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LinkedInKuwait now has let the dinar appreciate by more than 5% this year — the appreciation from mid May is now in the 5.45-5.5% range. China has let the RMB appreciate by a bit less (5.2%) this year even though it had a head-start. The RMB had appreciated by about 1.5% before the dinar was allowed to move at all.
Kuwait hasn’t just managed the dinar against a (dollar-heavy) basket. It has let the dinar appreciate against its basket. That is the right policy. Before it shifted to a basket, Kuwait had let the dinar follow the dollar down. It needs to correct a real undervaluation not just protect itself from further currency volatility.
China, by contrast, hasn’t really managed the RMB against a basket. It basically just has a crawling dollar peg. The rate of crawl varies. Right now the market expects the pace of appreciation (v the dollar) to pick up. But for 2007, the total appreciation is likely to be around 6%.
The dollar has fallen by more than that against the euro (over 12%) than the RMB has appreciated against the dollar. The result – as is now much more widely recognized – is that the RMB continues to depreciate against the euro and other European currencies.
And for that matter against a basket of G-3 currencies. The following chart – based on a suggestion from former Treasury Secretary Larry Summers – shows the RMB’s nominal moves against a 40% dollar, 40% euro and 20% yen basket. In nominal terms, the RMB has actually depreciated against this basket.
Chinese inflation is now higher than inflation in Europe or Japan, so China’s real exchange rate probably hasn’t depreciated against the basket. But there is a substantial difference between the RMB’s nominal and real appreciation against the dollar, and its ongoing nominal and real depreciation against the Euro.
Is it really a surprise that Chinese export growth to the US has slowed while its exports to Europe are booming? Or for that matter that China’s imports from Europe are now falling year over year?
Oh please Brad, Kuwait is a wealthy nation with a per capita income of US$ 30630. No one is living in abject poverty in Kuwait. Foreign guest workers that entirely provide physical labor outnumber the native Kuwait population. In stark contrast, China remains a low-income nation with a per capita income of US$ 1740. Hundreds of millions of Chinese remain impoverished especially in rural regions.
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf
The global comparative advantage for Kuwait’s economy is the production of energy.
The global comparative advantage for China’s economy is value added manufacturing.
The two economies are not comparable. Kuwait can revalue without damaging that nation’s primary natural resource export. A comparable revaluation would damage value added manufacturing in China’s economy. As long as Kuwait continues to denominate its oil exports in only US Dollars and recycle those petrodollars through the US banking system, US Dollar hegemony is maintained. Kuwait’s royal family remains dependent on US military power protection for their physical survival.
Brad: “China, by contrast, hasn’t really managed the RMB against a basket. It basically just has a crawling dollar peg. The rate of crawl varies. ”
I am a little surprised to see this conclusion from your chart. After PBoC said it would peg RMB against a basket in 2005/8, RMB fluctuated around the G-3 basket. After 2+ years, it actually appreciated a tiny 3% against the basket. It seems that PBoC did exactly what it said, and it “managed the RMB against a basket”!
Ha ha The Al Sabah family is doing a good job.
Given the accelerated growth in Chinese exports after the RMB started to appreciate, the argument that a Chinese revaluation would damage China’s export capability is tenuous – and almost certainly false if we are talking about the Kuwaiti-style rates that Brad mentions. Not only is a substantial part of Chinese exports dependent on imported inputs, including commodity inputs and semi-finished goods that are shipped to China for processing, but in addition China is such a dominant factor in most of its export markets that Chinese exporters have real pricing power.
In fact one of the better Chinese arguments used against the US demands for a revalued RMB has been precisely that the structure of China’s trade means that a Chinese revaluation would not help the US trade balance since it would not affect Chinese export volumes. It is hard to reconcile this with the argument that a revaluation would seriously damage the export sector. If Chinese exports were stable, or struggling, this might be a much better argument, but with annual export growth in the 15-20% range, I don’t think a collapse is in the cards.
The best argument in favor of revaluation is not that it would cause exports to drop, but rather that it would cause imports to rise and capital inflows to taper off. This would reduce monetary pressures within China.
“The global comparative advantage for China’s economy is value added manufacturing.”
The “value” added is dirt cheap wages and 19th Century labor conditions and environmental stewardship.
