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LinkedInIt is hard to put lipstick on a pig.
China’s November trade data (a 2.2% year over year fall in exports; a 17.9% year over year fall in imports — see Andrew Batson of the Wall Street Journal) suggests that global trade is contracting quite rapidly. And since trade accounts for a rising share of global activity, it suggests that the global economy has stalled — and perhaps is contracting.
The fall in China’s exports suggests global demand is falling. And the fall in China’s imports on first blush seems larger than can be explained just by the fall in demand for imported components for China’s exports and sliding commodity prices: it suggests that Chinese domestic demand is quite weak …
The November data from Korea and Taiwan tells a similar story. All experienced far larger falls in year over year falls in their exports than China did.
Sometimes the y/y change for China paints a misleading picture — as the timing of China’s New Year can have a big impact on the data. Not in this case. The 3 month moving average is heading down too — and it almost certainly has further to fall.
Up until now the widely reported difficulties in China’s traditional, labor-intensive export sectors (textiles, shoes) have been offset by strength in China’s more capital-intensive export sectors (electronics, machinery). See the World Bank Quarterly. But not anymore. November’s exports plunged well below China’s trend growth (using a linear trend, with monthly exports running roughly $20b over their level the previous year … ).
There isn’t much of a case for China to allow the yuan to depreciate against the dollar to help exports though. Not when Chinese exports are falling less than other countries exports, and China is gaining global market share. These are going to be hard times for everyone.
And China — with its large external surplus and strong fiscal position — should have more room to stimulate domestic demand than most. It certainly needs to do so.
China’s imports fell significantly faster than its exports in November, pushing China’s monthly trade surplus up to a record $40 billion. That is a lot of cash. Let’s see how large the US deficit is in November — it might not be all that much larger than China’s surplus.
China’s 2008 trade surplus looks set to exceed China’s 2007 trade surplus. Given that oil is going to average close to $100 a barrel in 2008 — more than $30 a barrel more than in 2007 — that is rather stunning. And right now there isn’t any much reason to think that China’s trade surplus will shrink in 2009. Exports will fall. But so will imports. And the fall in commodity prices implies that the terms of trade have shifted in China’s favor.
Watch how this chart evolves over the next few months …
The global flow of funds right now is actually quite simple: China runs a large surplus and the US runs a fairly large deficit — and, assuming hot money flows are (still) modest, China’s large surplus leads to rapid growth in China’s reserves and large Chinese purchases of US Treasuries. That is the dominant global flow right now — together with the “deleveraging” of the private sector.
One last point. China has released its November data before the US has released its October data. And I rather suspect China’s export data has already established the likely trajectory for US exports.
The seasonal dip in China’s exports (the data isn’t seasonally adjusted) usually comes after the US and European holidays — not before. The US trade data for the next two months is unlikely to paint a pretty picture of the health of the US or the global economy.
UPDATE: Nice analysis from the Economist.
All fall down.
Now is not the time to cease agitation for U.S. aggressive action against semi-permanent trade deficit.
Totally disagree. With the first line of the post. It’s not that hard to put lipstick on a pig.
If it’s a trusting pig that doesn’t bite, the only real issue is the pig will try to eat the lipstick. (It won’t harm the pig. Almost nothing hurts a pig.) Kids on farms have done this since, well, since the saying became popular. You can also put a bonnet on a pig. It won’t last long but it does make you laugh. And you can put bumper stickers on cows. They stick pretty well until the other cows pull on them. PSA: do not put handlebar tape on a cow’s or goat’s horns.
i guess that why the saying is that you can put lipstick on a pig but it is still a pig …
I’ll consult my uncle tho before certifying whether it is hard or easy to put lipstick on any other than a baby pig …
would not a large part of the import fall be due to lower prices for so many metals and soft commods? maybe the volumes have not declined by 17%… just the values..
volumes have not fallen by 18% — but they are likely down. remember this is a y/y number, so the relevant price index is the price index for november last year. imports in dollar terms are WAY down v. the summer.
Like antiochian.
How much of the fall in the dollar value of exports is because the price of Chinese goods as fallen with lower priced raw material inputs?
you’re too quick!
oh dear. it really does look like a trade war is coming.
How many developing countries are headed for a currency/balance of payments crisis? Would the list include India, Taiwan, Korea, Pakistan,etc…
bena gyerek responds:
oh dear. it really does look like a trade war is coming.
