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The US doesn’t name China a currency manipulator

by Brad Setser
April 15, 2009

This wasn’t exactly a surprise, despite Secretary Geithner’s comments in January. The US made a large global stimulus — and a larger IMF — its priority in the G20, not exchange rate reform.

Moreover, this isn’t the right time to force resolution of this issue.

China’s exports to world and US imports from China are both falling. Chinese reserve growth — read the amount of dollars China has to buy to keep its currency from appreciating — has fallen sharply. And perhaps most importantly, the RMB was one of the few emerging market currencies that appreciated during the crisis in real terms.

According to the (recently rebased) BIS real effective exchange rate index, the RMB has appreciated by over 10% since June 2008 — and by almost 18% since December 2007. Other indexes show sligtly smaller real appreciation. But there is little doubt that China appreciated in real terms when many other emerging economies depreciated in real terms. This seems to have been been an important factor in the Administration’s decision. The Treasury noted that the RMB was basically stable when most other emerging currencies fell (“As the crisis intensified, the currency appreciated slightly against the dollar when most other emerging market and other currencies fell sharply against the dollar.”)*

Make no mistake, China’s currency still looks undervalued. It is only a bit higher — according to the BIS index– than it was in 2001 or 2002, back when China was exporting a fraction of what it does now. In other words, the rise in the productivity of China’s economy hasn’t been mirrored by a rise in the external purchasing power of its currency. That is a big reason why China’s current account surplus remains large.

And the underlying issue remains: the biggest driver of moves in China’s real exchange rate remains moves in the dollar. History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus — and thus China’s accumulation of money-losing foreign assets — is going to come down. It will be hard — in my view — to have a stable international monetary system if the currencies of all the major economies but one float against each other. And China is now a major economy by any measure.

But it makes far more sense to have a fight over China’s exchange rate regime when China’s currency is depreciating in real terms and Chinese intervention in the foreign exchange market is rising — not when China’s currency is rising in real terms and Chinese intervention in the foreign exchange market is falling.

Especially when there are a few tentative signs that China’s stimulus may be gaining some traction.

The Obama Administration made it clear, I assume, that the size of China’s stimulus would be a factor in its judgment. The world needs demand. And if a large Chinese stimulus pushes up inflation in China and that led to a real appreciation, that would help bring about the needed real exchange rate adjustment even absent further nominal appreciation against the dollar.

Even the Peterson Institute’s Morris Goldstein – a hawk on this issue — didn’t seem to think this was the time to label China a manipulator. Back in January he argued that the US should indicate that China met the criteria for manipulation from 2004 to the first part of 2008.

“I think we have a somewhat more nuanced situation than we had a year ago or so. I think they should say, to set the record straight, that China had been manipulating in the past and still is doing so, but they were manipulating particularly from 2004 through 2007, 2008. They’re still doing it in the sense of large scale intervention to keep the renminbi from rising as much as it should. And that such currency manipulation is against the IMF rules of the game and it’s undesirable. The report should say that. The report should also acknowledge that in the last 15 months or so, they’ve made a lot more progress in allowing the rate to move. Their global current account surplus is peaked. It’s probably starting to decline. So I think they should be encouraged to cut down on the scale of intervention, but I wouldn’t recommend punitive penalties right now.”

But so long as China pegs tightly to the dollar and runs a large current account surplus, the basic issue is not going to go away.

* The appreciation against the dollar in nominal terms was so slight as to be almost impossible to perceive.

54 Comments

  • Posted by don

    Based on information from previous posts on this blog, I gather the slowdown in reserve growth is at least somewhat the result of a cessation of hot money flows into China. After all, china’s net trade balance is still improving, which implies a larger net capital outflow. I can’t wait to see if this surplus actually shrinks in future.

  • Posted by bsetser

    tis more than the end of hot money inflows; it is the product of a rise in hot outflows, notably in late 08/ early 09 as private investors in china started to think that the rmb could depreciate v the dollar. judging from the market price of the nondeliverable forward (an offshore bet on the direction of the rmb), expectations have now shifted again, and the “market” now expects a small appreciation.

  • Posted by real

    in order for us to get out of this, China will need a) massive increase in internal consumption b) appreciation of RMB and C) some degree of broad inflation.

    the BDI index sums it up well, things are getting worse, not better.

  • Posted by AllanGreen

    Wondering if I could get an answer here-

    what does currency manipulation in China mean for IMF estimates of its GDP, both PPP and brute?

    I would love some critical insight on estimates of China’s economic size. Was it last year that the WB cut its China GDP by 30%?

  • Posted by Twofish

    Allan: What does currency manipulation in China mean for IMF estimates of its GDP, both PPP and brute?

    It doesn’t. Also the term “currency manipulation” is a political term, and the politics has changed dramatically over the last several months.

