“Also it is *extremely* unwise to assume that the US dollar will depreciate even with the massive amount of money that is being printed. People have lost massive amounts of money making that bet over the last century. Financial systems are extremely complex, and strange and bizarre things do happen especially with currency exchange rates.”

Hmmmm…

History does not equal future, and counting on “strange and bizarre things”?

If this is the best you can do….think I’ll be increasing my dollar hedge.

I’m not sure what surge in Chinese sales to Europe you’re referring to. EU-25 imports from China rose 26.2% p.a. in 2000-02 (euro terms), and 17.4% p.a. in 2003-07. (http://epp.eurostat.ec.europa.eu/portal/page?_pageid=1996,39140985&_dad=portal&_schema=PORTAL&screen=detailref&language=en&product=REF_TB_external_trade&root=REF_TB_external_trade/t_ext/t_externaltr/tet00018). Import of machinery and transport equipment from China (40-45% of all imports from China) rose 30.5% p.a. in 2000-02 and 15.8% p.a. in 2003-07.

Utilized FDI averaged US$40-45 bn a year in 1996-2001, and $52-92 bn a year thereafter. That might have had some small effect on the export sector. The length of China’s highways increased 5.3% p.a. in the ten years prior to 2002, and 18.3% p.a. thereafter. Freight moved on the rails rose 2.7% p.a. in 1993-2002 and 8.9% p.a. since then.

And, the kicker: in 1993-2002. global trade rose an average of 5.6% p.a., whereas in 2003-07 it rose 16.5% p.a. Personally, I don’t think that was entirely due to China’s exchange rate.

As for the export boom not creating a job boom, I cannot believe the data are sufficiently accurate to lead to useful conclusions about the jobs per unit of export. What I can believe is the incredible explosion of growth, jobs and prosperity that my own eyes have witnessed, and that every single one of my contacts would verify.

Similarly, what accounts for the acceleration in chinese export growth from 02 on if not the RER depreciation brought about by dollar depreciation.

95-02. CNY appreciates in real term. China doesn’t run big surpluses.

02-06: CNY depreciates in real terms as productivity growth accelerates. China develops a large surplus.

I am happy to be persuaded otherwise, but for now, I would argue that the evidence suggesting that the real value of the RMB has a major impact on the rate of export growth is quite strong …

as for Zhongnanhai, i presume the engineers there have figured out that china’s exports can increase by a factor of 5 over the next 8 years (given their current size/ realistic growth in world amrkets). and I also figure the engineers there are smart enough to realize that China’s export boom didn’t actually produce a boom in employment, as there was too much substitution of capital for labor. Per unit of growth, CHina’s job creation was actually incredibly weak … and labor income fell as a share of GDP during the boom. If exporting was a jobs policy, it wasn’t one that was working …

bsetser: Your advice on China appreciating the RMB vis-a-vis the dollar at the first sign of export growth, and relying on domestic demand to pull out of the slump doesn’t seem to take into account the main economic objective at the heart of Zhongnanhai’s worries: unemployment.
Domestic demand is how China will crawl out of the NEXT major economic downturn, not this one.

China reducing its dollar holds relates in the sense that QE undertaken by the Fed has supplanted their demand, and WILL continue to INCREASE, for USD assets. More on these two topics here:

http://www.debtorsprisonblog.org/journal/2009/4/16/what-if-the-money-multiplier-model-doesnt-work.html