Definitive evidence the RMB is undervalued?
Chinese exports to India grew by 67.5% in the first three quarters of 2007. Bloomberg, last week:
"Exports to the U.S. rose 15.8 percent in the first nine months from a year earlier and those to Europe jumped 30.8 percent. Shipments to India soared 67.5 percent, the customs bureau said. "
It is kind of hard to argue that China will be running a trade surplus with India no matter what, because Chinese wages are so much lower than Indian wages. Or for that matter to argue that India — Indian households at least — run a big deficit because they won't save, no matter what. Louis Kuijs found that Indian households actually have more than Chinese households.
The impact of the RMB’s depreciation (yes, depreciation – the RMB hasn’t appreciated enough v the dollar to offset the dollar’s depreciation against many other currencies) on a host of other emerging economies has been an under-reported story.
Chinese growth has been a boon to resource exporters. But Chinese manufactured goods are undercutting South African and Brazilian and Indian goods, not just US goods ….
The work of Li Cui — often working together with Murtaza Syed — of the IMF shows that it is time to change another well-established narrative about China, namely that China is “just” an assembler of imported parts.
That used to be true. But it isn’t anymore. Cui:
Rapidly growing foreign trade has been key to China's remarkable economic performance of the past three decades, yet the conventional view is that China's growth has been largely domestically driven. According to this view, China uses its abundant labor to assemble imported inputs into low-tech consumer goods and capital goods exports, making it the world's workshop. Such processing trade typically adds little value to the domestic economy because the import content of exports is high. As a result, the argument goes, changes in global demand or in the exchange rate will have little direct impact on the economy's trade balance or growth—any change in exports will be largely offset by changes in imports.
But such a reading of China's economy does not reflect current realities. Although it may have described the Chinese economy in the early stages of reform, when China lacked domestic technological know-how and had to rely on imported intermediate products and capital goods for its production and exports (see Lemoine and Ünal-Kesenci, 2002), a recent IMF study suggests that it may have become less accurate in recent years (Cui and Syed, 2007). The domestic content of China's exports has increased and its products have become more sophisticated, in part because of substantial investments and technological upgrades that have expanded the economy's production capacity.
… the conventional view of China's main role in international trade as an assembly center is not as good a fit as it once was … [Emphasis added]
Cui estimates that the "domestic" value-added of China's exports is now close to 40%.
He also argues that China increasingly is producing capital-intensive goods that compete with the goods produced in the US and Europe, not labor-intensive goods that compete with the goods produced in other low-wage Asian economies. Li Cui:
Exports of capital goods and parts and components have increased markedly, accounting for more than 40 percent of total exports, compared with 10–15 percent a decade ago ….. Such a shift points to the changing trade and production structure in China toward more capital-intensive and technologically advanced products.
Call it a consequence of China's savings glut, and the resulting low cost of capital. Also call it strange. China still has a huge resevoir of low-wage labor in its countryside.
One last point. There is strong evidence that Chinese parts started to displace imported components in early 2005. That is when Chinese imports stopped growing in line with Chinese exports. It is also when China’s trade surplus really started to get big.
That is why I am deeply skeptical of studies that draw strong conclusions about how China’s rise has affected the rest of the world based on data sets that end in 2005. In 2004, China exported $590b worth of goods and imported $560b. By the end of 2007, China will export about $1220b worth of goods, and import maybe $950b. Data sets that end in 2004 miss this change. Data sets that end in 2005 only pick up the beginning of this shift. And it literally is a huge shift.
You hit the nail on the head when you mentioned “low cost of capital”. As they say all macroeconomic discussions end up in naive sociology: the obvious cause of the Chinese dichotomy is that without a democratic system, there is simply not enough pressure to share with the populace the benefit in productivity gains and to check the externalities as manifested in environmental degradations.
But surplus with India shouldn’t be too surprising by itself. While India has a world class service outsourcing sector and a few world class manufacturers, its overall manufacturing is woefully inefficient and simply couldn’t compete with low cost Chinese manufacturing without stiff tariff/quota protection, at least in the short term.
Perhaps also under-reported is that China’s high elasticity of exports to US dollar depreciation poses an additional threat to US current account rebalancing that might otherwise proceed with such depreciation.