    Allan: I would love some critical insight on estimates of China’s economic size. Was it last year that the WB cut its China GDP by 30%?

    The problem is that what people want is a single number that says that China’s economy is X big when in fact it’s very hard to get a single number like that. It’s easy to say that China’s economy is bigger than Fiji’s, but once you start comparing China with Germany, it turns out that there are lots of things in the statistics that are either unclear or in which you can handle them in different ways.

    The reason WB cut it’s estimate of the Chinese economy has to do with deflators. Basically to figure out the size of the Chinese economy, you need to figure out what a single RMB was worth in 1980 and what is worth today, and they reset those estimates.

  • Posted by df

    it s up to europe to act tough on China. Europe is the hardest hit by Chinese peg on the dollar.
    And Europe would benefit if the dollar would be dumped as an international currency, with IMF stepping in instead.

    So Europe should try to exchange support to the chinese proposition in exchange for less Chinese export. Dunno if this would work.

  • Posted by Twofish

    bsetser: In other words, the rise in the productivity of China’s economy hasn’t been mirrored by rise in the external purchasing power of its currency.

    I don’t think that the shift in currency values had anything to do with Chinese policy.

    The main policy decision that caused everything to go crazy was Bush’s decision to cut taxes and invade Iraq. The US has spent close to US$2 trillion on the Iraq war, and the wealth that is expended on the Iraq war had to come from somewhere. Part of the reason I’m rather optimistic about the US economy is that as the US gets out of Iraq, there is going to be a huge amount of wealth available to do things like fix the banking system.

    Part of what has changed over the last few months is that the US is simply not in a position to lecture China on how to run its economy or to pass judgment on Chinese economic policy.

    bsetser: History suggests that China cannot count on dollar appreciation to bring about the real appreciation it and the global economy need if China’s surplus — and thus China’s accumulation of money-losing foreign assets — is going to come down.

    But there really isn’t that much history here. The historical record consists of one period 2003-2008 and trying to extrapolate from one point is very difficult.

    Also, it is far, far from clear that Chinese asset accumulation is money losing. It might be, but there if you look at the broad history (i.e. the last three hundred years of economic history), people get into a lot of trouble because they take current trends, extrapolate them, and then something bizarre happens.

    The the case of the value of the RMB, lots of people in 2005-2008 made huge bets that the value of the RMB would rise, and they all got smashed over the last few months.

  • Posted by Twofish

    Deep down, I don’t think that the Chinese leadership is any more altruistic or less hungry for personal wealth and power than the leaders of the United States. The difference is competence.

    You have to ask yourself whether the United States after the last decade is richer and more powerful than it was at the beginning or even at a personal level whether or not the people making the decisions are *personally* richer and more powerful, and the answer is probably not.

    The lack of altruism matters because Chinese and American leaders will only do the “right thing” if they have a self-interest in doing so.

    For example, if you are a Chinese peasant, you are likely to benefit from the selfishness of the leaders in Beijing because you know and they know that if you become very, very unhappy, you can and will overthrow the government. So Beijing is going to do what it can to make you happy and rich.

    However if you are a peasant in Angola, you don’t have this sort of control over the Chinese government, and if Beijing can think of a way that makes your life miserable while making the Chinese peasant happy, it will do it because they can overthrow the Chinese government, and you can’t.

  • Posted by Johnny

    Chinese monetary reserves have been cut back since summer 2008.

    Behind the scenes, it looks like China is trying to get out of the “dollar trap”. I’m not as optimistic as some of you on this board in regards to the G20 meeting in London. It surely wasn’t as favorable or “open minded”-engaging as Gordon Brown or President Obama would like to entertain. Yes both Brown and Obama spoke of engaging the emerging players but the action was not as bold as China (or others such as Russia/Brazil, etc) may have wished for. The G20, lead by U.S. and UK failed to give high regard to China’s call for a new global currency which may have helped readjust the flows of global imbalances. As Merkel put it best the leaders “almost” tackled the crucial questions. Not did, but “almost”.

    Now the world is facing a collapse of global trade, increased global imbalances and is slowly witnessing China dramatically cut back on new dollar reserves (this will likely continue).

    With global trade in free fall, China cutting back on it’s U.S. dollar reserves, immense u.s. expenditures (as a percent of GDP, could spike to 100% by 2011) vs. net revenues (taxes,plunging tax receipts) I’m beginning to wonder just how this year will play out.

    China is surely trapped, but it looks like it’s slowly preparing itself for the inevitable.

    Ladies and Gentlemen, place your bets, the stage has been set for a currency crisis.

  • Posted by bsetser

    2fish — well, if you buy massive amounts of dollars to keep your currency from rising to give your exporters a leg up, it stands to reason that the currency would rise if you stopped buying … the odds are China will take losses.

