Reversal of fortune
Korea’s reserves fell by about $10 billion in July — a bigger fall than in November 1998,* at the height of Korea’s crisis. Korea, of course, has WAY more reserves now. It can afford to intervene heavily — as it clearly did earlier this month. The release of its reserves data just confirms something that the FT, among others, have already reported. Indeed, the reported fall in Korea’s reserves was a bit smaller than the $15 billion some expected. Some estimates even put Korea’s July intervention at close to $20 billion.
The fall in Korea’s reserves though highlights an important shift: many Asia’s currencies have decoupled from the Chinese yuan. There is still pressure on the yuan to appreciate,and China is still buying a lot of dollars to keep the CNY from appreciating. But a lot of other Asian countries are now selling dollars (and euros) to keep their currencies from falling.
This is a shift. In 2005, 2006 and 2007, most emerging Asian economies (Japan is different story) faced pressure to appreciate. Most were adding to their reserves. And many had currencies that appreciated faster than the Chinese yuan. That was even true in the first couple of months of this year, when countries like India and Thailand were all buying dollars to keep their currencies from going up.
Now, these countries — and countries like Korea that didn’t face the same pressure to appreciate earlier in the year — are all intervening to keep their currencies from falling. And for the first time in a long time, their currencies aren’t going up faster than the Chinese yuan.
Indeed, many emerging Asian currencies have depreciated against the dollar this year even as the yuan has appreciated. In 2006 and 2007, the slow pace of CNY appreciation was a constraint on faster appreciation elsewhere in Asia. Now, the depreciation of other Asian currencies seems to have become, if anything, a constraint on further appreciation of the yuan.
So why have the fortunes of China’s currency and many other Asian currencies diverged?
First, the appreciation of other Asian currencies over the past few years had real consequences. China has become India’s largest trading partner, largely because Indian imports of Chinese goods have soared.
Second, and no doubt more important, the sharp increase in the price of oil has created far more strain on Asia’s “deficit” economies and on its “surplus” economies. Countries whose current accounts were balanced — as well as countries that ran small deficits — with oil at $70 a barrel are now running significant current account deficits. China will still run a large current account surplus even with oil at $120. The runup in the price of oil and other commodities has kept China’s trade surplus from expanding, but it has yet to bring it down in a significant way. Right now, China’s nominal current account surplus looks likely to be roughly constant in 2008.
That could change if Europe slows dramatically, leading to a big slowdown Chinese export growth in the second half of the year and if — even in those conditions — commodity prices remain high.
But as of now, other Asian economies have been squeezed far more than China by the rise in commodity prices.
* Korea’s reserves would have fallen significantly in December 1997 as well if not for loans from the IMF and World Bank
State-owned China Development Bank may buy Germany’s Dresdner Bank for $14 billion
http://www.bloomberg.com/apps/news?pid=20601080&sid=aT6tayw47nec&refer=asia
Aug. 5 (Bloomberg) — China Development Bank is competing with Commerzbank AG to buy Allianz SE’s Dresdner Bank, Germany’s third-largest lender by assets, three people familiar with the matter said.
China Development Bank, which funds the nation’s public works projects, has conducted due diligence on Dresdner Bank in Frankfurt, said the people, who declined to be identified because they aren’t permitted to publicly discuss the matter.
Dresdner Bank may fetch as much as 9 billion euros ($14 billion), according to Merck Finck & Co., making it the biggest- ever overseas acquisition by a Chinese company. Spain’s Banco Santander SA is also interested in Dresdner, which Allianz bought for 23.3 billion euros in 2001, the people said.
Now you know Brad,
From Bloomberg, Asian Central Banks threaten US Treasury Dept to bailout Fannie Mae and Freddie Mac, or else! For the record, I personally oppose the taxpayer bailout of the GSEs because we need absolutely need to put an end to this global scam.
