continued abuses, I might even develop my own ‘unique’ moniker.
Brad: Allow me to congratulate you on this particular post which is brilliant.
Just two comments:
A. “Those who defend China’s current exchange rate policies are essentially defending a world where China’s government — whether SAFE, the CIC, or banks conducting “policy-led capital outflows” –will control a substantial share of the world’s total savings, one where China’s government will be the largest single player in the fx market, the US bond market and potentially the equity market. I don’t see any particularly strong reason to think that China’s foreign asset growth will fall from its current level of around $500b unless something changes.”
Comment: If current policies continue, what then is the outlook for the world towards 2020 and beyond? Economic and financial strength cannot be separated from political and military strength. Is the globe moving towards a world dominated by China in most areas? I, for one, would regret such an outcome, as a multi polar world is more favorable to freedom, and effective checks and balances globally.
B. “A 10% of GDP capital outflow (think $300b) would lead to a financial crisis in most emerging economies. In China, it wouldn’t be enough to prevent the RMB from rising in the absence of central bank intervention”
Comment: Could be that China is moving to become the world’s financier, including financing to developing countries? If so, are IMF and World Bank destined to disappear completely as world class financiers?
JSP — China certainly could emerge as the financier for the rest of the emerging world, displacing the world bank, the imf and, don’t forget private markets! the imf was a source of emergency not regular financing, so it already is sort of out of business, at least until times change. and china is clearly already an alternative to both the World bank and bilateral aid for poor countries (especially poor countries with resources). But in some big macro sense, for the rest of the emerging world to start absorbing China’s surplus, they need to start runnign deficits –r ight now more chinese inflows into the rest of asia means more reserve growth in the rest of asia.
DC — China’s employment problem is fundamentally china’s problem. but when china decides to solve its employment problem by using the central bank to subsidize its export sector, it makes its problems the world’s problems in a whole different way. what I don’t understand is why you are so insistent that the best way for china to solve its employment problem is for it to subsidize us and european over-consumption (through its lending on generous terms to the us) rather than say subsidizing domestic chinese consumption? incidentally, china right now is setting not just its exchange rate, but also the united states exchange rate — the US wants a floating currency, but right now its currency doesn’t really float, not v. most of the emerging world and certainly not v. China. So china is limiting the United States own policy autonomy … China cannot set its exchange rate without setting someone else’s exchange rate too. that is why the imf was set up — in recognition that exchange rate choices are not purely domestic/ sovereign because they clearly spill over and affect others.
and dc, if the first guest post was yours, please claim it — otherwise, i will take it down as no effort was made to link the material to the content of my blog. i don’t mind occasional visitors posting as “guest”, especially if they have a need for anonymity b/c of their job. I don’t like it when regulars don’t identify themselves … no more tho on blog comment policing. back to the discussion.
Brad-
Do you have an estimate of how much the world’s central banks forex reserves increased in 2006 and what % of that went into dollars, euros, etc.?
Brad,
Even taking Devil advocate, the Federal Reserve itself estimates that foreign central bank financing has maybe lowered long term US interest rates by 1 percentage point. Does it make any difference? Whether credit card interest rates are 12 or 18 percent, Americans continue to spend with abandon on $600 iPhones and $50,000 Gas-guzzler Hummer SUV’s. Frankly most mainstream US Economists fail to recognize that the average American doesn’t have the slightest concept of personal financial management; why else would the typical US household carry an irrational $9000 in high interest credit card debt.
No one forces Americans to buy their Chinese manufactured products at Walmart or Target, but since those US dollars that originate from the Federal Reserve cannot be spent in the Chinese economy, the Chinese PBoC is forced to deposit those excess US dollars back into the US Banking system via the US Treasury.
cam — for 06, $825b in reserves growth (counting all SAMA foreign assets and including an estimate for reserves china shifted to the banks via swaps), with a bit under $600b doing to $, $175 going into euros and remainder going mostly into pounds and yen. the estimate is derived from the imf’s cofer data, but i fill in the gaps created by countries that do not report with some herculean assumptions …
DC — me thinks home prices are rather sensitive to the difference between a 5% ten year rate and a 6-6.5% ten year rate (in today’s ft, ken rogoff estimated foreign inflows are keeping us rates 150 bp below what they otherwise would be)
“And with US M2 increasing so slowly, how is M3 rising so fast?”
