Showing posts with label china. Show all posts
Showing posts with label china. Show all posts

Thursday, May 9, 2013

China to Switch Sides (of the Trilemma)?

At Wonkblog, Neil Irwin rightly points out that China's announced intention to liberalize financial flows by making it easier to convert renminbi into foreign currency is a big deal.  He writes:
China is essentially weighing a trade-off.  A transition to a freer, more market-based financial system could pack many advantages, including a more efficient system of funneling savings into productive investment, more reliable savings vehicles available for its citizens, and advantages for Chinese companies as they do business across Asia and beyond.

But getting those advantages will come at a price. It means pivoting away from an export-led growth strategy that has been wildly successful over the last generation and has benefited from an artificially low yuan. It leaves China with greater risk of volatile capital flows that have created booms and busts, and bursts of inflation, in many other emerging economies over the years.  And most importantly, from the vantage point of the ruling Communist party, it will mean ceding some of the power now held by top party officials to the hard-to-corral whims of markets.
As Greg Mankiw explains, the international finance "trilemma" (or "impossible trinity" for those who think "trilemma" sounds too silly) implies that a country cannot simultaneously have (i) free capital mobility (financial flows) (ii) a fixed exchange rate and (iii) monetary policy autonomy.  That is, on this diagram, all countries must choose a side:
China's current policy puts it on the right-hand side; while the yuan is no longer pegged to the dollar, its value is heavily managed.  The capital controls come in by preventing foreigners from buying yuan when interest rates in China rise (which would otherwise cause the yuan to appreciate).  Allowing relatively free financial flows and letting the yuan float would put it on the left-hand side, which is where the US is.

There is likely a significant pent-up demand demand for yuan- denominated assets and the rest of the world would soon take advantage of the opportunity to diversify portfolios by investing in China.  Furthermore, free capital flows would help the yuan to gain status as a "reserve currency" held by governments (it isn't one now because nobody wants to hold reserves in a currency they can't freely exchange).  Purchases of Chinese assets by investors and governments would cause the yuan to appreciate (which would be partly offset by outflows as Chinese buy more foreign assets).  This would hurt Chinese exports but raise its wealth and increase its consumption, helping to "rebalance" its economy toward a more consumer-oriented model (currently, consumption is about 35% of China's GDP, versus roughly 70% in the US).

China's policy of intervening to keep the yuan undervalued (relative to what it would be under a free float) means that its been buying alot of dollar-denominated assets.  A reduction in this buying, as well as possibly lower demand for dollars from other countries if the yuan takes market share as a reserve currency, would mean a dollar depreciation.  This would boost US exports, while lowering the purchasing power of consumers, thus rebalancing the US economy in the opposite direction of China's.  In general, the financial inflows associated with the dollar's unique role have meant lower interest rates for the US - while this has been called our "exorbitant privilege", it is, at best, a mixed blessing, as it has distorted the US economy away from tradable goods production and helped fuel the previous decade's housing bubble.  Ceteris paribus, the changes discussed above imply higher interest rates for the US, but for the immediate future, one would expect the Fed to try to make offsetting adjustments.

Allowing the yuan to appreciate would also make exports from other developing countries more competitive, and reduce the pressure on them to keep their currencies undervalued.  That is, the biggest beneficiary of a shift by China might be Mexico.

Saturday, March 31, 2012

Comparative Labor Laws Fact of the Day

The NY Times' Keith Bradhser reports:
When China imposed its current laws limiting overtime four years ago, the regulations set off considerable complaints from workers and companies alike. There is a limit of three hours a day of overtime and six days of work a week. 

“The law is very restrictive about what it allows,” a foreign businessman in southeastern China said Friday. He insisted on anonymity lest his comments be construed as criticism of the government or of labor advocates. Labor laws in the United States are actually less restrictive, in some ways, in allowing workers to put in even longer hours than in China. Generally speaking, as long as American workers receive time and a half pay for anything over 40 hours a week, there are no limits on total hours. 

China officially bans workers and factories from arranging longer hours even by mutual consent, for fear that employers will put inappropriate pressure on workers to put in extremely long hours. 
So, how long before we see Chinese activists boycotting goods made under "inhumane" working conditions in America??

Friday, March 30, 2012

Rebalancing Watch, China Edition

We'll be discussing the US-China trade imbalance in Econ 270 next week.  This played a prominent role in worries about "global imbalances" that were prevalent several years ago.  The concerns linger, but both the US current account deficit and China's surplus have come down significantly over the past several years. 

