Thanks for the clarification and taking the trouble to reply back.

Best,
Print First Ask Questions Later.

the strange thing about China’s export boom is that it hasn’t generated a job boom. the most plausible explanation is that the policies needed to keep the rmb low have also kept the cost of capital low, and encouraged the substitution of capital for labor. the imf research on this point is quite convincing. job growth in china has been weak, and labor income is falling sharply as a share of chinese gdp.

Dr. Setser, I’ve been a lurker. But I’ve had my handle on NR’s blog before. I would say that China is subsidizing it’s poor through employment. The employment is provided by huge investments in export related factories. The Chinese need to absorb the rural-urban migration; 10-14 million annually. Besides, employment keeps people busy, if you know what I mean.

You could not get Asians to consume. e.g. Why do you never worry about body odour in Asia? Because there’s feces on the road-side! And that’s OK! Why don’t Asian’s have pretty manucured front and back-yards? Because it rains like nuts four months in the year!

It’s really a political issue. Employment comes first; keeping ‘em busy comes first. So the exports have to remain; USD/RMB peg has to remain and PBoC will continue to absorb it’s losses – it’s the cost of ‘doing business’. That gives Ben a free hand to kill the rates.

Just my humble opinion. I have the highest respect for you though.

Best,
Print First Ask Questions Later.

To me, we should consider the issue from another perspective. Growth of China reserves, year to year or 5 years to date.

Besides, we are unable to fully capture the total returns from its usage of reserves, how much has been allocated to other avenues which could have well provided a higher than 4.5% return? How much of these fx risk been hedged through financial innovations?

And of course, to me even if its bleeding 4%, its still a relatively small cost to pay, if we were to consider what might happened had China been without such a massive reserve to begin with? Would China been able to weather the current storm?

I agree but there has to be a roadmap for this. China needs to keep growing at 10% for another 20 years to maintain employment but there is no easy way to increase domestic consumption (rather than asset inflation). And now the easy option of accumulating reserves and exporting the consumption problem to the US may not be available anymore.

jin: “The only use of massive reserve is for the raining day—for someday China has to borrow huge from outside world.”

The reserves have become too big to be justified on that basis. Truly this money is a burden to China more than an asset: they can’t spend it and it feeds xenophobia in the West.

I am pretty sure that NR doesn’t use ghost writers tho — or ghost editors either. he writes it all himself. but he also clearly is pushing RGE, as is his right, given that it is (more or less) his company. I have no idea whether or not it will succeed.

I don#t think so. I rather think the discussion will dry up and if not as I have stated before the bloggers should be compensated. Otherwise one would have to ask oneself whether RGE is capitalising on their time and insight.
( Sorry for interupting the discussion)
BMH

lc — more domestic stimulus and a stronger RMB (v a basket, not just the $) would indeed by a nice shift. but it is also requires a policy change, as right now china’s policy is less domestic stimulus and a stronger rmb (v the $) to fight inflation. and faster appreciation would imply larger financial losses for the pboc. that shouldn’t matter, as the pboc really incurred the loss the moment it bought the fx and all that changes now is timing of when it realizes the loss. but sometimes things that should not matter still do matter.

Wouldn’t that be a two edged sword, indeed? You’d have to applaud it, but wouldn’t it be scary?