“…In the year 2004,China received applications from 86 countries and regions, for 1 of which it was the first time to file applications in China. The newcomer was Cameroon. The top ten countries in terms of the number of patent applications were Japan, USA, the Republic of Korea, Germany, Netherlands, France, Switzerland, United Kingdom, Italy and Sweden…” http://www.sipo.gov.cn/sipo_English/laws/annualreports/ndbg2004/200509/t20050902_53476.htm
4 June 2007 – “According to the …[WIPO] the number of international patent applications from Japan, Republic of Korea, and China, has risen by 162%, 200% and 212%, respectively, since 2000… The top five patent filers remain the United States, Japan, Germany, France and the United Kingdom…” http://www.euractiv.com/en/innovation/china-patent-applications-212-2000/article-152281
The resulting global economic imbalances are directly a result of the conscious decision to significantly devalue the US dollar with a lax monetary policy regime. A “sound money” policy would have prevented the Housing Bubble that has massively misallocated capital from high-technology investment into conspicuous consumption of McMansions. Led by the US Federal Reserve, Western regulators have ignored warning signs of financial excesses and fraudulent accounting practices. Western banks have used exotic off-the-books “SIV conduits” to buy and sell dubious mortgage products. Western rating agencies have graded low quality subprime securities with prime AAA ratings. Now the whole world is suffering from US excesses, and the Chinese are scapegoated for these economic problems. Failing to properly regulate financial markets, now the same US Treasury officials demand the China PBoC revaluate their currency in the same fashion as the disastrous Plaza Accord that left the Japanese economy mired in recession for a decade. The Crux of the global financial imbalances are found in the lax financial oversight and undisciplined money printing practices by Washington, not Beijing.
I wonder if, with tighter monetary policy, the US might have engineered a real depreciation in spite of the fixed peg to the renminbi, as Germany has so successfully done versus its less disciplined southern European competitors like Italy. No doubt some will say that US inflation was too low to allow this, but inflation having been Boskined down, the US probably needs to run a low published inflation rate to avoid losing competitiveness.
The analysis that Chinese value add is 40 percent is DEAD ON and likely growing higher by the day. Large capital investment, technology transfer and the skills learned from making millions of things will keep the Chinese going up the value curve.
The US, Europe and even the emerging market countries are in for a continued rude awakening. Clear industrial policies and visions are needed so that protectionist tariffs don’t appear. Europe should be the leading indicator of what could happen in the US and other countries faced with the continuing Made in China phenomenon.
An appreciating RMB at this point might only slow the Chinese machine down while causing inflation in the countries wishing this was so. Few other places could quickly establish such a capacity for assembly and indeed now INNOVATION; or at least continued improvement.
“…The intangible asset business tax is generally fixed at the rate of 20%. Under some circumstances, however, an interest party may apply for a tax exemption. For example, the favoured rate for an interest party from a country with which China has concluded a bilateral agreement on a favoured tax rate is as low as about 10% or less. In respect of the earnings made by a foreign enterprise or person transferring a technology to China, China may exempt such foreign enterprise or person from pay the business tax… Upon examination and approval of the application, it or he [what about 'she'?] may be exempted from the business tax relating to the part of the technology transfer fee (with the exception to that relating to a trade mark). After the taxation procedure, royalties may be paid to a foreign country or region according to the relevant Chinese regulation for the administration of foreign exchange [??]…” http://www.managingip.com/Article.aspx?ArticleID=1321717
Does Ireland still offer “…one of the most beneficial corporate tax environments in the world…” http://www.finfacts.com/irelandbusinessnews/publish/article_10003995.shtml
A super-duper bad-loan bailout scam
Call it Super SIV Mae. Wall Street’s pals in the Treasury Department want to ride to the rescue with a new entity of entitlement, the ’structured investment vehicle.’
By Bill Fleckenstein
http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/ASuperDuperBadLoanBailoutPlan.aspx
This week I have another entity of entitlement to add to the list: “SIV Mae” (SIV = structured investment vehicle). That seems a fitting description of the super-duper bailout put together by the Goldman Sachs (GS, news, msgs) subsidiary known as the U.S. Treasury Department.