I discussed the US current account in a recent post.  China recently reported a trade deficit (!).  That was a bit of a fluke, according to The Economist:
China’s trade balance often dips around Chinese New Year, as export factories close for the festival. The holiday also arrived earlier this year than last, distorting the data. But even if the figures for January and February are added together, China ran a deficit of over $4 billion. Exports and imports typically rebound in sync as China gets back to work. This year, imports rebounded alone.
But the broader trend is for a significantly sinking surplus. Jeff Frankel attributes this to real appreciation:
[T]he yuan was finally allowed to appreciate against the dollar during 2005-08 and 2010-11, by 25% cumulatively [=17% + 8%]. Second, and more importantly, labor shortages began to appear and Chinese workers at last began to win rapid wage increases. Major cities raised their minimum wages sharply over each of the last three years [FT, Jan. 5]: 22% on average in 2010 and 2011 (somewhat less this year, in response to slowing demand: 8.6 % in Beijing, 13% in Shenzhen and Shanghai). Meanwhile another cost of business, land prices, rose even more rapidly.

As a result, whereas all signs still pointed to a substantially undervalued yuan as recently as four or five years ago, this is no longer the case. One important measure of undervaluation — a comparison of China’s prices with what is normal given the country’s level of income (the so-called Balassa-Samuelson relationship) — showed the renminbi as undervalued against the dollar by as much as 36% on 2000 data (Frankel, 2005) . Even after an improvement in the international price data, Balassa-Samuelson regressions estimated the undervaluation at roughly 30% in 2005 and 25% as recently as 2009. (Others had other ways of estimating undervaluation; see Goldstein, 2004, and those surveyed by Cline and Williamson, 2008.)

The renminbi’s real appreciation against the dollar over the last three years has amounted to 12%, reducing the degree of undervaluation by roughly half, depending on whether one measures it against the dollar or against all countries. More is to be expected, as Chinese relative wages continue to rise. In any case, China’s real exchange rate is already closer to this measure of equilibrium than are most countries’ exchange rates (Cheung, Chinn and Fuji, 2010).
However, Michael Pettis argues that China is trading external imbalances for internal ones (and trouble down the road...):
So is China rebalancing?  Of course not.  Rebalancing would require that the domestic consumption share of GDP rise.  Is the consumption share of GDP rising?  Clearly not.  If consumption had increased its share of GDP since the onset of the crisis, the savings share of GDP would be declining.

And yet savings continue to rise.  This is the opposite of rebalancing, and it should not come as a surprise.  Beijing is trying to increase the consumption share of GDP by subsidizing certain types of household consumption (white goods, cars), but since the subsidies are paid for indirectly by the household sector, the net effect is to take away with one hand what it offers with the other.  This is no way to increase consumption.

Meanwhile investment continues to grow and, with it, debt continues to grow, and since the only way to manage all this debt is to continue repressing interest rates at the expense of household depositors, households have to increase their savings rates to make up the difference.  So national savings continue to rise.
That sounds like trouble, though this Economist article noted that there are some reasons to believe that estimates of Chinese consumption might be understated:
China’s official statistics show private consumption growing less quickly than the economy as a whole from 2001 to 2010. But they also show retail sales growing faster than GDP from 2008 to 2010. The discrepancy is partly because China’s retail-sales figures include some things they should not (such as government purchases and sales of chemicals and other wholesale goods), and miss out other things (like health care and other services), that are a big part of consumer spending. But several economists also believe the official figures understate private consumption.

To derive an alternative measure, Yiping Huang and his colleagues at Barclays Capital, an investment bank, have tried to pick out those retail sales that are likely to reflect consumer purchases. He has combined those purchases with sales figures for service firms. By this alternative measure, consumption fell as a share of GDP until 2008, but started growing strongly thereafter. “Rebalancing of the Chinese economy has already started,” the Barclays economists conclude.

Sunday, August 7, 2011

A Silver Lining to the Debt Ceiling Fiasco?

In a recent Project Syndicate column, Stephen Roach shared some observations from recent conversations with Chinese policymakers, who were not pleased with the debt ceiling mess:
Senior Chinese officials are appalled at how the United States allows politics to trump financial stability. One high-ranking policymaker noted in mid-July, “This is truly shocking… We understand politics, but your government’s continued recklessness is astonishing.”
Roach suggests that China may be losing its appetite for US Treasuries, and this, he believes, spells trouble for the US:
So China, the largest foreign buyer of US government paper, will soon say, “enough.” Yet another vacuous budget deal, in conjunction with weaker-than-expected growth for the US economy for years to come, spells a protracted period of outsize government deficits. That raises the biggest question of all: lacking in Chinese demand for Treasuries, how will a savings-strapped US economy fund itself without suffering a sharp decline in the dollar and/or a major increase in real long-term interest rates?
The US should hope he's right.  An abrupt reversal would be very disruptive, though it would probably do more harm to China than the US (provided the Fed steps in to limit the increase in US interest rates).  But China's massive purchases of US assets aren't a benefit to the US overall - they are part of a policy that has distorted the US economy away from tradable goods production and towards excess homebuilding (and asset bubbles).