    W’s policies from 02 to 04 certainly played a role. But i think you are discounting the impact of China’s policies.

    the RMB’s real depreciation had a large impact on china’s exports (as a host of studies have shown, consistent with other studies showing that a real USD depreciation helps US exports).

    And the decision to impose lending curbs to avoid inflation after inflation moved up in 03/ early 04 is clearly tied to a fall in china’s imports and the emergence of its surplus.

    Usually a country that doesn’t save and embarks on a costly war while cutting taxes is penalized with higher long-term rates, and that pulls home prices down. That didn’t happen in the US. indeed, i got interested in china and chinese reserves in large part b/c it didn’t happen.

    The issue isn’t whether or not the tax cut/ war pushed down US nat’l savings and pushed up US aggregate demand. they did. the issue is why that policy mix didn’t generate higher real interest rates and thus offsetting falls in private demand growth.

    And there i do think you need to look at the chinese policies that led to China’s surpluses.

    I also would note that the main reason why i would give China a pass this time around is the real appreciation of the RMB.

  • Posted by Glen M

    How had the RMB done compared to the makeup of its reserve holdings? Compared to the EURO for example?

  • Posted by charlie

    I don’t think China cares as much about losses on USD holdings as much as people think they do. The way I see it, they’ll only be effected if their own currency becomes worthless. As long as they can print as much RMB as they want and exchange it for any other currency, they really have no need for currency reserves at all.

    What can they do with their USD holdings that they couldn’t do without them? Right now, nothing.

    If something happens and their currency becomes non exchangeable, then they’ll need their USD holdings to buy imports. At that time, depreciation will matter. I don’t see anything outside of their country being severely nuked or being hit with a 5 mile wide asteroid that will make their currency worthless.

    Having said that, it seems the only thing that can break China’s peg on USD is for the US to print a ton of money and have much of that money land in consumers hands who want to buy Chinese imports. It’s possible the resulting rush in USD into forex in exchange for RMB could overwhelm the PBoC and the resulting domestic inflation that would result from their continued pegging attempts would become untenable. One way or another, prices would rise in China and the PBoC may decide it’s better to do this via an appreciating currency than via domestic inflation.

    This isn’t likely to happen any time soon. The FED can buy all kinds of debt to try to cause this, but what would likely happen is the proceeds would go towards propping up bank reserves and cause a bubble in equities. It wouldn’t cause wage inflation, which is what would be needed.

  • Posted by jye

    bsetser– I see a conflict in the following 2 statements.

    1) China’s currency still looks undervalued. … the rise in the productivity of China’s economy hasn’t been mirrored by a rise in the external purchasing power of its currency.

    2) more than the end of hot money inflows; it is the product of a rise in hot outflows, notably in late 08/ early 09 as private investors in china started to think that the rmb could depreciate v the dollar.

    Statement 1) argues RMB is undervalued. Statement 2) says, around current exchange rate, private investors changes their minds about depreciation/appreciation. If 2) is true, then the current exchange rate is about right.

    Do you care to explain more?

  • Posted by MMiller

    Brad,

    Have you considered what China may be doing vis-a-vis commodities? Evans-Pritchard raises an intriguing possibility:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html

  • Posted by jonathan

    Your comment in your comments section regarding higher real interest rates hits right at the heart of how the world economies relate. (I tried to stick in a 3rd use of “comments” but I have personal rules about being redundant for show.)

    I was looking at charts of tax burdens over time and it’s clear that blaming the Fed for loose money leaves out the political decision to reduce the overall tax to GDP ratio when spending was increasing. The well-known national debt numbers show the same thing, that we added about $2.3T in the 80′s, then again in the 90′s and then in less than 8 years, not even counting what’s happened lately, added $5T. That’s more than an extra decade’s worth of debt growth in less than 8 years! I imagine a number of arguments will develop over time about which lever – money supply or tax policy – hurt the most.

    (In this regard, I saw one of the “tea party” protests pass by yesterday. The debt has grown the most under GOP Presidents and GOP Congresses. Without making a statement about which party is “better,” the GOP is simply not the party of fiscal responsibility.)

  • Posted by August

    it’s funny to hear that china is manupulating its currency. while in reality the US/FED is the single biggest manipulator. what china does is simply peg its currency to the dollar, so that whatever dollar does, it just follows.

    so if china is indeed manioulating, that’s because the dollar is being manipulated.

  • Posted by DJC.

    Chinese shift to Natural Resource “Hard Assets” from fiat printed US Dollars

    http://online.wsj.com/article/SB123983905001523027.html

    Bankers, lawyers and diplomats contend that Chinese leaders have sent out word that China SOE’s should secure natural resources. “There is a clear policy of getting resources,” says one Western diplomat.