A trade war will happen if the Congress does something stupid, like provide tariffs for some specific product, like automobiles, that applies to all the countries in the world. But I have not heard any appetite for that. Instead, all I hear is the call for new trade agreements that require fair trade – that is, foreigners promise to do something different. Promises to do something diffent will not cause a trade war. Our trading partners know that the U.S. cannot enforce any agreement to do something different. So, everybody signs the new agreement, Obama has done all he has promised to do, the labor unions got what they wanted and the trade deficit continues merrily along.
Now if the Congress takes my advice, we also will avoid a trade war. The 5 nations singled out for tariffs will find it in their own interests to pay the tariffs and shift some of their exports elsewhere.
@Brad: I think you wrote a book on IMF bailouts and bail-ins, along with Dr. Roubini. It would be useful to know your views on whether developing countries are likely to receive IMF aid in the face of currency crises that might possibly be likely as export demand falls around the world, arguably without a drop in demand for food grains and oil, etc in imports.
This appears to be especially in the light of the swap lines that have replaced the IMF’s traditional role in currency crises recently, and your earlier call for an enlarged and more effective IMF, if I remember right.
Maybe this world wide contraction, or collapsing consumption, will force a creditor nation like China to think about, and depend more on, it’s domestic economic growth and policies(gdp?), as opposed to export growth (gnp?).
It seems that in the long-run, as the rate-of-change in China’s exports continues to expand, it will cause the rate-of-change in imports by deficit countries, at some point to eventually – invert.
I.e., in equilibrium, China should run deficits large enough to enable the nationals of debtor nations to acquire a sufficient amount of foreign exchange to enable them to serve their international debts.
Otherwise, the deficits will inexorably force the debtor nation’s currency down in terms of their foreign exchange values—and this will prove to the Chinese – unstoppable (regardless of it’s pegs, and other financial gimmickry).
bill j: oh dear. it really does look like a trade war is coming.
I really don’t think so. Name five congressmen that have give recent speeches supporting a trade war. (Seriously, I like to keep trade of what my opponents are doing/saying.)
the more evidence there is of a contraction in trade, the stronger the case for a bigger imf that lends a bit more freely to support global demand. the IMF is currently working on a host of programs (The basis for loans) in eastern europe. Asia is relying on their own reserves. But it goes without saying that if the EM world has to contract b/c of a lack of external financing at a time when the G-7 countries are already in recession and china, which has no need for financing, is slowing or contracting too, that is bad bad news for the world economy.
Who is going to be growing in q4 and q1? I don’t see many obvious strong hands.
BRazil and the Gulf have momentum, but both look to me likely to slow singificantly next year. Chinese growth has slowed dramatically. Russia is going to contract. Etc.
Brad, have you had time to research the situation with international trade letters of credit and their impact?
Dave Altig’s Macroblog has a good post up on this issue. Galina Alexeenko and Sandra Kollen, senior economic research analysts at the Federal Reserve Bank of Atlanta, wrote the post.
Credit storm hitting the high seas?
December 10, 2008
http://macroblog.typepad.com/macroblog/2008/12/credit-storm-hi.html
.
@flow5
any thoughts on Fed s “newest” proposal?
It is time to revisit the theory that the Smoot-Hawley Tarrif Act helped turn the Great Recession into the Great Depression, a theory promoted by free-market proponents. You can now observe that world trade drops during a severe recession even without new trade barriers. I would like to submit that, in the thirties, countries with conducted trade through bilateral clearing accounts, which is arguably the utmost in protectionism, got out of the depression rather quickly.
Brad,
I just recently found your blog. Great stuff.
Correct me if I’m wrong but it seems to me that the US has everything to gain from a devaluation of the Yuan. I can not think of a more advantageous arrangement than to exchange fiat currency for real goods and having that money loaned back to us at zero percent to fund our visits to the hospitals. Personally, I would have no problems with being able to spend every one of my dollar bills twice. If we end up closing our current account deficit and fiscal deficit, I don’t see any way that we can fund domestic services such as health care.
Secondly, I think you ought to look at the underlying socio-economic climate in China to understand the decision-making. The Chinese government has been under tremendous pressure to promote the livelihood of Chinese farmers, which necessitates the shedding of hundreds of millions of excess labor in farming. To that end, the Chinese government has recently passed a legislation that allows farmers to lease their land for long periods, which in effect creates greater mobility in the labor market. That’s one end of the bargain. On the other end, the government would have to find more productive uses of their labor, and I don’t fault the CCP one bit for promoting labor-intensive manufacturing industries to do so.