Michael,
A modest currency revaluation wouldn’t have an impact on Chinese technology and capital equipment exports, but it would significantly impact on labor-intensive exports of textiles where profit margins of China’s manufacturers are already razor thin to meet the Walmart price. In case you haven’t noticed, the largest migration in world history of an estimated 300 million migrant workers over the coming decade is currently underway from rural China to the urban centers. These migrant workers have a relatively low level of skills and are not employable in high technology industries. It is imperative that the Chinese leadership find employment for the bulk of the population in labor intensive industries.
DC — one of the things I learned in China is that the “textile” industry has lost credibility because they kept arguing that their razor thin margins would disappear with even the smallest move in the $/ RMB, and there arguments didn’t change even after a 10% (cumulative) move. there is actually a pretty good argument that lots of labor intensive industries in china compete far more with each other than globally, and thus all benefit from a stronger exchange rate.
jye – more detailed studies suggest that the dollar makes up most of China’s basket — and that China’s broader real exchange rate goes up or down with the dollar. Look at the papers on this topic presented at the Peterson institute’s China conference.
Michael – tis true that the overall rate of growth of Chinese exports hasn’t been affected by the exchange rate move (And after three years of 2.5% plus contributions from net exports to GDP, China certainly can bear to contribute demand to the world for a time). However, the geographic changes in China’s export growth suggest that exchange rate changes can have an impact: exports to the US have slowed (and the rmb has appreciated v the $), exports to Europe and the emerging world haven’t (no appreciation there). Of course, there is also a demand story in the us — i.e. the US is just buying less stuff, and that has slowed the growth in US imports from China more than changes in the exchange rate.
DC — incidentally, China is now taking market share in the US market from a host of other producers …. as US imports from China are growing much faster than overall US non-oil imports.
Whilst it is true that China manages its currency against a basket of currencies, the weights are not 40,40,20 as suggested. The basket weights are not disclosed, and although the Yen and Euro may have the largest weights assde from dollars they are likely to be less than 20% combined. This is becuase the PBoC manages the cureency within daily fluctuation bands of 0.5% against the US dollar and 3% against the Euro and Yen. If the weight of the two were 40% each, a 3% move in one currency would translate to 1.2% move against the US dollar which is outside of the permitted band. That does not mean the currency shouldnt be allowed to appreciate more rapidly though, its just that the current fx regime only allows small movement against the basket. Our estimate is that the currency is being allowed to appreciate by 4% per annum against the basket which is predominantly US dollars.
“US imports from China” – most of which are sold as U.S. brands by U.S. brands – yes?
The Saudi riyal has also appreciated against the USD recently. Not by much though, by about 1%.
http://finance.yahoo.com/currency/convert?from=USD&to=SAR&amt=1&t=1y
So far in 2007, the Chinese export to the US, EU, India, and Russia has increased by 15.5%, 30.7%, 66.4%, and 83.1%, respectively, from last year. Obviously, they try to find new export markets.
Might ‘Chinese exports’ include at least some significant part of the $100 billion plus that is alleged to be embezzled every year, and if so, whether it may also help to know where and how that money is ‘invested’. Is it at all possible that FX influences embezzlement – how much of it is aimed at getting money, and people, out of the country to earn a better rate of return instead of investing domestically on pollution controls, alleviating poverty etc?
What is the estimated market cap of BRIC – any GCC? – firms listed on foreign exchanges – NYSE and LSE presumably the leaders – and whether any or all may be greater than the value of shares traded in their own countries and currencies. If a nations’ external assets should, or could be factored in – assuming that a ‘Chinese stock’ traded in dollars on the NYSE is a ‘Chinese asset’.
Is the 40% dollar, 40% euro and 20% yen basket selected as a measure against the RMB on assumptions about current export markets alone? Wouldn’t one significant difference between the GCC and China be that GCC populations are predominantly foreigners – East Indians – whose willingness to work for the wages offered is affected by relative valuations of the rupee? if rupee should be part of a gcc basket. and if it makes sense to include oil in a GCC basket, if any one or more metals should be included in China’s basket given the relative importance of these commodities to the Chinese economy – if at least part of Chinese flows to London may be based on transactions involving the LME.