M1 isn’t growing, but M2 isn’t growing that slow:
http://federalreserve.gov/releases/h6/Current/
It is mostly in line with GDP. The difference is the increase in velocity and leverage. Much of the banking is now done directly (electronically) over saving accounts instead of cash and checking (which has reserve requirement). M3 would also include leverage through overseas banking.
Brad,
When the Housing ATM machine finally shuts down, we will have our global rebalancing. As Economist William Greider writes,”only an economic recession is guaranteed to reduce the US trade deficit”. Frankly, a recession is long overdue to cleanse the US Economy of malinvestment in real estate, as evidenced by the subprime mortgage fiasco. Fueling one asset bubble after another, the Federal Reserve’s lack of proper regulation of financial markets is responsible for serious misallocation of capital over the past several years. Economist Stephen Roach even labels the Federal Reserve as a “Serial Asset Bubble Blower”.
Trending out, I would guess that CNY appreciation will pick up a bit till end of 2008. One thing is that the SIC is going to buy USD, and its prospect improves if it buys the USD as cheaply as possible. Secondly the Olympics will see a surge of overseas visitors from overseas and raising the price of CNY beforehand makes sense. Combining the appreciation, cut in VAT rebates, repricing of resources and labor cost increases, strong domestic demand and higher inflation at home, and headwind in safety concerns, it will be very surprising if Chinese trade surplus could keep the same pace in 2nd half. But if it does moderate we can expect to spend the following years arguing what actually did the job.
“DC — me thinks home prices are rather sensitive to the difference between a 5% ten year rate and a 6-6.5% ten year rate (in today’s ft, ken rogoff estimated foreign inflows are keeping us rates 150 bp below what they otherwise would be)”
Written by bsetser on 2007-07-18 13:16:41
It was my understanding that China was not a big player in buying US 10-yr notes. Additionally, the Saudis, of late, have been sellers of said notes. If anything is keeping the 10-yr note rates down, it is the fear of a US economy running out of steam. Aren’t US buyers, by far, the biggest buyers of US 10-yr notes?
true, china hasn’t been a big recorded buyer of treasuries, at least based on the tic data (hell, based on the tic data, it was reducing its treaury holdings over the past two months) tho it may be buying through london, and overall central bank demand has shifted from treasuries toward agencies (see the frbny data — i had a graph based on that data that i posted not so long ago). i think that recently there has been a lot buying by folks nervous b/c of subprime — so in that sense i agree with the gist of the comment. but i would argue that there has been quite strong demand for treasuries from central banks until quite recently (if you look at the survey data and then extrapolate, you would assume some of the buildup in uk holdings in the tic series since last june are central banks in drag) and given various arbitrage conditions, big Chinese purchases of agencies and i think some of the higher quality “private” mbs have played a significant role holding overall us rates down.
the last “guest” comment was from yours truly, bsetser
Brad, Macro Man - It’s back to “squaring off” again with “steadfast” Dave Chiang!
I’m exhausted just trying to finish reading all “8″ items and I’m surprised you stopped at “8″ instead of “10″ items to finish off — BTW, “8″ is a very lucky number in Chinese’s money glossary (hurray for good fortunes coming from Brad to China).
Just want to jump in to the China discussion here before the day ends. My question is since US is the leader of the global pact, it should be able to take the first steps to: devalue the dollar ever more, reduce wages where it needs to be and restart its manufacturing base so as to compete globally, and enforce and stop illegal immigration.
Would like to add more later!
JSP - You should worry more about the environment due to over consumption of resources than about China who’s only looking after its interest like any developed, developing and emerging countries — I would worry more about Japan’s economic dominance and Middle East’s unrest.
Guest (or blank) — Quit complaining about who’s using your moniker and do Brad, yourself and all commenters a favor and take forthright action now — Please Change Your Moniker!!!
Brad - I think to not having China (its policy or not) in setting someone else’s exchange rate, is for US to either: order its US multi-nationl firms to stop over-producing and -using resources to sell plastic junk stuff to the world, thereby creating more “unwanted and limited” landfills to dig up and dump wastes, and stop all junk TV home shopping infomercials and new casinos springing up.
It’s very harmful to the environment and societies!