$800 billion dollars bailout. The precise amount that Paulson asked for, and got, in debt ceiling addition so he could buy $800 billion, potentially, worth of Fannie and Freddie’s debt. Don’t you think the American People deserved to know BEFORE the US government signed over $800 billion of taxpayer money to foreign central banks.
http://www.bloomberg.com/apps/news?pid=20601109&sid=azswcZQvmUX0&refer=home
” Investors in Asia, the biggest foreign owners of Fannie Mae’s $3 trillion of bonds, were asking the Treasury to bolster the government- sponsored company and its smaller competitor, Freddie Mac, said three people with knowledge of the talks.
Paulson told Mudd he had a plan to restore confidence in Fannie and Freddie, the core of the Bush administration’s efforts to revive the U.S. housing market. “At that point, the proposal began to take form,” Mudd, 49, said in an interview. “We’re trying to solve a crisis of confidence. Would this do it?”
The next afternoon, before financial markets opened Monday in Asia, Paulson announced the rescue plan, saying he would seek authority to buy unlimited equity stakes in the companies and their bonds if needed, while the Federal Reserve would lend directly to Fannie and Freddie. Congress included the proposals in a broader housing bill that President George W. Bush signed into law last week.
Asian investors were among the most important groups to soothe because central banks, financial institutions and funds in the region own $800 billion of Fannie Mae and Freddie Mac’s $5.2 trillion in debt, according to data compiled by the Treasury. U.S. officials were concerned that sales from the region would push lending rates higher, said the people, who declined to be named because the discussions were confidential. “
So why have the fortunes of China’s currency and many other Asian currencies diverged?
Simply stated, Korea and Japan don’t have any domestic reserves of oil or natural gas. Taiwan only has a minimal domestic production. As a large continental power, China still produces 60% of its oil requirements. At $120 per barrel, high energy prices are murdering the countries without any domestic energy reserves.
China could have saved itself and everyone else a whole lot of headaches by letting its currency float more liberally and earlier, when the times were good.
I’ve also never seen anything good, long term, out of vendor-based financing.
Brad,
Everyone knows DC is right. Now the Koreans will have to toil like coolies while the Chinese luxuriate in HK hotels spending their oil wealth. Is this the end of the Blog?
Rein Huizer,
You want to talk about corruption & “banana republic”? Try the U.S.! Yearly deficits growing at $1 trillion! Illegal wars without end for U.S. global hegemony. Etc. Etc. Etc.
Does this mean that China will finally take action to redress its imbalance problem before the rest of the world is forced to invoke GATT Article XII to keep the world economy from crashing? Even if China is unwilling to speed up RMB appreciation, surely it would be possible to spend a chunk of their vast reserve horde on imported goods to promote public health and education?
The only alternative for the rest of Asia is to attempt import substitution which will be problematic in a world of $120 oil.
One of the principal reasons that USD/Asia-ex CNY was not allowed to go lower is that CNY/Asia kept going lower after the July 2005 reval. Most Asian finance ministers were not so concerned about the level of USD/Asia as they were about CNY/Asia, the Koreans, Taiwanese, and Japanese especially. The reluctance to allow the Chinese Yuan to appreciate and open the capital account has ultimately, along with excess US consumption, fostered the imbalances that have engendered so much chaos in the market over the last year. The yield bubble popping in the US and Europe presages the manufacturing/capacity/investment misallocation bubble in China that has largely resulted from export-subsidized growth for 20 years.
DC - if, as you say, allowing CNY to appreciate will result in job losses for Chinese and if the CNY is indeed undervalued (objectively indubitable), then it must follow that the jewel of China’s economy (export and manufacturing industry) is really not that competitive at market exchange rates. Not only is this growth model undermined by a fall in global demand (which is happening as we speak) but also a collapse once exchange rates reflect economic reality (FDI, PPP, trade & capital accounts). This I believe is at the heart of the Beijing comrades’ decision to not allow the CNY to appreciate and emphasize more growth over clear inflation concerns.What say you? Nobody is out here on this blog to bash China, but people are trying to pose questions and discuss answers that lie at the heart of the market dislocations and global imbalances now.