Wall Street, the Treasury Department and the Bank of England appear determined to do whatever it takes so that we have absolutely no price discovery on any mortgage-related assets that may have gone bad — thereby giving a pass to the folks who’ve made obscene amounts of money conceiving and marketing them. Whether you call this crony capitalism or socialism, the worst of it is what we have become.
To quote a knowledgeable friend of a friend: “How anyone can look at the creation of this fund as anything other than a cynical way of moving an existing pile of crap from one place to another is beyond me. The fact that no one seems to think there is anything wrong with it (and I include the regulators) tells you just how ‘fixed’ the markets’ problems are.
“The level of terror that must exist in the boardrooms of the banks and regulators that peered into Pandora’s box this summer must be extreme. They set up the conduits to skirt balance-sheet constraints, and investors realized they were getting paid no-risk premium to buy the paper and fled.
Country A has 3 patents, Country B has 5000 patents, Country A increases it´s “innovation” by 6 patents, Country B by 2000 patents … Country A is more innovative since it has increased it´s amount of patent by 200% and Country B only but 40% … LOL! … Did you get it?
From Asia Times Online,
http://www.atimes.com/atimes/Global_Economy/IJ20Dj01.html
For years now, the G8 nations have focused unnecessary energy on getting Asian countries to float their currencies, whilst ignoring their own responsibilities to balance budgets and reduce dependence on their savings. The arbiters of quality in the bond markets, the rating agencies, were allowed to flourish as corrupt business entities without any oversight whatsoever. Meanwhile, as your citizens splurged on a borrowing binge all of you looked on like proud hippie parents witnessing their kids absorbing their first drug hits. The crisis is of course entirely of your own making.
The Western central banks have fallen into the trap of unleashing liquidity on an unsuspecting population, who gobble up cheap financing without realizing the inflation sting that lies ahead. Citizens in other countries have smartened to the moral bankruptcy of your central bankers, and taken to purchasing billions of dollars worth of gold, oil and other real assets.
Then there is the ham-handed attempt by the three largest US banks to put together a rescue fund for the SIV (structured investment vehicles) sector. Among all the ideas that involved good money chasing bad, this one takes the cake. To think that none other than the US Treasury Secretary Hank Paulson chaired this effort leaves the rest of us with an astoundingly bad taste in the mouth – forgive me for being impertinent, but aren’t you guys supposed to be the policemen rather than the thieves?
Selling off bits and pieces has begun and it isn’t just paper:
http://news.yahoo.com/s/ap/20071022/ap_on_bi_ge/bear_stearns_partnership;_ylt=AkEixpIkYdD9bGeD4J4GoKuyBhIF
Well even Greenspan agrees with you, DC, with regard to the super-SIV, a very bad bad idea. US seems to be aping the Japanese solution of holding on to the waste hoping it will magically vanish somehow.
Why don’t we hear more about the consequences of these deals? “The world’s biggest finance company Citigroup has signed an agreement with China’s Huarong Asset Management Corporation, according to which it will acquire China’s NPL assets worth 36.4 billion yuan, making the deal the largest one in acquiring bad assets… “To speed up reform of the financial system, China must dispose of the huge amount of bad assets of the state-owned commercial banks as soon as possible, so that they can go public after the joint-stock reform is completed…” http://english.peopledaily.com.cn/200511/29/eng20051129_224447.html
Brad – if you want to be seen as a CFR person, why not move your blog to the CFR site? wouldn’t it better enable you to get on with new perspectives that are pertinent to your work there, perhaps along with past, current and potential participants who want to move on from the same ol’ same ol’
as a general principle – to locate blame elswhere is to disempower oneself. to blame oneself – even mistakenly – means that it is more likely that you will take action against ‘a sea of troubles’.
so to continue blaming china is disempowering, whether justified or not. to blame china noisily, furthermore, risks being counter productive. it tends to polarise the other side into arselickers and hardliners, which does not help, either.
look at the euro – a peg not between two currencies but a number of currencies. we do not hear spain wingeing about germany. not yet, anyway . . .
in what order will the bubbles burst ? now there is a potentially profitable topic for discussion.
