Could a stronger RMB help limit food inflation in China
The FT’s Lex — in the course of article that seems to suggest that the RMB will rise by far less than the market now expects — says that China doesn’t import enough food for a stronger RMB to have much of an impact on inflation:
“A stronger currency would, however, do little to make food cheaper. China is largely self-sufficient in food, which accounts for just above 1 per cent of imports. Indeed, imports overall are equivalent to less than a third of total gross domestic product – low compared with its neighbours.”
The argument that Chinese imports are small compared to its neighbours is a red herring. China’s imports are larger relative to China’s GDP than the United States’ imports, and China has a lot more in common with other continent-sized economies than its small neighbors.
The argument that the availability of lower-priced imports couldn’t hold down the price of food also seems suspicious. Afterall, if the RMB rose — and not just against the dollar but against a host of currencies — it might make sense for China to start importing food even if it doesn’t now. In order to compete against imports, Chinese producers would have to lower prices. So long as there aren’t trade barriers, the international price of a commodity should affect domestic prices even in the absence of a lot of physical imports.
Moreover, back in 2004 and 2005, a common argument against RMB appreciation — one made most notably by Dr. Stiglitz — was that RMB appreciation would drive down the price of rice, and thus hurt China’s many poor rice farmers. Then the worry was that rice imports would push prices down to too low a level. Sebastian Mallaby:
“The country’s technocrats were convinced years ago that revaluation made economic sense. But revaluation would cut the price of food imports, depressing earnings of Chinese farmers. Faced with simmering discontent among rural Chinese who have been left behind by China’s coastal boom, the dictatorship fears that currency revaluation could unleash furious protest.”
If a stronger RMB would have lowered the price of rice then, it is hard to see why it wouldn’t also tend to bring prices down now. At minimum, concerns that a stronger RMB would hurt China’s poor farmers should no longer be an impediment to a faster move in the RMB.
A stronger RMB would also clearly help reduce the need to raise the RMB price of oil. And no one doubts that much of China’s oil is now imported.
The real problem, at least in my view, that China faces using an appreciating RMB as a tool against inflation is rather different. A slow controlled appreciation creates a strong incentive to move money into China (and reduces the incentive to take money out of China). It thus generates capital inflows that add to the central banks’ already large difficulties with sterilization. A steady controlled but fully expected appreciation consequently does little to slow money growth.
And if you think that China’s inflation stems from too much money rather than too few pigs* (or too little rice), that is a problem. The only solution, as Michael Pettis emphasizes, is a big one-off revaluation that changes expectations.
* Ken Rogoff was the first to use this phrase
http://www.atimes.com/atimes/China_Business/JD08Cb01.html
Currency Wars (Huobi Zhanzheng), a book written by a Chinese native who lived in the United States and worked on Wall Street, has become a runaway bestseller in China in the past nine months. The book caused a sensation of interests and heated discussions in Chinese cyber space and other media on Western intentions behind its demand that China quickly appreciate the value of its currency. Song Hongbing, the book’s author, draws from a wide range of literature in English and argues that the modern history of international finance is primarily a process of how a very small number of powerful families in the West have established their control over governments and international institutions.
According to Song, there is no such thing as a free market when it comes to global finance and financial institutions. The book’s significance and its number one spot in China today is due to the author’s argument that after Japan was brought to its knees by the forced appreciation of the yen, and after the Asian financial crisis of 1997-98 that shattered the other Asian “miracle economies”, the American and European financial oligarchs are now turning their attention to China - and the form of the real Western subversion of the Chinese economy would come in the form of “currency wars”.
As the book’s preface makes very clear, the West has so far been unable to stop the rise of China but there is clear and present danger ahead. China’s “economic carrier” is vulnerable to financial sub-attacks that are launched by the powerful Western financial institutions. The book warns that China must do everything possible to prepare for and defend against a coming currency war waged and led by the US and other Western countries’ financial tycoons.
Looks as though China’s quandary is that they have lost much of their competitive advantage in manufacturing primarily because of changed labor laws. Therefore, while a stronger Yuan would help to control food inflation, it would also harm an already crippled manufacturing sector.
Roughly 20% y/y growth in exports (taking jan and feb combined — tho i need to check the number) and strong growth in industrial production amid a US slowdown doesn’t suggest an across the board loss of competitive advantage. China’s success is pushing up wages and putting pressure on some sectors — but that is different than a general problem.