    China Inc. is drawing increased attention as Chinese companies snap up mining and energy assets around the world. China announced foreign acquisitions totaling $52 billion last year, two-thirds in natural resources, according to Dealogic. This year, there have already been 65 deals totaling $23.2 billion, nearly all in natural resources, Dealogic says.

    Four years ago, concerns by U.S. lawmakers about ties between China’s government and business helped kill a bid for Unocal Corp. by Chinese oil company Cnooc Ltd.

  • Posted by DJC.

    Grossly irresponsible US monetary policy by Geithner and Bernanke of printing trillions of fiat dollars to bailout politically-connected Wall Street banks will leave the entire economy in total ruins. – DJC

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5160120/A-Copper-Standard-for-the-worlds-currency-system.html

    Nobu Su, head of Taiwan’s TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

    China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.”

    “The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources,” he said.

  • Posted by Twofish

    DJC: Grossly irresponsible US monetary policy by Geithner and Bernanke of printing trillions of fiat dollars to bailout politically-connected Wall Street banks will leave the entire economy in total ruins.

    No it won’t. Printing massive amounts of money is exactly what the US economy needs right now. – Twofish

    Buying assets for the sake of holding them as currency reserves is just plain stupid. Dumb. Dumb. Dumb. I don’t think that they are doing that.

    My suspicion is that the State Reserve Bureau is just stocking up on metals while prices are low. Also this is the agency that lost $200 million through a single trader a few years back, so it’s not out of the question that they are trying to prop up the price of copper and metals to cover some bad bets.

  • Posted by DJC.

    Twofish,

    Buying assets for the sake of holding them as currency reserves is just plain smart. Especially when the base US Dollar M-1 money supply is at an accelerating 14% double-digit growth rate. The Federal Reserve is literally printing trillions of fiat dollars devaluating the purchasing power value of those dollars held by the China PBoC.

    http://www.shadowstats.com/alternate_data/money-supply

  • Posted by Johnny

    China is hedging for a fall in the dollar with purchase of copper, gold, oil, and other hard asset commodities to eventually propel internal drivers for consumption.

    Since China is rapidly decreasing reserve purchases of U.S. debt, if China doesn’t or can’t afford to buy, who will?

    In that case only the Treasury/Fed will be left as the true currency manipulator running the printing press until the country is out of trees.

  • Posted by Johnny

    @ TwoFish

    soon the world will be move from talking about “Toxic Assets” to “Toxic Credit” as we move from financial market crisis into a serious currency crisis.

  • Posted by Twofish

    bsetser: It stands to reason that the currency would rise if you stopped buying … the odds are China will take losses.

    If nothing else changes then sure, but lots of things are changing. The other thing is that you have to ask the question “losses as opposed to what?”

    bsetser: W’s policies from 02 to 04 certainly played a role. But i think you are discounting the impact of China’s policies.

    W’s policies from 2002 to 2004 were critical because once W invaded Iraq and cut taxes, the key assumption that had been the basis of Chinese currency policy since 1993 and in fact the key assumption that had been the basis of global finance since the late 1980′s was broken.

    At that point the question becomes how China would have reacted, but without the Iraq War, there would have been nothing to react to. The situation is quite similar to the 1970′s and the consequences of Johnson and Vietnam.

    bsetser: Usually a country that doesn’t save and embarks on a costly war while cutting taxes is penalized with higher long-term rates, and that pulls home prices down.

    Or inflation which pushes home prices up which is what happened in the 1970′s.

    bsetser: The issue isn’t whether or not the tax cut/ war pushed down US nat’l savings and pushed up US aggregate demand. they did. the issue is why that policy mix didn’t generate higher real interest rates and thus offsetting falls in private demand growth.

    Because there was a source of real wealth in China once the SOE’s were fixed. Something that is very critical is that China would not have been able to support this level of exports in the 1990′s. In order to China to have such large dollar reserves, it was necessary for China to have a pool of savings to sterilize the dollar influx.

    So I think we agree on the dynamics of the situation. The part I disagree on is that once Bush decided to go to war in 2003, that there would have been outcomes that were much better than the what happened. Suppose interest rates increase dramatically, what then? Pull troops from Iraq and leave the country in with Al-Qaeda in charge? Keep the troops and raise taxes to the point, that the economy is permanently in recession?

    The big decision was to invade Iraq, and the big gamble was that it was going to be a short victorious war. Once that decision was made and the $2 trillion gamble was lost, everything else that was done were minor details.

  • Posted by gillies

    i was intrigued by the ‘copper standard’ suggestion.

    hard to imagine going shopping with gold bars – but perhaps people would trust a currency made of copper and thus in more convenient denominations.

    campaign slogan for his second term -

    “small change you can believe in.”

  • Posted by DJC.