“…To please customers looking for the “Made in Italy” label, several luxury companies now have their goods made in Italy by illegal Chinese laborers. Today, the Tuscan town of Prato, just outside of Florence and long the center for leather-goods production for brands like Gucci and Prada, has the second-largest population of Chinese in Europe, after Paris. More than half of the 4,200 factories in Prato are owned by Chinese entrepreneurs, some of whom pay their Chinese workers as little as two Euros ($3) an hour…” http://www.nytimes.com/2007/11/23/opinion/23thomas.html?em&ex=1196053200&en=fd9a8ac3bd4ae42f&ei=5087
DC- Somewhere down the line china will reach the status of kuwait within next
10 years. 10 years of 5% revaluation will give gain of no more than 40% gain.
will the wage inflation in china will be tamed for ever. i think current value
of yuan is more one dollar. And at this current industrial production rate there
will be more industrial capacity in china than world requires. None of them is
feasible. Always balanced economy is best for world and i think world will adjust
to it only with a severe depression rather than step by step of few year recession
to obtain it. In all probable case chinese wage inflation is to get worser.
Brad- China has improved its productivity of atleast 10% to keep its razor thin
margin
Andy Seaman — I hope I didn’t imply that China manages its exchange rate against a 40/40/20 basket. It clearly doesn’t. the 40/40/20 is an attempt to construct a very rough trade weighted RMB v the G-3 (the weights are approximately correct). the point of constructing the basket was to show that while the RMB is appreciating v the $, it is depreciating v a broader basket — i.e. too much attention has been given to the RMB v the $ v the RMB euro and other important prices.
I personally would be surprised if there is even a 20% weight for non-$ currencies in the basket. the econometric work i have seen suggests a $ crawl fits the data better than almost any basket, and to make the basket work, the components of the basket have to change over time.
all the 40/40/20 basket was based on all trade, using US and European and Japanese import and export data rather than Chinese data at the end of 2006 (i.e. the total is EU trade with China in $ + Japanese trade with China in $ and US trade with china in $). And then I rounded it a bit — end-07 weights would give a higher weight to Europe. There is no good way to do this given the distortions (or complications) in the data created by Hong Kong, especially for the Chinese data. this particularly methodology tends to undercount g-3 exports to China (b/c some exports to HK end up in China) while counting correctly g-3 imports from China. Using the Chinese data has the opposite effect — it counts Chinese imports from the G-3 (i.e. g-3 exports to China) reasonably accurately but undercounts Chinese exports to the world (g-3 imports).
Some excerpt from Slavoj Žižek:
There is another, no less surprising, lesson to be learned from the Chinese Communists’ presiding over arguably the most explosive development of capitalism in history, and from the growth of West European Third Way social democracy. It is, in short: we can do it better. In the UK, the Thatcher revolution was, at the time, chaotic and impulsive, marked by unpredictable contingencies. It was Tony Blair who was able to institutionalise it, or, in Hegel’s terms, to raise (what first appeared as) a contingency, a historical accident, into a necessity. Thatcher wasn’t a Thatcherite, she was merely herself; it was Blair (more than Major) who truly gave form to Thatcherism.
The end of last article:
It is striking that the course on which Hugo Chávez has embarked since 2006 is the exact opposite of the one chosen by the postmodern Left: far from resisting state power, he grabbed it (first by an attempted coup, then democratically), ruthlessly using the Venezuelan state apparatuses to promote his goals. Furthermore, he is militarising the barrios, and organising the training of armed units there. And, the ultimate scare: now that he is feeling the economic effects of capital’s ‘resistance’ to his rule (temporary shortages of some goods in the state-subsidised supermarkets), he has announced plans to consolidate the 24 parties that support him into a single party. Even some of his allies are sceptical about this move: will it come at the expense of the popular movements that have given the Venezuelan revolution its élan? However, this choice, though risky, should be fully endorsed: the task is to make the new party function not as a typical state socialist (or Peronist) party, but as a vehicle for the mobilisation of new forms of politics (like the grass roots slum committees). What should we say to someone like Chávez? ‘No, do not grab state power, just withdraw, leave the state and the current situation in place’? Chávez is often dismissed as a clown – but wouldn’t such a withdrawal just reduce him to a version of Subcomandante Marcos, whom many Mexican leftists now refer to as ‘Subcomediante Marcos’? Today, it is the great capitalists – Bill Gates, corporate polluters, fox hunters – who ‘resist’ the state.
The lesson here is that the truly subversive thing is not to insist on ‘infinite’ demands we know those in power cannot fulfil. Since they know that we know it, such an ‘infinitely demanding’ attitude presents no problem for those in power: ‘So wonderful that, with your critical demands, you remind us what kind of world we would all like to live in. Unfortunately, we live in the real world, where we have to make do with what is possible.’ The thing to do is, on the contrary, to bombard those in power with strategically well-selected, precise, finite demands, which can’t be met with the same excuse.