Anyway, I would love to hear your thoughts.
hmmm — observer, I am not a fan of being dependent on the generousity of others, and I also rather suspect that it is hard to build up the skills required to create leading edge products (or even not so leading edge products) once you lose them, so there is a cost to a period where you pay for your imports with bonds rather than goods and services.
as for your later point, it is a well developed line of argument — and a big part of the Dooler Garber Bretton woods 2 hypothesis. China will keep its exchange rate low to facilitate the outflow of labor from rural areas to urban export jobs.
two problems tho.
One. China hasn’t actually been promoting labor intensive industries, labor intensive exports. its export boom hasn’t produced a jobs boom. in part b/c the booming export sectors now tend to be capital rather than labor intensive.
Two. Relying on exports for jobs means more exposure to the global economic cycle, and it looks like there actually is a meaningful cycle — and that may work against the CCP’s desire for stability …
trade war: us + eu vs china
i can name one former senator that has a very consistent record of voting for protectionism.
here are various forms of protectionist policy already being pursued:
– currency devaluation and build up of excess currency reserves
– tax breaks for exporters
– soft loans to exporters in industries with massive excess capacity (e.g. car companies)
referring back a bit : sorry, i have nothing against dubai -
ireland also has construction, debt, tourism, a collapsing property bubble, financial services, elements of tax haven operations, tax breaks for multinationals, and racehorses . . . all vulnerable and shrinking fast.
i suggest that complete globalisation tends towards global boom which tends towards ‘the perfect storm’. every graph you see these last few weeks looks like a printout from wylie e coyote’s altimeter.
i think this contraction is on a historic scale. the tide has now turned on the automobile age. in ireland the new commuter suburbs are feeling the pain first, that is where the mortgages are young and where house prices were boosted by e u immigrants, now drifting home.
the bad news for moralists is that the contraction also affects private citizens and businesses who have ordered their affairs conservatively and prudently.
even the alternative energy and recycling and organic people are not immune.
if we put lipstick on a pig it would almost certainly get our pork products pulled off the shelves again under some e u food quality regulation.
i am going to dream about bernanke and paulson and the economy tonight -
- two morticians putting lipstick on a dead pig, ready for the funeral (to be conducted by pastor obama, no doubt.)
Brad, thanks for responding.
Whatever impact the exchange rate had on the productive capacity of the United States had already been incurred a long time ago. It’s hard to think of anyone who would give up a banking job to go back to the Nike factories.
Do you have any evidence that exchange rates specificly have played any role in any loss of competitiveness of capital-intensive and knowledge-based industries in the States? It seems to me that to the extent we have lost competitiveness in those industries, take computer-chip manufacturing for example, it is the result of foreigners catching up in knowledge and skill rather than as the result of exchange rate distortions.
I would go even further to say that the capital surplus has improved our competitive standings in cutting-edge industries. For example, I can not think of any other government in the world that has $100 billion a year of funded spending on R&D for the military, where advancements in technology have often trickled down and commercialized. I mentioned another cutting-edge industry in my prior posting, which is the health care and pharmaceudical industry. I would argue that foreign financing has allowed the US to subsidize higher education and medical spending (demand and supply), two key factors in the rapid advancement of medicine and medical equipment.
Lastly, as you have admitted, the aim of the Chinese government isn’t to provide charity to the States but to maintain social stability by employing labor in more productive areas. Given the exposure of manufacturing industries to global demand, it is highly possible that the Chinese government will eventually develop a scheme to nationalize farming as the way to provide a social safety net to migrant workers.
China doesn’t have the ability to radically increase their domestic demand, or they would have ages ago. Raising wages puts pressure on a big competitive advantage they have.
Already, their labor intensive industries are disintegrating, and what remains for the near term are capital intensive, such as electronics. But shoes aren’t going to made in China in the coming future.
They have a real looming problem with unemployment, and any extra money is going to be spent dealing with that, not in conquering the world – as the West is always nervously imagining.
ummm — why doesn’t China have the capacity to start running 3-4% fiscal deficits rather than a 1% surplus?
and note that if China deals with its unemployment problem by subsidizing exports with an undervalued exchange rate/ maintains a large current account surplus it necessarily will be buying a lot of the assets of the rest of the world. Right now it buys treasuries — but it might change. And financially speaking, some might call these purchases a form of conquest … certainly assets are being transfered to China’s government.
gillies — amusing comment; like the image of an EU commissioner railing against rouged pork …
Brad,
I’m not aware of any reason why the Chinese government would have ran 3-4% fiscal deficits prior to the domestic and global slowdown. If you look at where the fiscal deficit spendings have come from in the States, they’ve come from the redistributive portions of the budget such as Medicare and SS spendings and also on national defense. China hardly has the luxury to spend on expensive medical treatment from the limited pool of domestic savings at the expense of private investments. Also, weren’t private investments driving up the GDP fast enough without the benefit of public spending?
