A RMB that isn’t appreciating cannot be killing you …
The premise of Joe Nocera’s New York Times story “Two factories, two firms” is logical enough: an appreciating RMB should hurt a low-end, cost-conscious textile exporter and help a higher-end manufacturer that doesn’t compete on cost and benefits from lower prices on imported capital goods.
The problem? The two firms in question seem to trade more with Europe than the US. And the RMB isn’t appreciating against the euro.
Aspiring textile magnate Jin Jue complains that “the RMB is killing me.” But it is hard to see how. His factory turns out “inexpensive clothing aimed at the European market.” The RMB has depreciated against the euro – both over time and this year. Jue’s difficulties aren’t coming from an appreciating currency, but rather appreciating costs – rising domestic wages (“thanks to inflation in China – up 8.7% in February alone – his workers wanted more than the several hundred dollars or so a month he says he pays them”) and the end of export tax rebates (a policy that was adopted in lieu of allowing currency appreciation).
It is equally hard to see how Li Xian Shou – who produces silicon wafers for solar panels – benefits from a stronger RMB. At least not in the way the article argues. Nocera writes:
“As we toured his plant, I couldn’t help noticing that much of the machinery RenSola uses to make wafers comes from Germany. A rising yuan helps there too.”
Well, it might if the yuan wasn’t falling against the euro.
The reporting here is good – the color around Jin Jue’s plan to shift toward China’s domestic market is great. But there is an assumption that since the RMB is rising against the dollar it is rising globally. And that simply isn’t true. The RMB is down – in nominal terms – against both the euro and yen this year. It is basically flat against a trade-weighted currency basket.
Don’t get me wrong – the RMB is appreciating in real terms. But that appreciation has come primarily from the increase in inflation, not from an appreciation against a broad basket of currencies.
The reporting of Denis McMahon of the Wall Street Journal lacked Nocera’s color. However, McMahon quite correctly argued in late March that looking at the RMB dollar without looking at the RMB euro is misleading.
much of the yuan’s recent gains have been brought about by the dollar’s own misfortunes. The U.S. currency has lost almost 8% against the euro and 11% against the yen so far this year, driven down by a slumping U.S. economy and deep rate cuts by a Federal Reserve determined to fight a ballooning credit crisis.
“A moderate appreciation against a depreciating currency is not an appreciation — it is a depreciation,” Standard Chartered economist Stephen Green said in a note to investors last week.
Tellingly, the yuan has depreciated against the euro by about 4% since the beginning of the year.
With the European Union now the largest export destination for Chinese goods, topping the U.S., the currency’s moves will do little to rebalance China’s trade surplus or slow the tide of foreign money pouring into an economy already swamped with excess liquidity.
I should also note that the Wall Street Journal’s reporting on the recent US export boom also noted that their growth is linked to the dollar’s fall. If only the oped pages would take note, and balance all the articles they have published arguing that currency moves don’t affect trade balances with a few arguing that they do. After all Dr. Mankiw – keying off work by Dr. Chinn – called the fall in the trade deficit that has followed the dollar’s fall “textbook” economics.
Sometimes the textbooks are right. Exchange rates do matter. The RMB-euro as much as the RMB-dollar and the dollar-euro.
Trades are priced in USDs. They will adjust to a weakening dollar but probably not as fast as the Fx market. The Europeans won’t want to pay any more than Walmart, though they will buy at a higher volume because of the strong Euro. The first factory doesn’t have the scale of economy to compete. Germans likely price their machinery to be competitive even in USD. So the second factory benefits from a stronger RMB even if it is not appreciating against the Euro.
Long term fixed or crawling peg does not work.Over investment is rife in china. Most consumer goods come from china. If china had all the resources to feed the industries, most developing countries around the world would be dead. Small nominal appreciation will not affect even low end export industries as rest of currencies are appreciating much faster and this gives them more pricing power in the medium term. We should expect higher consumer good prices in near future.
even if trade is invoiced in USD, in the first instance the European importer could afford to pay more (in USD/ RMB terms) because of the euro’s appreciation — higher USD payments wouldn’t need to translate into either higher prices or reduced profit margins for the European importer/ distributor.
The Chinese government shouldn’t and won’t adopt Western Neo-liberal theories of “financial shock therapy” by rapidly appreciating the currency that will likely result in massive unemployment and political instability. Already the Chinese RMB has revalued almost 17% versus the US Dollar over the past couple years without any major improvement in the overall US trade position. Frankly, the US Federal Reserve policies are largely responsible for the worsening US trade position having massively misallocated capital with not just one economic bubble, but two bubbles in Dot-com stocks and Housing. Building bigger McMansion houses doesn’t help the US competitive position. It is not the China PBoC’s responsibility to bailout the US financial system. The China RMB currency will only be gradually revalued to allow time for manufacturers to make productivity improvements.
hasn’t worked yet for russia, altho for india…
Brad,
The question is who has pricing power. If it is still Walmart, the price in RMB will be under more pressure to go down if you are a supplier of similar products — it doesn’t matter if your customers are mostly Europeans. The Europeans are not running a charity. They will coattail Walmart gladly. Strong Euro translates first into volume, not necessarily price. Only if the marginal players like the one mentioned in the article leave the field and the industry consolidates to a point where export demand outstrips supply will the picture change. This is how commodity industry works.
Why isn’t the EU bringing this to the WTO as currency manipulation case?
I understand there is a credit crunch and Europe may benefit somewhat from Chinese money, but they are hopefully not as dependent on it as the US, they also suffer from the Euro strength.
With either McCain or a Democrat the US is likely to get greener. I say, a massive across the board VAT, or better, a Currency Peggers Tariff, to stem the overconsumption of the American consumer that you decry which has built the manufacturers that you are concerned about (although I expect movements to come from Europe first). You, obstinately refuse to understand those things being discussed here, post off topic consistently and generally support what you perceive to be better for the Chinese people at the cost of global stability which just might be the unduing of China itself. Well done, blame everyone but Chinese Policy Makers.
China’s REER is appreciating…
http://research-and-analytics.csfb.com/docpopup.asp?docid=42054243&type=pdf
I could not access the csfb link, but i am not sure that it is relevant — as I noted in my post, China’s REER is appreciating. I also noted that its appreciation reflects the rise in inflation inside China not a broad nominal appreciation. Menzie Chinn has a nice post with all the data plotted out over at Econbrowser.
FG — Most experts think that intervention to hold down your currency isn’t a violation of any WTO commitment. It wouldn’t formally count as an export subsidy. Currencies are viewed as tied to monetary policy and part of the IMF’s remit, not part of the WTO. That probably limits the EU’s willingness to press a case.
that said, the EU has until now been willing to let the US put the pressure on china and hasn’t pushed hard for more action inside the IMF. That reflects differences inside Europe — Italy is more worried than Germany and so on. But the EU’s passivity has been a problem here.
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Anon - what’s with the list of companies?