Enron Accounting at Citicorp
http://www.safehaven.com/article-8657.htm
Changes enacted after Enron Corp.’s collapse were supposed to prevent companies from burying risks in off-balance-sheet vehicles. One lesson of Enron was that the idea that companies could make profits without taking any risk proved to be as ridiculous as it sounds. Regulators made a great show of slamming closed that loophole. But as the current situation makes clear, they not only didn’t close it all the way, but the new rules in some ways made it even harder for investors to figure out what was going on.
SIVs, along with vehicles called conduits, don’t get recorded on banks’ books because regulators and accounting-rule makers gave banks a pass when crafting post-Enron rule changes meant to curtail off-balance-sheet activity. The latest master liquidity enhancement conduit (M-LEC) proposal is every bit the cover-up that was happening in the latter stages at Enron. The worst aspect of this bailout is that it is sponsored by the Treasury.
Citigroup, for example, has nearly $160 billion in SIVs and conduits, but its shareholders wouldn’t get a clear view of this from reading the bank’s balance sheet. Instead, footnotes only disclose that the bank provides “liquidity facilities” to conduits that had, as of June 30, $77 billion in assets and liabilities.
Citigroup Net tangible assets as of June 30 2007 are $65.5 billion. That’s kind of interesting isn’t it? Citigroup has $65.5 billion in net tangible assets but $160 billion invested in off balance sheet SIVs and conduits. If a fire sale of those SIVs and conduits resulted in a 25% loss, Citigroup would have net tangible assets of $25.5 billion. If a fire sale of SIVs and conduits resulted in a 41% loss in those SIVs and conduits, Citigroup would have zero net tangible assets.
Does Paulson, the Fed, or Citigroup want to find out what those assets are worth? Of course not. That is the reason for a Don’t Ask – Don’t Sell policy and official approval of Enron Style Accounting by Paulson.
I can pull this thread back to China’s amazing transforming transformation: that reduction in US imports from China –is that also a shift to more tooling and less toys?
Is the shift to “value-added” also wearing on the European (and Japanese?) export machines? How do we separate out the US (if any) segment in these co-ventures that are making this impact on world trade patterns? The improvement in the US trade picture –is that because not only are American consumers buying less “value-subtracted” (junk), but also because China is importing more US tooling? Can we have a trans national picture here please?
AFFG, patent = protectionism = anti-free-trade
Plus recent work show patent is a disincentive to innovation in many sectors of the economy (think business method patents).
Counting patents to measure “innovation” is just a joke (see recent IBM patents). Patent just measure the degree of parasitism of laywers and political clout of big corporations not wanting competition in the economy.
Hopefully, the patent system will go down immediately when China/India/Brazil will start to assert patents against the USA (revealing the true nature of the system if it was needed). BTW China started to use patents against foreign company operating in China.
Thumbs up Laurent!
Thanks to Indian laws, lots of africans are surviving AIDS.
Those USamericans would patent a cigar-rolling method, just to avoid cuban tobacco distribution under their international law, and lawyers army, if they could!
Gillies,
I’m afraid that nobody wants to take your argument, because you hit the nail on the head, and they haven’t any solution (RMB up-ing apart).
2fish could have an answer, but he keeps silent. So is Brad.
Maybe, they are used to analyze the world economy from power positions, or knowledge-power positions.
Maybe, they don’t accept that an unfair political situation could destroy their economics and knowledge positions.
An american corporations-convenience dictatorship, destroying the democratic USA doesn’t mach. But what’s happening?
In the end, don’t they have some hole in their support of multinational corporations, or some naiveness in free trade, now that someone is becoming getting bigger than them?
In Europe, we have the great example of Germany, a country that assimilated eastern Germany at the same time it was supporting and giving lots os money to countries like Spain, Greece and Portugal, after a hangover of eating 18 million people in their economy.
If the Germans are the third exporting nation in the world, after China and Japan, after assimilating East Germany and financing Spain, Portugal And Greece infrastructures, what’s happening to “The Greatest Nation of the World”?
Peg-s or bubbles, some policy answer is needed, not only in economics or macroeconomics.
As you said, more or less a month ago, to bring the 1.3 billion Chinese people to west economy, will have very big consequences and hangovers in West economies. You don’t need to be Brad, to understand that.