The mere fact that credit is plentiful drives up the nominal value of assets held by the Chinese, which doesn’t mean the Chinese are getting any more payments on those assets than we get from our investments in China.
As protectionist as we are in our views about China possibly taking over the assets of US industry, the Chinese themselves are even more paranoid about the prospect. It is no coincidence that Chinese holdings of US securities, even those issued by agencies, have been liquidated in favor of further Treasury purchases. The goal is domestic employment and preservation of the exchange rate, not a takeover of American industry (for now).
observer: i can name one former senator that has a very consistent record of voting for protectionism.
Obama is as protectionist as he is a socialist. Trying to label Obama as a protectionist was political non-sense by Clinton and McCain, and it’s significant that both campaigns used protectionist as if was a bad thing.
bsetser: ummm — why doesn’t China have the capacity to start running 3-4% fiscal deficits rather than a 1% surplus?
It does. However China does have a lot of hidden debt that will need to be paid. The important thing will be to see if China has something like a banking crisis in the next three to six months. I’m optimistic that it won’t, but Michael Pettis and a lot of other people tend to disagree.
bsetser: One. China hasn’t actually been promoting labor intensive industries, labor intensive exports. its export boom hasn’t produced a jobs boom.
Yes it has. The thing about China was that it was shedding jobs from the SOE’s as quickly as it was generating them via exports. Also, high paying manufacturing creates a lot of secondary service industry jobs.
bsetser: in part b/c the booming export sectors now tend to be capital rather than labor intensive.
No. The booming export sectors are extremely labor intensive, but that’s not where the bulk of Chinese growth comes from.
observer: The Chinese government has been under tremendous pressure to promote the livelihood of Chinese farmers, which necessitates the shedding of hundreds of millions of excess labor in farming.
On the other hand the shift between rural and urban areas is something that is going to take decades. The other thing is that over the last year, China has tried to promote rural industry by massive infrastructure spending.
The other thing is that any sort of labor intensive industry is going to run into problems, once the labor runs out which is going to happen very shortly.
bena: here are various forms of protectionist policy already being pursued:
- currency devaluation and build up of excess currency reserves
- tax breaks for exporters
- soft loans to exporters in industries with massive excess capacity (e.g. car companies)
Sure, but none of those violate WTO, and my gut feeling is that they don’t create the sort of comparative advantage problems that import tariffs do. It is important at this point not to get into “ism’s” but rather focus on specific policies.
In the last ten years, it is popular to talk about convergence, but what I think is a little funny is that the economic systems of the US and China are starting to converge, only not in the way that the US expected.
So the US is ending up with four megabanks that are basically state controlled, as well as a massive bailout of industrial enterprises with too much pension and health care debt.
“Nice analysis from the Economist”
Their analysis looks pretty much like gibberish to me. In a world of deficient aggregate demand, a big trade surplus will not help global growth.
flow5,
Chinese fx exchange reserve is not equivalent to Chinese net investment position — it depends on who ultimately owns some of trade surpluses.
Brad,
Do you have any data on China’s net investment position?
Yawn. When China’s export growth percentile is in the negative double digits wake me.
It might be worth noting that China has a history of running down import demand – especially for things its SOEs negotiate for in bulk at annual prices, such as coal, steel and a host of non-ferrous metals – at the end of the year, simply because the negotiations re-open in January. The extent of the drop in exports is surprising and, no doubt, is the bigger driver of the import drop. It might, however, be somewhat exaggerated by some deliberate choices to run down inventory…
Brad,
I can’t understand something. Today the Treasury issued its semi-annual report to Congress on “International Economic and Exchange Rate Policies.” You can read it here.
In the major findings of the report they claimed that no foreign government was manipulating its currency. But in the China section they have a detailed analysis of exactly how China is manipulating its currency.
Why do they claim that no government is manipulating its currency?
a) To avoid protectionist sentiment.
b) Doing so would require actions which they don’t want to take.
c) The peons write the details, but the higher ups write the overall summary.