Rock Chalk
Stronger Revalued Yuan killing Chinese textile industry and millions of jobs
http://www.nytimes.com/2008/04/05/business/worldbusiness/05nocera.html?ex=1207972800&en=11473a2bd5f73fb9&ei=5040&partner=MOREOVERNEWS
“The RMB is killing me,” groaned Jin Jue.
Mr. Jin, a hip-looking 35-year-old with spiky hair and an all-black ensemble, describes himself on his business card as the “board chairman” of the Shanghai Jinjue Fashion Company. Mr. Jin is the classic low-cost, tight-margin, squeeze-every-penny manufacturer, the kind of entrepreneur who has been the backbone of China’s astounding economic rise — and who has also been the primary beneficiary of the low yuan, which has spurred the market for China’s cheap goods.
Except … where were all the workers? I had expected the place to be teeming with people. Instead, only about a quarter of the room was in use; Mr. Jin later confirmed that 60 percent of his work force had either quit or been laid off. Business, clearly, was terrible, and Mr. Jin was losing money. What the low yuan giveth, the rising yuan taketh away. As China’s currency has risen, Mr. Jin’s cheap clothes suddenly aren’t so cheap anymore.
“For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries. But that free ride may be coming to an end.” http://www.nytimes.com/2008/04/08/business/worldbusiness/08inflate.html?ex=1365307200&en=2ae8922fa7a55fd4&ei=5088&partner=rssnyt&emc=rss
Brad
Aone off revaluation might solve some problems but it is dangerous to mess with expectations and the tendency of various bureaucracies to compete over agenda would make such a move into a factional fight. The poor farmer figure is extremely emotive in Chinese society and the issue of wealth gap is thereby sensitive. On almost every CPC meeting there’s almost always at least some discussion on measures to reduce the wealth gap and improve the living standards of farmers. Add the nightmarish scenario of farmers protesting to the (by now) usual protests of itinerant rural workers and disaffected groups and you may have an inkling why the government is reluctant to act.
The only way to enact a one-off revision and to stave off rural problems would be to enact a simultaneous subsidy scheme for farmers which would mean making agriculture a protected industry (think pre EC CAP policies) - that would mean constructing a future problem with the likelihood of korean style rural/farmer unrest/protest.
When I was resident in a chinese city, the stock exchanges were red hot, the neighbours were blasting the biznews channel 18hours straight on a weekend and the US$ bank account was seeing downward figures every week( for transaction purposes, the bank thought it would be less problematic to have a straight US$account than an RMB which would place huge restrictions on money movements.) that was unrelated to expenditure, the grocery bills were stealthily increasing though weight was lost- betcha it’s worse now. You could always tell when the market had a slight correction, that was the day you actually see people eating lunch. Should that one off revision come through, groceries will still go up but a lot more people will eat lunch. The question is will Jim Rogers do a reverse?
It is the real appreciation that counts, not nominal ones. Since food price appreciation is by far the largest contributor to the inflation in China one would think the import demand for food is already there.
Hot money couldn’t go in forever. Money rushing in, which lowers the cost of capital, also reduces returns for any possible investments, from bank deposit to equity and real estate. Banking on appreciation alone begs the question of how to get the money out — if it is driven by hot money, you will have to get out ahead of others before the tide turns. Of course so long as China runs a large trade surplus that is not a problem.
For Jayhawk …
down, what, 9 with about two minutes left. what a come back. what a shot. erased the memory of the hinrich 3 that that didn’t fall v ‘cuse, and the lee three that was blocked.
rock chalk jay hawk.
free throws
but still!
it was a game of
missed chances and circus shots
defence mattered
until it counted
Spot oil is $109 per barrel, but Bernanke insists inflation is non-existent. Oil can be at $200 per barrel but the CPI would read 0% inflation that justifies slashing interest rates further. - DC
Asian Inflation Begins to Sting U.S. Shoppers
http://www.nytimes.com/2008/04/08/business/worldbusiness/08inflate.html?_r=2&ref=business&oref=slogin&oref=slogin
The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.
But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.