Brad,
The Chinese textile industry has somewhat improved its productivity to compensate for the revaluation of the yuan. Productivity levels in the textile industry which is very labor intensive can only be gradually improved. A sharp revaluation of the yuan would be very destructive according to the Chinese Academy of International Trade and Economic Co-operation, a thinktank of China’s commerce ministry. However, China as the country still enjoys one of the most comprehensive industrial supply chains in this sector, from human resources and materials to equipment. The China PBoC should certainly be prudent by maintaining a very gradual pace of revaluation.
How competitive is Chinese agriculture? If China allows its currency to appreciate more rapidly, won’t a lot of these folks be thrown out of work as the agricultural products that produce get priced out of world markets? I know that Chinese infrastructure is pretty good in eastern China, but my understanding is the interior isn’t very well developed yet and there aren’t many substitute forms of employment there. Where would these folks go?
Isn’t this how Brazil got its flavellas and los angeles got its problem with illegal aliens? Surplus agricultural labor thrown off work faster than employment could be created in urban areas -causing either slums or mass migration?
Off-topic:
Brad featured on “Naked Capitalism”:
“Private demand for US financial assets has disappeared”
http://www.nakedcapitalism.com/2007/11/private-demand-for-us-financial-assets.html
But I believe the second paragraph is technically not quite right:
” In theory, the two sides of the equation, the current account (primarily trade in goods and services) and the capital account (largely capital transfers but also includes the purchase or sale of “non-produced goods” like mineral rights and intellectual property) offset each other exactly. On a practical level, however, there are leads, lags, and measurement issues. A serious mismatch strongly indicates the likelihood of further adjustment.”
“…”David Li deserves recognition”… He “brought that innovation into the markets [and] it has facilitated dramatic growth of the credit-derivatives markets.” The problem: The scale’s calibration isn’t foolproof. “The most dangerous part… is when people believe everything coming out of it.”… The story of Mr. Li and the model illustrates both the promise and peril of today’s increasingly sophisticated investment world. That world extends far beyond its visible tip of stocks and bonds and their reactions to earnings or economic news… Mr. Li, 42 years old, began his journey to this frontier of capitalist innovation three decades ago in rural China. His father, a police official, had moved the family to the countryside to escape the purges of Mao’s Cultural Revolution. Most children at the young Mr. Li’s school didn’t go past the 10th grade, but he made it into China’s university system… Mr. Li, who had moved over to a J.P. Morgan Chase & Co. unit (he has since joined Barclays Capital PLC), published his idea in March 2000… The model, known by traders as the Gaussian copula, was born… the model, by making it easier to create and trade collateralized debt obligations, or CDOs, has helped bring forth a slew of new products whose behavior it can predict only somewhat, not with precision… The biggest of these new products is something known as a synthetic CDO… Synthetic CDOs are booming, and largely displacing the old-fashioned kind… Some banks are deeply involved… Much of that money is riding on Mr. Li’s idea, which he freely concedes has important flaws. For one, it merely relies on a snapshot of current credit curves, rather than taking into account the way they move… Investment banks try to compensate for the shortcomings of the model by cobbling copula models together with other, proprietary methods… “We’re not stupid enough to believe [the model] is omniscient,”… Trouble awaits those who blindly trust the model’s output…” http://math.bu.edu/people/murad/MarkWhitehouseSlicesofRisk.txt
“…Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society… The term “luxury good” implies scarcity and high unit value…” http://www.lewrockwell.com/north/north204.html
“…Within the sociology of money, the emphasis has been on Western societies, so that the sociological study of money in Asia and Africa still has to be done…” http://mams.rmit.edu.au/e0eneunbp2w.pdf
” How competitive is Chinese agriculture? If China allows its currency to appreciate more rapidly, won’t a lot of these folks be thrown out of work as the agricultural products that produce get priced out of world markets? I know that Chinese infrastructure is pretty good in eastern China, but my understanding is the interior isn’t very well developed yet and there aren’t many substitute forms of employment there. Where would these folks go?