That’s the core of the matter they don’t dare to defy, with climate-change, with peak-oil, overpopulation, lack of water, of soil and so on.
It’s a pity.
There is a need for China to start “export tax” – urgently, for the good of China. It should start from agriculture, from bi-lateral dicussions with Korea, Japan, – fast -, then expanding to poluting, energy intensive industries with all major trading partners, taking indutries’ opinion into considerations, with the acrued tax money used to address “social harmony”.
After China does this, the resulting global industry evolution will still happen, just a bit slower, hence less pain.
The big picture is not just China or trade imbalances – it is the global supply chain.
The sub-groups of the global supply chain – North America, West Europe and East Asia move at a glacier pace, but the movement is unmistakably clear. Eventually, East asia will dominate. Within East Asia, China will dominate – barring a catstropic global event, like a global nuclear war. There is a gloden rule in East Asian industrial expert circle: ” Once China learned how to do something, nobody can compete against her on price”.
The North American and West European supply chains are structured tree-like, gravitate toward their high-tech nerve centers, the East Asia supply chain – Japan, Korea, Taiwan, China and likely Vietnam to be included in 5 years, is structured like a giant color plate ( China ), the high-tech centers only provides spices and flavors, which implies a shortened Darwinian cycle – a business model that is, by fate, slim, mean and sometimes brutal. Aided by sea transport, it is geography that pre-ordained East Asia and China in our globalized world.
The EU and the US draw all the attentions, but it is the small countries neighboring China that are forced into impossible choices right now. Burma’s tragedy is one example. Even without the stupid military leadership and the nasty oppositions that show zero ethnic toleranc among them, without the US and the EU market access and competes against China head-on ……Burma – to a less extent, many other similar countries – needs to ask China sincerely, “Please assist and advise how to proceed …” …. This is a cruel world indeed.
brad, i fear koteli is right. we who live outside the united states and beyond a diet of u s mainstream media, have a freedom to think that has become ‘prozacked’ in your own country.
the question – ‘why doesn’t china do something ?’ is an evasion of a debate that needs to take place in the united states, as to whether globalisation is to be taken ‘all the way’ until chinese wages and those of the developed nations are equalised – or is the current bout of globalisation to be brought to a close in competitive devaluations, new protectionisms, and nationalism fed by phoney threats from pygmy enemies ?
the debate in the u s should be out in the open in an election period, where is it going on ? is democracy too important to be left to the people ?
.
Hi Behttp://tw.netsh.com/eden/blog/ctl_eden_blog.php?iBlogID=2632783“>st wishes。Allow me to offer my heartiest wishes. The best of luck! Best wishes! Best regards!
Just because someone doesn’t‘t love you the way you want them to, doesn’t‘t mean
they don‘t love you with all they have.
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Gillies,
I do not think there is any choice but to go all the way. The question is, to what level. China’s relative rise depends mainly on them, not us. As the British found in the 1960s and 70s, protectionism does not help, because you cannot protect third country markets such as the commodity producing nations. Protectionism just damages global prosperity.
Rebel,
I’m afraid that big enterprises in the west will go on, not just only outsourcing, but up-ing the price of everything (bread, milk, eggs, energy, etc) until they realize that the consumer is dead, and their business model goes down.
The talk about core-inflation and liquidity is no-sense.
They are corrupt and so will be until the chicken has no eggs.
Today I heard to W. Bush to say “Viva Cuba Libre”.
I don’t know if he was referring to a Coca-Cola with Havana-Club, or was making a joke about freedom!
USA has made very clear decisions about weak countries, but where is their power in front of China?
The enemy is among them, much more clearly than Cuban intelligence has been inside CIA all the time.
The difference is that Cubans inside CIA were pro-Cuba, and US businessmen in USA are pro-China.
Chinese products are flooding Europe, but prices are going up not down. At least in Spain.
Spanish corporations, Zara, Corte Ingles, Cortefiel…, the distribute very Chinese products in european prices (50 TO 80% profit). But ordinary shops, with several good firms, are dying . But the prices are just a bit lower, just enough to kill them.
I don’t think that protectionism will resolve it, but you’d have some alternatives if you dare to defy corporations.