I just don’t know what to make of this. Any insight would be appreciated.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Howard Richman responds: Why do they claim that no government is manipulating its currency?
Because when push comes to shove there are just too few people in the United States that care about the trade deficit with China for any politician to care about.
You totally missed what the fight was about two years ago, and all of the people who were complaining about currency values got what they really wanted, and no one political significant cares anymore. I have a standing challenge to name five Congressmen how are currently making a big deal about China trade and three industries that would benefit from RMB appreciation. So one no one has taken me up on this.
What’s more it is likely that in the next year the United States may (and probably will) copy China’s policies and use export rebates, subsidies to domestic industries, investment restrictions, and intentional action to change currency exchange rates. No one in Congress or Treasury wants to be in the embarassing position of complaining that China is doing something that the United States may be likely to do next year.
for china’s net international investment position — i recommend SAFE’s data.
http://www.safe.gov.cn/model_safe_en/news_en/new_detail_en.jsp?ID=30100000000000000,176&type=&id=2
i did a post on it as well, but google didn’t help me find it ….
MMcM. y/y oil import volumes are down per the WSJ. Even taking your argument about holding off on purchases for negotiating leverage, i would think that this implies a meaningful contraction in domestic demand …
bsetser: “i would think that this implies a meaningful contraction in domestic demand …” I agree with that completely. I’m wondering to what extent that demand is being artificially depressed as some importers decide they’d rather wait six weeks for cheaper materials…
A few points from a lapsed commentator:
1. No one in the Chinese leadership has any experience whatsoever with falling foreign demand.
2. The technocrats and their advisers were in school (at best) during the last US consumer recession.
Hence, mistakes will be made.
As for running a 3-4% of GDP budget deficit, the data out of China are so poor that we can’t tell how large GDP is, let alone whether the government (central? provincial?) is running a surplus or deficit. The most common mistake I’ve seen in 25+ years of daily analysis of China’s political and economic scene is assuming the data are OECD quality.
True, there’s no substitute, but we all need to be reminded of that old saw G.I.G.O.
“China doesn’t have the ability to radically increase their domestic demand, or they would have ages ago. Raising wages puts pressure on a big competitive advantage they have.”
You could substitute Japan in the statement above. You would then say “Japan doesn’t have the ability to radically increase their domestic demand, or they would have ages ago.”
Of course this is completely false. Having the ability and having the desire to do something are completely different.
Brad, you might be looking for this post:
http://blogs.cfr.org/setser/2008/06/24/why-not-more-articles-on-chinas-reserve-growth-and-just-who-are-chinese-banks-lending-to/
And welcome home, DOR. We’ve missed you, and you’ve got an excellent seat from which to watch the action from what I dimly recall, so check in when you can.
@brad: … it “appears” to be shrinking fast. That said, it could very well, continue to.
On alternative endings:
If Bernanke’s doing what I suspect him to, then he may yet vindicate himself onto the future history book. That coin though has two sides to its note. The second being small – not large – businesses, not (derivative) banks!
As mistakes are easy to make as was demonstrated recently, I’ll postpone my vote on the lipstick.
Observer,
Pretty good comments.
Brad,
Is there anything surprising in what you see? This is not a sign of negative growth, just a correction towards the true growth path of the world economy, under the layers of Blair-Bush credit-based makeup. Of course the exporters (and thus world trade) will feel the pain now all that artificial demand is lost.
Twofish responds to my question about why the Treasury would release a report whose conclusion did not match its text. The conclusion said that no country was manipulating its currency. The text documented how China was doing it. Twofish’s theories:
1. Nobody in the US cares. — I don’t agree. The Democrats have been winning seat after seat by giving lip service to the trade issue.
2. The US is going to do the same thing as China, so it doesn’t want to complain. — I don’t agree. There is no indication, whatsoever, that the US government plans to do anything even though balancing trade would immediately get the U.S. out of the depression.
It is difficult to avoid the interpretation that the top levels of the US Treasury in the Bush Administration want Chinese loans for the US banking sector and are willing to sacrifice the rest of the U.S. economy to get them.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Dr. Setser,
According to Diane Lin, a fund manager,
interviewed at Bloomberg, import VOLUME was down 9% YoY, in so less than half of the fall was prices.
I’m having a hard time getting my head around the idea that China can be maintaining any positive growth, at least MoM everything seems to be negative.