The reason China has accumulated gigantic holdings of US Treasuries is that it has been intervening in foreign exchange markets - selling renminbi for dollars - to keep the value of its own currency down and the dollar up.  It then invests the dollars in Treasuries (i.e., the Treasury bond holdings are a consequence of the foreign exchange policy).  The result is US-produced goods are more expensive relative to Chinese goods. This contributes to the trade imbalance and reduces the size of US exporting and import-competing sectors.  Furthermore, many other countries feel the need to undertake similar interventions to maintain competitiveness vis a vis China, so it is not just the bilateral trade balance that is affected.

According to Roach, China has recognized the need to "rebalance" its own economy to rely less on exports and more on domestic consumption:
China has adopted a very transparent response. Its new 12th Five-Year Plan says it all – a pro-consumption shift in China’s economic structure that addresses head-on China’s unsustainable imbalances. By focusing on job creation in services, massive urbanization, and the broadening of its social safety net, there will be a big boost to labor income and consumer purchasing power. As a result, the consumption share of the Chinese economy could increase by at least five percentage points of GDP by 2015.
If the debt ceiling mess has given China's leadership a greater sense of urgency to get on with that, that's a good thing for them, and for us.

Roach's column came out before the S&P downgrade, but that may have reinforced China's views.

Saturday, February 19, 2011

A Real Appreciation for China (Cont'd)

Another day brings more evidence that inflation in China may be taking care of the undervalued renminbi problem (see this previous post).

The Economist:
In adjusting current accounts, what matters is the real exchange rate (which takes account of relative inflation rates at home and abroad). Movements in nominal exchange rates often do not achieve the desired adjustment in real rates because they may be offset by changing domestic prices. For example, the yen’s trade-weighted value is around 150% stronger than it was in 1985. Yet Japan’s current-account surplus remains big because that appreciation has been largely offset by a fall in domestic Japanese wholesale prices, so exporters remain competitive.

An alternative way to lift a real exchange rate is through higher inflation than abroad. To an American buyer, a 5% increase in the yuan price of Chinese exports is the same as a 5% appreciation of the yuan against the dollar.
Fred Bergsten (interviewed by Michael Casey):
The real [inflation-adjusted] renmimbi exchange rate has appreciated against the dollar at an annual rate of about 12% since last June, although considerably less on a trade-weighted basis. The dollar has fallen against most other currencies, so on a trade-weighted basis, the renmimbi has risen less. On the other hand, one has to accept that the Chinese think of this totally in dollar terms. So the dollar exchange rate is a legitimate focus for them, and if you believe that the dollar is going to bounce around and come back over time it will drag the renmimbi back up with it [against those other currencies.]

They have been letting [the real exchange rate] go up an average of 10 to 12% on an annual basis so it’s fair to say that if they would let that continue for another couple of years they would achieve a restoration of underlying equilibrium in the exchange rate. That would take away most, if not all, of the distortions that their persistent interventions have created....

[G]iven China’s history of hyperinflation, it would be far better to adjust via the nominal rate. It has always surprised me that they seem to prefer to do part of it through inflation. And now that they are really worried about inflation, which has become the focal point of their economic policy, this would be the perfect time for them to let the currency adjust. They know the currency is going to adjust over time anyway and it is better to let it happen through the nominal rate. At the same time, it’s an ideal time for us if they make the move now because it will help rebalance our external accounts and help deal with our high unemployment. From the standpoint of both sides there couldn’t be a better time to adjust the nominal exchange rate for the renmimbi.
See also Bergsten's commentary "A Breakthrough on the Renminbi?" at the Peterson Institute's blog.

Sunday, January 30, 2011

Rebalancing Watch

International trade fell sharply during the worst days of 2008-09, and this was reflected in a sharp decline in the US trade deficit.  One of the big questions in the recovery is whether the trade deficit (or, more broadly, the current account deficit) will return to its pre-crisis level.  That is, was the reduction in the deficit temporary, or have we achieved some "rebalancing"?