    Gillies,

    Not only copper, but Chinese Forex reserves are being allocated for a strategic oil reserve, uranium, and rare earth metals. With the recent acquisition of Australian and Southeast Asian mining interests, the Chinese government presently controls an almost monopoly 80-90% of the world’s supply of rare earth metals that are essential for the production of almost every high-tech industrial product from bullet train power systems, hybrid electric vehicles to wind generator turbines. The declining export of Chinese rare earth metals has major Japanese industrial corporations in a panic state.

  • Posted by DJC.

    Rank country GDP (Purchasing Power Parity) YEAR 2008

    United States $ 14,290,000,000,000 2008 est.

    China $ 7,800,000,000,000 2008 est.

    Japan $ 4,348,000,000,000 2008 est.

    India $ 3,267,000,000,000 2008 est.

    Germany $ 2,863,000,000,000 2008 est.

    United Kingdom $ 2,231,000,000,000 2008 est.

    Russia $ 2,225,000,000,000 2008 est.

    France $ 2,097,000,000,000 2008 est.

    Brazil $ 1,990,000,000,000 2008 est.

  • Posted by Glen M

    DJC,

    The problem with these strategic acquisitions is that the manner in which the are controlled is against WTO rules. Page 97 of the USTR report on the barriers to foreign trade has details. How much do you think China’s trading partners are going to tolerate before they react?

    It is too bad China can’t buy demand.

  • Posted by John McLeod

    Pardon OT.

    H.4.1 table update just documented biggest ($26.762 billion) treasuries weekly buy “ever” or at least since Feb ’00.

    http://www.reuters.com/article/companyNewsAndPR/idUSNYS00500020090416

    … and T-bills are ***down*** What’s with that?

  • Posted by John McLeod

    … my bad … SECOND biggest (biggest was $43.928 on week ending Oct 1, ’08)

  • Posted by DJC

    Glen M,

    Contrary to the widely held views of the Washington Consensus Elites, the United States doesn’t control or own the entire world. The same Washington bureaucrats who couldn’t operate or manage a babysitting daycare, think they are entitled to tell the Chinese government how to operate their country. Advise on any aspect of Chinese politics, culture, business, or society isn’t welcome from foreigners. Frankly, it’s none of the US damn business. So if the US government doesn’t like the Chinese government, then don’t conduct any business with them. The Chinese will find other global business trading partners.

  • Posted by Ying

    “It is too bad China can’t buy demand.”

    It’s the easiest thing in the world to learn how to spend money and increase demand. If the government has money, it can equip every class room with computers and provide free education till university. If individual has enough savings, they can spend more. The problem is that there is no money. China has the capacity to produce but no money. There is a diminishing rate of return from global trade. The real economy of US and China has both stagnated long before the financial crisis. The cost to buy a sweater in US is almost the same as the cost to buy it in China. Looking forward, unless US can find another cheap source of labor than Chinese, the global economy will be stagnated. Brad is wrong in the sense that he thinks that Chinese firms are interested in increasing market shares overseas. They are interested in making money not market shares. If trade with US doesn’t make money for them, they will do something else such as trading with other countries or developing its own internal system.

  • Posted by bsetser

    gillies — i salute your brilliant writing.

    actually, china is currently trying hard to buy demand. or least to have the state banks lend to create (investment) demand w/o worrying too much about whether or not they will be paid back.

    john, I too noticed the big increase in custodial holdings.

  • Posted by Twofish

    DJC: Not only copper, but Chinese Forex reserves are being allocated for a strategic oil reserve, uranium, and rare earth metals.

    No, they aren’t. Beijing is not that stupid. Beijing is going on a spending spree to buy mining technology.

    DJC: With the recent acquisition of Australian and Southeast Asian mining interests, the Chinese government presently controls an almost monopoly 80-90% of the world’s supply of rare earth metals.

    1) You really don’t control anything that isn’t in your own country or which you can’t send soldiers to.

    2) Except for oil, no one has ever been able to create a cartel to control strategic minerals. The problem is that except for oil, minerals are rather easy to substitute.

    Ying: he problem is that there is no money. China has the capacity to produce but no money.

    Then create it. Type a few numbers into some computers, boom. You create money. That wasn’t hard, was it?

  • Posted by Twofish

    DJC: Buying assets for the sake of holding them as currency reserves is just plain smart.

    No. First of all, the value of assets fluctuates wildly and drops at the worst possible time. Second, if you have anything that has any industrial use, the last thing you want to do is to keep it in a vault where it is useless. If you put something in your reserve, you can’t use it, which is why it is a bad idea to use copper as a reserve metal, because you probably want to use it to make wire.

    We ran into big problems when a house stopped being a place that you live in and started to become an investment. If you have any commodity that starts to be a store of value rather than something to use, the price goes sky high which can seriously mess up an economy.