I see many parallels between the Chinese economy now and that of Japan in the 1980’s: export-driven growth model, undervalued exchange rate, easy monetary policy in the face of real estate and equity bubbles, banks subsidizing zombie companies at the expense of depositors, a dearth of political diversity and accountability, and reserve/money supply growth in excess of nominal rates, and I can go on. I sincerely hope, for the sake of a more balanced economy, that the end-game turns out better.
Sam,
The current valuation of the Chinese yuan isn’t responsible for US market dislocations and global imbalances. China did not “hollow out the US Industrial base.” CEOs of US companies that offshored to China, hollowed out the USA. The US Government that borrowed heavily from the rest of the world to pay for military pork and make corrupt elected officials rich beyond their wildest dreams, hollowed out the USA. Huge commercial and investment banks that, through financial engineering and off-balance sheet “investments” making bankster insiders trillions of dollars while bankrupting their shell corporations, hollowed out the USA. Good luck blaming the fall of America on a country in which the average person earns a $1,500 per capita income.
Read this, and try to blame it on the Chinese. Dude, turn off Fox News. The US mainstream media representing the Washington Consensus is one of those who “hollow out USA”.
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2008/08/04/survival-of-the-unfittest.aspx
Dude, DC - you have not answered my question. Can the comments section for once have a topical discussion instead of the usual critical comments and cliches of “Washington consensus failed”, “hollowing out of USA”, “Wall Street greed” bla bla bla
Sam,
First, the yuan is not undervalued versus a basket of currencies, the US Dollar is overvalued. Southeast Asia, Korea, Japan, and the Middle East run trade surpluses with China.
Second, there is not gross misallocation of capital in China, there is gross misallocation of capital in the US Housing bubble. The US economy is imbalanced with consumption accounting for 70% of GDP. Industrial production is 40% of China GDP: Germany’s industrial production represents an equilvalent respective GDP ratio.
Third, the Chinese economy is declerating to a 8-9% GDP growth from a torrid 11% GDP growth. That is exactly what the Doctor has prescribed. A 8-9% GDP growth is harly recessionary.
Fourth, I abhor having my taxpayer dollars bailout the criminal financial scams of Goldman Sachs, Fannie Mae, Freddie Mac, Citicorp, Bear Sterns, Countrywide, Indymac, and a sordid host of politically connected crooks.
When you look at those total world export/import numbers of China, the trade with China would be pretty much in balance WITHOUT the US deficit. The US trade deficit was created intentionally by American business elite looking to maximize short term profits by any means necessary.
“Can China really afford for the world’s largest consumer nation to be insolvent or go bankrupt ?”
Here are some facts about China
2007
US imports from China: 321.5 billion.
US exports to China: 65.2
Balance: -256.3
Total world exports from China: 1,218.0
Total world imports to China: 955.8
China GDP: 3597 billion dollars/24,661.9 RMB
The trade with US is roughly 7-8 percent from the GDP and 25 percent of exports. Big chunk but when the economy there are growing in a year more than the TOTAL YEARLY EXPORTS TO USA (350-400 billion dollars), China is not very dependent of USA anymore.
Source:
http://www.uschina.org/statistics/economy.html
bsetser - Would Korea be better suited to cut their fuel subsidy program now and deal with the pain up front? I have visited S. Korea, and the political and socialclimate there might allow the cutting fuel subsidies to be a safer course of action than in other Asian countries.
DC - Either you owe a commenter on another econ blog an apology or the two of you are one in the same, which would be rather sad. Please don’t steal another commenter on another board’s comment or idea and pass it off as your own. What I find comical is that you deleted out a section of one of the quotes with “hollowing out of America” phrase, which was on the other board’s comment (see your #12 comment), reinforcing Sam’s quote from comment 10. Please stay on target with posts as your “threadjacking” is rather annoying.
sam — I very much agree that the CNY’s depreciation v most of asia was a big impediment to further appreciation of EM Asia ex China from 2005 through the end of 07. Korea was also constrained by JPY weakness, which i think had more to do with the carry traders spurred by low japanese rates than central bank intervention.
obviously things have changed recently.