DOR — fair points. Directionally though China could spend more (or hand out cash ….) or scrap remaining fees for schools and health care and run up a fiscal deficit, even if we won’t know its share of GDP.
And you are right that Chinese policy makers haven’t experienced this before. Then again some of us warned China a long time ago that relying on exports so heavily meant that you risked importing economic volatility from the rest of the world –
Howard,
Since China held the renminbi at a fixed (ie the opposite of manipulated) dollar exchange rate from 1994 to 2005, after which it appreciated almost monotonically against the dollar, it would be hard to argue that China has manipulated its currency (at least, not by engineering depreciation).
I do agree though that China would be manipulating its currency, not to mention giving up the moral high ground, if it forced a depreciation of the renminbi in response to falling exports. Hopefully, they will resist this temptation.
Richman: Nobody in the US cares. — I don’t agree. The Democrats have been winning seat after seat by giving lip service to the trade issue.
No they haven’t. I voted for Obama remember? The problem is that at some point they have to stop talking about “change” and answer the question “What change?”
I made damn sure before I voted for Obama and friends that when they had to make a decision on this, that they’d make it in ways that I don’t object to, and to have plan B ready in case it turns out do something different than what I think say in their speeches.
You can go seat by seat to see that this is the case. You might get a line in a speech about how bad the deficit is, but lines in a speech is all you are getting.
Never make the mistake of trusting a politician to do what he says in a speech. This applies to any politician.
Richman: It is difficult to avoid the interpretation that the top levels of the US Treasury in the Bush Administration want Chinese loans for the US banking sector and are willing to sacrifice the rest of the U.S. economy to get them
It’s not just the Bush Administration, it’s the Obama Administration and most of the people in the United States. Also, if it the judgment of most voters, keeping a trade deficit is the best way of keeping their jobs and standard of living, then it’s really hard to argue that you really are “sacrificing the US economy.”
True. No one in the Chinese government has much experience with falling foreign demand, but no one in the Chinese government in 1990 had much experience in transitioning an economy away from central planning.
The quality of leadership or lack thereof really shows through when people are faced with a new situation that they’ve never seen before.
locococo:
“any thoughts on Fed s “newest” proposal?”
I don’t know. My guess is that the Fed’s introduction of the payment of interest on excess & required reserves has proven more difficult than expected.
The Fed’s technical staff can’t quantify / calculate the correct remuneration rate on excess reserves.
With the Fed issuing it’s own debt, its balance sheet expansion (lending/discount operations) could be “mopped up” on a dollar for dollar basis.
However, the Fed cannot offset these advances on a very large scale – without destroying the Treasury’s capacity to manage the national debt.
China is in control now and all we in the USA can do is borrow more and more. At some point this thing won’t work anymore!
Brad
My company does a lot of importing of Ag Chemicals from China. As such we have a man on the ground so to speak over there. I don’t think anyone has a clue yet how bad things are over there. The sheer percentage of business closures in the last two months is astounding. We understand up to thirty percent of small businesses in certain areas shut down two weeks ago for the new year. Year end bonuses were paid and money paid to return workers home. All were told not to return unless contacted. They may have a lot of dollars but our situation pales in comparison. That economy is now very scary.
@Rebel Economist: “Since China held the renminbi at a fixed (ie the opposite of manipulated) dollar exchange rate from 1994 to 2005, after which it appreciated almost monotonically against the dollar, it would be hard to argue that China has manipulated its currency (at least, not by engineering depreciation).”
Actually, China manipulated its currency by not letting it appreciate. Basic economics holds that trade imbalances correct themselves. The currency of the country with a trade surplus strengthens, the trade deficit country’s currency weakens. China did not let this happen.
Howard
@Steven Govan
I took the liberty of reprinting what you wrote just above on my blog as it matches what I have been predicting and saying.
Howard Richman
http://www.tradeandtaxes.blogspot.com
Brad,
Thanks for the reference on the Chinese net investment position. That was very helpful.
Howard,
Unfortunately, the basic economics you cite only applies in the long run. In the shorter term, capital flows can drive the exchange rate and through that, the current account – not all economists and textbooks have fully caught up with the development of the international capital market.
Since in China, the government restricts private sector capital flows, you cannot be sure what the “unmanipulated” capital flow would be. It is possible, especially as China’s own economy deteriorates, that unrestricted private capital outflows might exceed the current flow of intervention, in which case a floated renminbi might depreciate.
The good resource is informative and actual