    DJC: Especially when the base US Dollar M-1 money supply is at an accelerating 14% double-digit growth rate.

    Which roughly matches China money supply. Right now we are in a deflationary environment and flooding the world with currency is the way out of this problem.

  • Posted by Twofish

    DJC: Advise on any aspect of Chinese politics, culture, business, or society isn’t welcome from foreigners.

    This is totally and utterly false, every Chinese official that I’ve ever met has welcomed advice and suggestions from foreigners about how to run China. As long as it is advice that they can ignore if they want, they are quite interested in listening.

    Personally, I find DJC’s views to be arrogant, chauvanistic, self-centered, and ultimately quite dangerous.

    Which is why I’m very relieved that very few Chinese in any position of power (or for that matter very few Chinese outside of any positions of power) really share his opinions.

    The other point is that not everyone with relatively positive views on Wall Street is a foreigner. Me for example. I’m Chinese, as is probably a third of the people in my office.

    DJC: Frankly, it’s none of the US damn business.

    Actually it is. Small planet. Also, Americans have come up with some very good ideas. Most of the reforms in the Chinese banking system over the last decade were copied from the United States. It’s one of those “do what I say and not what I do” situations. You had lots of Wall Street risk managers ending up in China because the Chinese government was quite interested in their ideas, whereas the US government wasn’t.

    Right now, the big thing in Chinese finance is to look at the system of private equity, and to start setting up copies of Silicon Valley.

    The Chinese government is extremely open to new ideas, and they are always looking for better ways of doing things.

  • Posted by Twofish

    Ying: . If the government has money, it can equip every class room with computers and provide free education till university.

    This isn’t true. No matter how much money you have, you can’t produce a healthy baby in one month, and it takes years to create working educational systems. It’s very, very hard.

  • Posted by opentrade

    if China liquidated it’s u.s. dollar denominated holdings in the next year or 2 would the U.S. turn protectionist?

  • Posted by Glen M

    Brad,

    China has been buying consumption, not demand. There is a significant distinction.

  • Posted by Glen M

    DJC,

    This is not about telling the Chinese government how to operate their country. It is about honouring an agreed upon set of rules. That is the US’s damn business, along with every other signatory to the WTO GATT also. You seem to be suggesting that China has no obligation to fulfill its agreements.

  • Posted by opentrade

    hopefully the IMF will soon sell it’s GOLD so that China, India, and other surplus countries can swoop up these reserves in minutes.

    selling off IMF gold reserves is very risky. especially as demand is hot.

    you cannot buy gold at the “spot price” without a 25% premium in todays time.

  • Posted by Twofish

    Glen M: It is about honouring an agreed upon set of rules. That is the US’s damn business, along with every other signatory to the WTO GATT also. You seem to be suggesting that China has no obligation to fulfill its agreements.

    Personally, I think that China has done a pretty good job following WTO and GATT rules. The tricky part is that sometimes there is a lot of dispute over exactly what those rules are, and international law and trade law is one of those areas where you need some good lawyers to argue what the rules are. The important thing about WTO is not so much that it provides rules, but rather it provides a process for enforcing and negotiating trade norms. Unlike a lot of other areas of law, there are lots of examples of trade law in which the written rule clearly says something, but international practice is something quite different, and “everyone does it so it’s not illegal” is a perfectly valid legal argument in international and trade law.

    One has to ask if China is so obviously violating WTO norms and standards, why doesn’t the US aggressively file trade complaints against China, and the reasons are that a) in a lot of situations there is a good chance that the trade dispute panels would rule against the US and b) even in situations in which the US gets a favorable ruling then in a lot of situations having an official ruling would influence what the US can do.

  • Posted by DJC

    Twofish,

    Sure the US economy can have some sectors with deflating prices simultaneously with other sectors with inflating prices. But the notion of deflation over any stretch of period is absolute economic nonsense simply because the US Dollar is a fiat printed currency. Bernanke is on record as stating that, “the Federal Reserve has the modern technology of the high-speed printing press to counter any deflation”. It seems Bernanke is putting into practice the words from his mouth implementing a grossly irresponsible monetary policy, mostly for the benefit of Goldman Sachs and Citicorp. I stand corrected by Mish Shedlock. Actually the base M-1 money supply over just the past couple money is expanding at a 100% annual rate. The Federal Reserve has printed a cool $1 trillion in just the past two months. Soon the US Dollar will be worth the equilvalent of toilet paper.

  • Posted by Twofish

    Glen M: The problem with these strategic acquisitions is that the manner in which the are controlled is against WTO rules. Page 97 of the USTR report on the barriers to foreign trade has details.

    One thing that you have to do when someone gives you a legal argument is to realize that there is another side to the argument. Just because USTR says that something is against WTO rules doesn’t mean that it really is against WTO rules.