DC — I agree with one of your points, namely that exports to the US are less important to China than they used to be. Exports to the US have clearly fallen v China’s GDP over the past year. Conversely, exports to Europe are far more important relative to China’s GDP than in the past. What we don’t know is whether or not a rise in chinese value added has offset the fall in exports to GDP …
on the other hand, China exports more relative to its GDP to the US than say Europe does, so in some sense china remains absolutely quite exposed to the US. It wasn’t so long ago that total US exports were around 10% of US gdp (they are a bit higher now), so even 7-8% of GDP in exports to a single country isn’t small for a big place like China.
i also would guess is that China’s deficit with the rest of asia is falling rapidly as more and more components are made in china. that certainly was the trend in 06 and 07.
I also would note that you have made your points on the washington consensus policies in the past here; it really isn’t necessary to continue to repeat them.
Bsetser & DC - I’m not an economist by vocation but I do know that what is most relevant for now, here, and in the future is what happens at the margin. When DC says that China’s total trade with the US amounts to 7-8% of GDP and 25% of exports, so “China is not very dependent of USA anymore.”, you are sorely wrong. If the US savings rate goes from 0 to 3%, then the equivalent of Wal-Mart sales for a year is wiped out. What will that do to China then? Be careful what you wish for and mindful of unintended consequences. Tell me who is the marginal consumer in the global economy right now? You remind me of these talking heads on TV who oppose drilling because it represents “only 7 months of consumption”. Well, it’s not as if that discovery when it comes online will be the sole supplier of oil demand for 7 months, what will that do at the margin for the supply-demand balance? US cutting back demand, US government starts to get serious about drilling, and Obama announces to tap the SPR if he wins. It’s not as if these change the long-term dynamics of resource pressures, but they affect the margin. Smart money knows this and has hammered oil and commodities down 25%. Think at the margin, that’s what matters in economics
As far as the US outsourcing for greedy profits, we do not outsource the value-added work. Apple innovates, designs, and makes the tough decisions on the Ipod in Cupertino. Some factory in Xiamen assembles it perhaps. Who adds the value here? At my desk right now, I’m using a Sun Workstation, an Intel semiconductor, Microsoft Windows & Excel spreadsheet, Bloomberg terminal, and a CDMA phone terminal. Of course, they might be assembled and shipped from China, showing a trade deficit, but where is the value added really? Who keeps the economic profits? Of course, my chair design and innovative structure is probably done in China, brilliant. This is what Andy Kessler (who has run real money and understands tech better than all of us) calls the “we think, they sweat” dynamic. Chinese won’t think until they move up the value chain by rebalancing the economy away from a bloated manufacturing and export sector. Moreover when Bill Gates talks about intellectual property rights enforcement with Hu, he’s mindful of MSFT’s bottom line but also the encouragement of innovation in China. Without rebalancing and IPR enforcement, we’ll continue to get pirated Windows, rip-off Chanel bags, fake DVD’s, and a DC incessantly copying and pasting URL’s, facts, and thoughts that aren’t his own.
Sam says: As far as the US outsourcing for greedy profits, we do not outsource the value-added work.
I strongly disagree. US multi-nationals are outsourcing more and more engineering work (read value-added) because of the currency manipulation by China and India. Engineers are being replaced in the US. IBM has moved about half it’s work force to India because India holds down it’s currency against the dollar.
I also tend to disagree with the “we think/ they sweat argument” — and for that matter, the Gavekal “platform company argument. It discounts the extent to which China/ others have moved up the value chain. The most obvious example is the extent to which component production has migrated to China, dramatically increasing the Chinese value added in goods that are “manufactured in China.”
The us is still far wealthier than China (or india) and has many advantages in many high tech sectors (as is necessary to maitain the discrepancy between us and european wages and chinese/ indian wages) — but it is equally clear that china intends to do more thinking/ less sweating over time.
even if China currently is having trouble giving up some of the “high sweat” sectors that are less and less competitive as coastal china develops (see my next post).