Even rightwing Larry Kudlow asked Treasury Secretary Hank Paulson on CNBC, “What is the Bush Administration doing to maintain the monetary value of the American Peso”. The rightwing monetary fascists running this country at the Federal Reserve and US Treasury (ie. Goldman Sachs operation) still haven’t figured it out that destroying the US Industrial base and Middle Class will eventually destroy even wealthy Americans if they intend to remain US Citizens. The United States really But outsourcing US jobs is still supported by the entire Washington Consensus corporate lobby for cynical short-term gain.
ku lost in 03 b/c of free throws … they matter.
By looking at the food production and consumption data of the USDA, it is clear that there is one single reason for the high Chinese inflation. And it is that there was a shortage of roughly 7 million tons of pork meat compared to the potential demand in 2007. This missing meat had to be replaced by other food, eg. by grain (7 million tons of pork corresponds roughly to 20-25 million tons of grain), which increased the price of those. Besides pork shortage, another major factor of food inflation is the explosive growth in Chinese edible oil consumption.
I think it would be easy to fight this food inflation. The Chinese government should buy a few million tons of pork meat and edible oil abroad, and sell it below market price.
Loser U.S. Neo-con foreign policy
1. It took EIGHT YEARS between WTC attacks. WHY DO YOU THINK THAT IS? It’s not because Clinton was so great. It’s because Osama can’t project power easily enough from Afghanistan.
2. Do you know Osama’s plan?? While Neo-con numbskulls go running around bragging about “we’re fighting them over there so we don’t have to fight them here” and “no attack on US soil”, Osama’s plan was to draw us into a conflict *over there* so he didn’t have to fight us here. (Why? See #1.) He learned his strategy by watching the US-in-Vietnam and by participating against the Soviets-in-Afghanistan. Neo-converts not only fell for it, they created a slogan to advertise your own stupidity.
To put it another way: Osama doesn’t have to attack us “here”. Bush put the troops where Osama can attack them *and* rally more people to his cause. Welcome to Radicalization 101.
3. Bush didn’t protect us from the FIRST attack. He didn’t even TRY, in spite of alarming intel.
Unfortunately, problems cannot be solved with the level of awareness that created them. Therefore, as demonstrably incompetent as the Bushies are — like every loser IT manager who ever pushed/oversaw a disastrous IT project — will and have declared “success” every step of the way.
Terrorism is a real threat. But, the Bushies don’t know how to manage jack sh!t. Lead competently or get the hell out of the way.
4. The clear global geo-political winner from the Neo-con fiasco is China. Having destroyed the US industrial base from misallocating capital on stupid wars and Housing bubbles, the Chinese economy is the leading industrial superpower today.
To last guest:
“the Chinese economy is the leading industrial superpower today.”
—Are you sure?
A bit of humbleness would be good for everybody. Why do you want to be “SUPER”-anything?
Do you think Asustek makes better profits than Apple, making machines for Apple?
Let’s be humble and try to live just well in a community, if we could!
To you, Brad,
Any comments about today’s article “Mind the gap” by John Plender in FT?
It sounded me a lot to the concept “Anglo-Disease” by Jerome a Paris.
http://www.eurotrib.com/?op=displaystory;sid=2008/4/8/65846/86979
Watching to the pound losing ground towards the dollar, while the dollar is going down…
Maybe, MacroMan too, could say something interesting, of course.
Too many qustions, probably…
i generally agree with plender —
his solutions are sensible.
his expectation that sensisble solutions will be blocked by bank lobbying/ a lack of poltiical will seems right.
i have long thought that the us regulatory regime didn’t focus enough on liquidity. one result was that em regulation also didnt focus enough on liquidity in the 90s, as most ems also ended up focusing on capital b/c that was what the big countries did.
Thanks a lot for your answer, Brad.
Go on your good and brave work.
We need a lot of common sense.
When I reed references to you on the web, I get very pleased.
You deserve it and much more!
Tkx!
The aesthetics surgery is the burka of the West!
Sorry, Brad,
I get obsessed from time to time:
The aesthetics surgery is the burka of the West!
You have money or you don’t have it!
That’s the american equation and the difference between the East and the West burkas!
Until you get divorced… of course!
But divorcing is a very good business for a very few people.
It’s the main part of MSM rosy picture, but nor very supported by WS foxes.
Why?
It’s love?