    Glen M: How much do you think China’s trading partners are going to tolerate before they react?

    Quite a bit. First of all, when you make a legal argument, it’s always “I’m obviously right and they are obviously wrong” but when you make a decision about what to do, the lawyers often realize that the things aren’t quite as clear, and if they push the issue they could lose.

    Second, nations will often overlook apparent violations of WTO rules if in exchange, other nations will overlook their apparent violations of WTO rules, and if in this process, everyone agrees not to press an issue, this changes those rules since much of trade and international law is based on custom and usage.

    For example, US and EU restrictions on Chinese textile imports seems to be a very blatant violation of WTO standards, and China would probably get a favorable ruling if it challenged those restrictions in front of a WTO panel. However, in exchange for not bringing up a case before WTO, China has been able to get concessions in other areas.

    This sort of horse trading is not how most legal systems work, but it is precisely how trade law and much of international law works. The difference is that most national laws are basically “commands from the sovereign” whereas international law consists of agreements between sovereigns, and the power relationships are quite different.

    The problem with things like the USTR report is that the give the impression that China is an outlaw nation that randomly violates international norms, which simply isn’t true.

  • Posted by DJC

    Under the US Dollar hegemony regime backed by military forces forward deployed across the Gulf Arab oil states, Americans get to consume for free, while the Chinese and the rest of the world gets to work for free. The US government enjoys massive deficit spending without tears to fund numerous wars across the planet. The Chinese finance US weapon systems that target China. – DJC

    The Rupture of the International Currency System is Confirmed
    http://www.globalresearch.ca/index.php?context=va&aid=13214

    According to the American leaders and their procession of media experts, to continue to be a prisoner and even to reinforce this prison condition by buying always more Bills Treasury and US Dollars.

    However, does everyone know with what dream a prisoner dreams? With escaping of course, leaving its prison. Also, for LEAP/E2020, there is not any doubt that Beijing seeks without slackening from now on (3) to get rid, as fast as possible, this mountain of “toxic” credits which became the US Treasury Bills and the American currency under which the richness of 1 billion 300 million Chinese (4) is imprisoned.

  • Posted by Twofish

    DJC: It seems Bernanke is putting into practice the words from his mouth implementing a grossly irresponsible monetary policy, mostly for the benefit of Goldman Sachs and Citicorp.

    Can you explain to me exactly how wrecking the US economy and hyperinflation will help Goldman-Sachs and Citicorp?

    On the one hand they are supposed to be these evil uber-powerful geniuses, but on the other hand they are supposed to be so incompetent that they spend their time destroying themselves.

    DJC: Soon the US Dollar will be worth the equilvalent of toilet paper.

    No it won’t. One reason it won’t is that it’s interests of Goldman-Sachs or Citigroup or the United States government for the dollar to be worthless.

  • Posted by charlie

    DJC,

    You need to understand how money supply grows. An increase in money supply in not sufficient in of itself to cause inflation.

    What the FED does is buy debt. In effect what this does is force the money that was invested in whatever they buy to either be spent or much more likely be invested in something else.

    The biggest effect is it drives down interest rates since it decreases the supply of debt which means the sellers of debt can get a better price (Basically the lower the interest rate that has to be paid, the better the price from the borrowers perspective).

    What’s happening now is the debt is being bought from banks and the banks are using the money to cover investment losses. They’re using it to increase their loan loss reserves. The money is not going into circulation, so it’s not causing inflation.

    The FED isn’t trying to devalue the dollar or cause high inflation. They’re trying to keep financial institutions solvent. Once financial institutions are solvent, they can then borrow the money back from banks and decrease the money supply. In theory, it shouldn’t lead to much inflation. I would think that Chinese officials recognize this aren’t too worried about a collapse in USD.

    Basically, the money went into circulation as housing prices went up. The money you see as an increase in money supply effectively went into circulation over the last 10 or so years. It went into the hands of those who sold their houses at inflated prices and didn’t use the proceeds to buy another overpriced home. It didn’t cause much inflation. Probably because globalization was a very strong deflationary counter force.

    In order to have a big increase in inflation in the US, you need the employment situation to change. There has to be a shortage of workers and those workers have to command higher wages. This will put money into hands that will spend instead of horde. I don’t see this happening any time soon.

    If you want to look at an indicator of inflation, don’t look at money supply. It’s better to look at the velocity of money.

  • Posted by DJC

    Twofish,

    Out of the $180 billion that Bernanke wired to bankrupt AIG, the largest chunk of that pot of money was rewired to Goldman Sachs. The Federal Reserve provides trillion dollar bailouts to the corporate executives that created the fiasco that is derived from Enron-type accounting practices. I am certainly sure that Bernanke knew where the taxpayer money was directly going. Now how does the corporate welfare bailout of Goldman Sachs help the American taxpayer straining to feed the family?