As a Mac user, do you think that Apple, who yesterday surpassed IBM and Intel in market capitalization, would be theere wihout China? What keeps the Dow Jones more or less up? The real economy? For who?
I’m pleased that mac-s are now as cheap as pc-s, but I prefer to keep my job.
Best Regards, and really like your comments.
koteli
Gillies — interesting comments, as usual.
“so to continue blaming china is disempowering, whether justified or not. to blame china noisily, furthermore, risks being counter productive.”
The first point seems to me to be true. I tend to think it is fair to blame china for maintaining its dollar peg even tho this has meant a big increase in uts current account surplus — a surplus that has to be absorbed elsewhere. but it is — at noted — disempowering. “Empowerment” though means threatening to cut off trade flows (or limit investment flows)absent a change in Chinese policy; the US (Europe) cannot prevent china from buying $. It can tax Chinese imports (tho not without violating trade commitments) or restrict the kinds of assets China can buy.
I honestly would be a bit happier if I could easily point to US policies (beyond the absence of an energy policy, as noted earlier) for the us deficit, b/c that is empowering. you can change your own policies. but the second w term hasn’t produced the kind of fiscal deficits of the first term, so it is hard to make that argument with a lot of vigor. and over the past couple of years, the us hasn’t had a particularly loose monetary policy (despite DC’s arguments, which fit 02-04 better than 05 to mid 07) either. US policy rates have generally been higher than the policy rates in the other major economies (Aussie and New Zealand are the exception, but only australia is a major, and only just …).
So my analyical work — here i would particularly note the rise in china’s surplus with europe and china’s decision to effectively lend the proceeds to the US — has led me to the conclusion that chinese policy matters, and that it determines the global equilibrium as much as the US. that is an uncomfortable argument for me. Us policy is easier to change than chinese policy
obviously, the us could respond to a chinese policy that has led china to be a far bigger source of global supply than global demand by restricting through policy its own demand growth. but that is a rather harsh thing to do — and something that “hits” the us more than it “hits” China. Things targetted at China are unattractive on other grounds, so the world is left more less waiting for the internal contradictions in chinese policy to work themselves out (and for the party congress).
hope that sort of addresses the topics raised on this thread.
I don’t know how out dated this would be now since I got the book, ‘China inc’ a year and a half ago.
but you could look it up.
As an US x-pat in Greece, major inflation is predicted in the basic commodities here. (wheat, milk,) etc) i forget the exact # but 60%? inflation predicted short term…
I duno about other parts of EU, but I don’t see why it shouldn’t be different.
Meanwhile ‘Liquidity Credit, is constantly reaching new levels, and going bad. ( I can go into some stores and buy EVERYTHING on no interest payments…)
With the continued weakening of the Dollar to the EU and the RE ‘bubble’ back home)… I worked in the Real Estate market for a long time, and if I could use a Put on house prces i would. (Boat and Auto prices stagnant as well.) FL-
From talking to people in England I get a since of a very similar real estate situation, at least in the the early part of 07
At least in Spain you have industry, – went to Barcelona this summer, -
Well I know I’m more micro examples oriented; but how can you not see it all around you?
Excuse me while I go back to studying the markets as a technician, and forget about all this mess. Z;-)
Fez
Brad, thanks for this explanation:
The us could respond to a chinese policy that has led china to be a far bigger source of global supply than global demand by restricting through policy its own demand growth. but that is a rather harsh thing to do — and something that “hits” the us more than it “hits” China.
It’s difficult to negotiate in those terms even if politicians were able to.
Are they able to? Really?
Of course China is to blame.
But a revaluation is not the point. In medium term there should be a real adjustment by inflation differentials, so that no currency can be long term adjusted wrongly.
The point is more, that the workers in China has to get a bigger share of the value they produce. A big account surplus is result of too much savings than can be reasonably invested in the own country. In China this is triggered by an extreme income difference between those who have a lot to save and those who have nothing. The reaction in the rest of the world was mainly either concentrate on non-tradeable goods and buy tradeables on debt (US and parts of Europe) or to shrink worker incomes relative to the capital incomes as well (rest of Europe).
To cure that problem I would suggest for China to immediately introduce an public old age insurance based on an inter-generation contract as it is common in western countries or a public health system.