Isn’t this how Brazil got its flavellas and los angeles got its problem with illegal aliens? Surplus agricultural labor thrown off work faster than employment could be created in urban areas -causing either slums or mass migration? ” – Ed
That’s absolutely correct. At a Seattle Washington conference, when criticized over China’s economic model, former Chinese President Jiang Zemin even told former President Bill Clinton, “If you think we are doing such a Sh!tty job, we would be more than happy to have 10% of our population or 100 million people emigrate to the United States. Let us see how you feed and clothe an extra 100 million people.”
“The story of Mr. Li and the model illustrates both the promise and peril of today’s increasingly sophisticated investment world.”
‘sophisticated’ is the wrong word. ‘convoluted’ ? all ponzi finance is a pyramid which rests entirely upon the last people to join. if they fail to deliver, all fails.
so its not sophistication that is required but simple questions : (e g ) this scheme yields higher profits – so who’s paying ?
incidentally, i read that the holders of c d os do not have the documentation that you need to carry out foreclosures. the borrowers may have the laugh on the banks, yet.
.
Nov. 20, 2007 · “Since the late 1980s, hundreds of thousands of illegal immigrants from China’s Fujian province have been smuggled into the United States… the flow of Fujianese to America continues, but the business of human smuggling has changed significantly. When the smuggling began two decades ago, the cost of coming to the United States was around $15,000. Now, immigrants pay $60,000 to $80,000 to be brought to America…” http://www.npr.org/templates/story/story.php?storyId=16422719
“…I visited a leather-goods factory in China, where women 18 to 26 years old earn $120 a month sewing and gluing together luxury-brand leather handbags… One bag I watched them put together… cost $120 apiece to produce. That evening, I saw the same bag at a Hong Kong department store with a price tag of $1,200 — a typical markup…” http://www.nytimes.com/2007/11/23/opinion/23thomas.html?em&ex=1196053200&en=fd9a8ac3bd4ae42f&ei=5087
Ed — I think the main flaw in your argument is the implicit assumption that China’s current export/ investment driven model has been creating lots of jobs. The data shows that it hasn’t — largely b/c the cost of capital is so cheap that there is a strong incentive to substitute capital for labor.
that said, I do think the impact of any revaluation on rural rice farmers is a serious issue, and one that likely requires some kind of offsetting policy action — i am even open to tariffs to increase the internal price of rise (a la the rest of Asia), tho classic economics says a subsidy is better. what doesn’t work is setting the exchange rate to keep the least efficient parts of the Chinese economy (i.e. rice farming) in business. the right exchange rate for rural china is clearly the wrong exchange rate for the coasts – or rather one that introduces major global distortions.
DC – methinks is it precisely the ministry of commerce that has lost a bit of credibility here. And in any case, all the concerns about the risk of China losing market share seem a bit misplaced when right now China is gaining market share at the expense of a host of other developing economies …
Brad-
Aren’t you supporting my argument here? If the current export/investment driven model isn’t creating a lot of jobs here then if China’s currency appreciates rapidly and people are thrown off the farms, won’t they be left unemployed in really large numbers?
From what I have read it seems like Chinese agriculture is still highly inefficient. After an industrial accident killed off the local bees, it is still economical to hand-pollinate the pear trees in the Sichuan Province. Farm labor is really cheap there and better employment prospects have yet to pull these folks off the farm.
http://www.nytimes.com/2007/10/27/arts/television/27stew.html?ref=television
The legitmacy of the current Chinese government seems hinged upon whether or not it can deliver the goods economically.
Under the current incremental strengthening of the renminbi it seems like farmers are pulled off the farm by higher wages in the urban areas in a somewhat orderly fashion.
If the renminbi appreciated much more agressively against the dollar, it seems to me you run the risk of mass unemployment when the eyes of the world are about to be on China for the Olympics.
It seems to me, that PBofChina is testing the waters here, trying to figure out how quickly it can let the renminbi appreciate without causing mass unemployment. They are probably being to conservative for right now, but when you are dealing with the number of people employed in China in agriculture you probably want to be conservative in proving your models for the price elasticity for the demand for agricultural labor in China too.
Citigroup Inc., seeking to restore investor confidence amid massive losses due in credit markets and a lack of permanent leadership, is receiving a $7.5 billion capital infusion from the investment arm of the Abu Dhabi government.
The investment by the Abu Dhabi Investment Authority will help rebuild Citigroup’s capital levels, which have been eroded by a credit crunch that began in the summer. Citigroup Chief Executive Officer and Chairman Charles Prince resigned earlier this month after the bank, which had already written off billions of dollars, said it was facing as much as $11 billion more in losses.