“This is what Andy Kessler (who has run real money and understands tech better than all of us) calls the “we think, they sweat” dynamic. Chinese won’t think until they move up the value chain by rebalancing the economy away from a bloated manufacturing and export sector. Moreover when Bill Gates talks about intellectual property rights enforcement with Hu, he’s mindful of MSFT’s bottom line but also the encouragement of innovation in China. Without rebalancing and IPR enforcement, we’ll continue to get pirated Windows, rip-off Chanel bags, fake DVD’s, and a DC incessantly copying and pasting URL’s, facts, and thoughts that aren’t his own.”
Excellent as usual Sam. Your statement always makes me wonder why people are so confident that China is going to be the next super power. I dont understand how a country that isnt free can ever produce enough ideas to ever power domestic demand. which leads me to the conclusion that they are building massive over capacity in manufacturing. Capitalism has been and always will be about the consumer. A communist country will never be a consumer country becuase spending implies wealth and wealth means the power to change. something the ccp has zero interest in doing. I feel really bad for china. The higher ups are essentially sending all the peoples savings to the US in order to let us live in 5000sf houses and drive bentlys. Knowing full well they can never redeem all the bonds they have.
Brad,
Seems like most people lost sight of the issue of why Asian currencies re under comparative strain now. Your explanations are fine, but there is one thing that makes me wonder, and that is the comprison with the 1997 crisis. Then you had a Korean domestic crisis (strikes enormous wage inflation, great loss of market share, extremely high leverage indicating very weak bnking system, etc requiring corrective action for which the immediate post Chun democarcy was ill-equipped. You also had very dysfunctional Chavalit government in Thailand, where everyone had ben speculating in real estate by borrowing USD from barely regulated “finance companies, again an extremely vulnerable financial system unable to survive the collapse of a boom, and a domestic political constellation unable to intervene.
Both countries got rid of their “conservative” nationalistic and (for a westerner) ugly governments, got the fall guys from the IMF in, cut loose of the deadwood, ripped off every foreign bank in sight, and then slowly reverted to an upgraded version of their respective oligarchic systems, with populist/nationalis rhetoric (in Thailand even with a coup!), freshly competitive, with a sobered middle class and workers that had learned their lesson and were also reminded on a daily basis how competitive “China” was becoming. It could be that we are in the early stages of a similar (but different mechanism, do not know what yet). In Korea we have a former Hyundai manager as president (”strong executive” type constitution) with several conflicts on the shelf, and in Thailand, despite some cute posturing by the judiciary, the government seems to be in the hands of the business lite, rather than the military/aristocracy group. With the King getting on, that may be quite a difficult situation too. My intuition is that in several Asian countries (Thailand and Korea in particular), the (very small, highly incestuous) establishment prefers a scenario of avoidable (by having good policies instead) misery, followed by transfering power to more “liberal”, “urban”, “western” types temporarily, letting the external market do a lot of small wealth destruction while the few (who may have taken FX positions ahead of the trouble) re still OK and buy assets on the cheap once the crisis unfolds. One could call this “hedge fund government” . I am just curious with what these rogues will come up with this time. It would be interesting to watch countries like Indonesia and Malaysia though. They hve really very little reason for a crisis and for some reason, I would not be surprised if we could have a little contagion again.
That could be another reason for the PRC to be very conservative in its appreciation policy.
Finally, there is also Vietnam. With agriculture recovering and the long term benefits of energy independence (if they get it right, the oil and gas are there) they have only a short window for respectable currency weakness.
DC: now you see how easy it is to make your own conspiracy scenarios. Just one theme: tightly knit, selfish politicians combined with workers and peasants without bargaining power able front run not only a boom but also a bust. And doing us a favor by offering ever cheaper gear. You do not have to rly on copying others.
Beau Butts, you wrote:
“urely it would be possible to spend a chunk of their vast reserve horde on imported goods to promote public health and education?”
Why does China have to waste those reserves on articles of consumption? Why shouldn’t it buy up US assets? They could buy Boeing and Apple and Microsoft. Wouldn’t it be better, long term, for China to put its money on high tech companies?