  • Posted by Twofish

    DJC: I am certainly sure that Bernanke knew where the taxpayer money was directly going.

    You are contradicting yourself. Either Bernanke is using taxes to finance the bailout, in which case you have no inflation or he is printing money. If that causes inflation that defeats the whole purpose of the “evil conspiracy.”

    DJC: Now how does the corporate welfare bailout of Goldman Sachs help the American taxpayer straining to feed the family?

    First you answer my question, before we go off to another totally unrelated question. You claim that Bernanke is setting up the US for hyperinflation. My question here is how would this benefit Goldman-Sachs and Citigroup who you think run the US Treasury.

    If you concede that the ultimate cost is going to be borne by US taxpayers then this presumes no inflation.

    In any case, most taxes come from the wealthy so if we have to finance this by increasing taxes on people that make $250,000+, that sounds good to me.

  • Posted by Glen M

    Twofish,

    I am well versed in the realities of legal interpretations. Despite that, the fact remains that China is the target of the vast majority of investigations by the USITC. Also, keep in mind, the same realities that subjugate literal enforcement of GATT rules will, eventually, force US politicians to address the resultant job losses. As such the pendulum will just as easily swing the other way.

  • Posted by Twofish

    Glen M: Despite that, the fact remains that China is the target of the vast majority of investigations by the USITC.

    Which means absolutely nothing. As part of China’s WTO accession it agreed to allow nations to put under special scrutiny.

    There is a specific Congressional act 19 USC 2451 that authorizes USITC to investigate and take countervailing measures against Chinese dumping, and China agreed to this special treatment in Annex 16 of its access protocol see (WT/L/432). This special treatment would likely be totally illegal if China didn’t agree to it.

    Now the question is whether or not these sort of investigations every lead to anything, and they don’t. USITC has only approved a very few petition, which goes to the President who promptly tosses the petition and the report in the trash can.

    China likely agreed to being a special target precisely because they knew that the investigations would come to nothing.

    Glen M: Also, keep in mind, the same realities that subjugate literal enforcement of GATT rules will, eventually, force US politicians to address the resultant job losses.

    I doubt it. There have been more job gains from trade than losses, and as long as that is true, you aren’t going to see too many complaints. If nothing has been done over the last decade, I don’t see anything new happening especially since the trade deficit is going down, China is moving away from exports, and China is the source of major markets (it’s practically the only place in the world that GM is making money).

    The only industry that has every gotten anywhere with limiting China trade is the textiles industry, and one thing about trade negotiations is that you can use divide and conquer tactics. Once cotton underwear manufacturers get what they want, they don’t care how many steel workers lose their jobs, and vice versa. The WTO negotiation process encourages this sort of industry specific approach to trade.

  • Posted by Glen M

    Twofish: There have been more job gains from trade than losses, and as long as that is true, you aren’t going to see too many complaints.

    I keep hearing this. Can you provide any statistical backup?

  • Posted by Twofish

    Glen M: I keep hearing this. Can you provide any statistical backup?

    The trouble with statistics is that you can basically massage them to get any number you want, and a lot of times you end up adding apples and oranges.

    Also, it really doesn’t matter. People don’t care how many jobs get created or lost by trade as much as they care about whether *their* job gets hit.

    I can provide anecdotal evidence for this in that the industries I’ve been involved in (finance and high technology) are very heavily involved in trade, particularly Chinese trade, and we can look at employment numbers for those areas. Also we can look at Congressional voting patterns on trade bills which correlate very strongly with job gains and losses in their district.

    I can certainly say that I’m not going to vote for anyone that wants general trade restrictions because it would kill my job. We can then look at statistics and voting patterns to see if I’m unique or not, and I don’t think I am.

  • Posted by Twofish

    The other thing with statistics is the “pounding rubble” problem. Suppose Chinese trade completely destroys an industry, low end electronics assembly for example. All the US workers lose their jobs, find new ones, and once they found the new jobs, they don’t care that much that they lost their old jobs.

    There is no one lobbying to protect low-end electronic assembly in the United States, because there is no low-end electronic assembly in the United States. It’s all moved to China. Once an industry is dead, no one complains. If someone that was once employed in that industry gets another job (say working for Walmart), at that point their political stance will change.

    So if Chinese trade destroyed 1 million US jobs in 2001, but created 900,000 in 2003, then what you end up is 900,000 in favor of trade and 100,000 against it. At which people campaigning against trade is political suicide in most areas of the US.

  • Posted by DOR

    Ying: “China has the capacity to produce but no money.”
    –Nonsense. China is awash with money.

    “The cost to buy a sweater in US is almost the same as the cost to buy it in China.”
    –Nonsense. The difference is about 10:1

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