Is this really rational?
http://www.nytimes.com/2007/07/18/business/worldbusiness/19dollar.html?ref=business
“It is also reflected in the tourism statistics in France, Germany, Spain and other countries, which show that the number of Americans visiting Europe has increased this year, even as the value of the dollar has eroded.”
HZ - I hear you loud and clear!
That tells you how much American Consumers shop for values when it comes to charging their plastic (waste) credit cards when it comes to “there’s no tomorrow” irrational self-indulgence and how US expects developing countries like China to follow its craze.
Asian Man,
Is the relationship between China and the US symbiotic, co-dependent or parasite and host?
black swan - I would say all the above but I prefer to say mutual and cooperative simply because there’s only 1 planet Earth meaning we’re all brothers/sisters - “Earthlings” shazbah and naru naru!
So when can I expect black swan to turn into a beautiful “white swan” as in America Beautiful?
I don’t see what diffeence it makes if one proves that China is a currency manipulator. They obviously wnat the yuan appreciation in an orderly way, within a several years period. Right now, it is a 5%/year rate against tha USD. One can argue that it is not a real appreciation, because the USD is falling against other currencies, but
if it were the other way around, than they would say the opposit, that there is no appreciation against the USD. I think the rest of the world should be more patient, and give some time to the Chinese. It could be even worse: they could decide to depreciate the yuan aganinst the USD by 5% a year. What could the US do? China has recently shown what it can do: buy a little less US debt than you used to (you don’t even have to sell your bonds), and the interest on the bonds goes up, and Wall Street starts to worry. A country in debt to its neck (and increasing) does not have that many choiches. Even its wars are fianaced by China and others.
Brad says that the Chinese set not just the yuan’s rate but the dollar’s rate as well, and the US can not do anything agains it, even if it wants a different rate. Of course, the US could do something against it: cut back on consumption. It is one thing that China exports 103 billion dollar worth of goods in June. But there must be someone who buys all these goods. It is not that the rest of the world must buy everything the Chinese want to sell. If the Chinese exported 1000 billion dollar worth of goods in the next month, does that mean that every US customer must buy 10 times more of everything? I think the main problem is the overconsumption of the US. I just read the other day that in the US even the toilet paper usage per capita is twice as much as in other similarly highly developed countries.
Of course, overconsumption is not some evil thing that the US does. It is a natural consequence of the current economic system. When the 2/3rd of the GDP is given by personal consumption, and the GDP must increase all the time, then after some time you must overconsume to keep the GDP growing forever.
Asian Man/Ac
It would be as jingoistic for me to try to defend America’s consumption problem and foreign war problem as it would be for you to defend China’s rivers of sludge and its government’s actions in Tienamin Square.
The Chinese dollar peg, and thus de facto euro devalution, does give an interesting twitch to the looming ECB control battle. French (and Italians too at least) want Euro devalued, ECB defends its independence and inflation targeting backed by Germany. The further dollar drops and the corresponding trade deficit with China rises, better chances Sarko has to get ECB to devalue. What happens if ECB too starts pegging to dollar?
Maybe this is one more reason why China isn’t moving from the dollar peg, if they diversify to Euro thus driving it futher up, they risk a trade war with EU, thus potentially leading to lower imports to both USA and EU at the same time…
teme — you are right about the impact of the weak rmb (and yen) on european politics. but i think China could easily allow the rmb to appreciate against both the USD and the EUR, which would allow it to reduce the amount of both dollars and euros it needs to accumulate.
diversification is a bigger problem for Europe now — since by diversifying its holdings, china ends up driving the $ down v the euro, and also pushes the RMB down v the euro, making Chinese exports more competitive in europe.
Thanks for the reply Brad, the RMB fall v Euro effect of the dollar peg is very real. I’ve been following your blog for a while, and it is very worrying. I am not quite sure if that is a complement
Global economy could perhaps handle the adjustment even if it wasn’t orderly with minor disruption, but factoring in politicians in USA, Europe and China it could get really ugly.
Minor political thing btw, last year Russians basically shut down rail transportation from China to Europe by raising the fees way too much. Why Russians did this isn’t clear, probably not to themselves either, but they’ve dropped the prices since and the traffic is rebounding nicely. Probably had some effect on the composition of Chinese exports to Europe. Trans-Siberia isn’t fast, but it is still faster than a boat.