Friday's advance estimate of GDP provides some encouragement in this regard.  The US economy still has a long way to go, but it is now at least back to its pre-recession level of output.  The trade deficit remains smaller than it was before the recession - it was 3.3% of GDP in the 4th quarter of 2010, versus 4.9% in the last quarter of 2007.
The widening trend that began in mid-2009 appears to have leveled off or reversed.  Menzie Chinn James Hamilton suspects that the decline in the trade deficit in the quarter was tied to the decline in inventory accumulation:
But the fact that a huge negative contribution of inventories coincided with a huge positive contribution of imports does not seem to be a coincidence. There's a clear pattern in the recent data that when one of these makes a positive contribution to GDP growth, the other makes an offsetting negative contribution. Although we often think of inventories as a substitute for production (you could either produce a good or sell it out of inventories), in the current environment inventories seem to act more as a substitute for imports (you could either import the good, or sell it out of inventories).
Nonetheless, it looks like the trade deficit may not headed back to where it was. What happens going forward depends in large part on what happens with the US' trading partners.  Faster growth in the rest of the world should reduce the trade deficit.  We're seeing this in much of the developing world, which is recovering more quickly (indeed many emerging markets now face a danger of inflationary overheating).

At Project Syndicate, Martin Feldstein argues that one of the major surpluses, China's, will come to an end because its astronomical saving rate is headed down:
China’s national saving rate – including household saving and business saving – is now about 45% of its GDP, which is the highest rate in the world. But, looking ahead, the five-year plan will cause the saving rate to decline, as China seeks to increase consumer spending and therefore the standard of living of the average Chinese.

The plan calls for a shift to higher real wages so that household income will rise as a share of GDP. Moreover, state-owned enterprises will be required to pay out a larger portion of their earnings as dividends. And the government will increase its spending on consumption services like health care, education, and housing.

These policies are motivated by domestic considerations, as the Chinese government seeks to raise living standards more rapidly than the moderating growth rate of GDP. Their net effect will be to raise consumption as a share of GDP and to reduce the national saving rate. And with that lower saving rate will come a smaller current-account surplus.
Of course, declining savings only reduces the current account if investment doesn't also fall with it.

Real exchange rates play a role, too, and in this regard, inflation in China is causing its exports to become more expensive, its intervention to hold down the nominal exchange rate notwithstanding.  The Times' Keith Bradsher reports:
Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific...

Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports. 
See also this recent post.  Whether it comes by inflation or a movement in nominal exchange rates, a Chinese real appreciation would take some pressure off other developing countries which are shadowing China in holding down their currencies.

Wednesday, January 12, 2011

Real Appreication of Chinese Inflation

The Times' Keith Bradsher reports on inflation in China:
In China, consumer prices were 5.1 percent higher in November than a year earlier, according to official government data. And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high.

“Four percent, China can bear it — beyond 5 percent, people will complain a lot,” said Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation here.

Higher global commodity prices, as well as rising wages in China, play roles in the increasing cost of Chinese goods. But economists say the main reason for the inflation now is China’s foreign exchange reserves, which surged by a record amount in the fourth quarter.

The central bank has been pumping out currency at an ever-accelerating pace over the past decade to limit the renminbi’s appreciation against the dollar. That strategy has helped preserve a competitive advantage of Chinese exporters by keeping their prices relatively low on global markets — while also protecting the jobs of tens of millions of Chinese workers in export factories.

Now, though, that cheap currency policy seems to be reaching its limits. The extra renminbi are feeding inflation. That is starting to undermine exporters’ price competitiveness — just as a stronger renminbi would do if Beijing was not intervening to begin with. 
That is, there are two ways for a real exchange rate to appreciate: through changes in (i) nominal exchange rates and (ii) relative prices (i.e., inflation).  The real exchange rate is defined as the nominal exchange rate, e, (e.g., the dollar price of renminbi) times the ratio of the two countries' price levels:
real exchange rate = e x P(China) / P(US)
While China intervenes heavily by selling renminbi for dollars to keep e from rising (and piles up massive "reserves" of dollars in the process), faster inflation in China - the increase in P(China)/P(US) - means that Americans must give up more stuff to get a unit of Chinese stuff.  That is, the relative price of Chinese goods is rising.

China is intervening as hard as ever in the foreign exchange market, according to Bradsher's article:
China’s foreign reserves leaped by $199 billion in the fourth quarter. The increase was much larger than economists had expected, and they suggested that China had roughly doubled its intervention in currency markets to around $2 billion a day. 
But the policy only works to the extent that China can offset the inflationary effects of the extra renminbi - for example by raising bank reserve requirements - and it appears they're no longer effectively able to do so.

The real increase in the price of Chinese goods will show up in US prices, but only modestly due to limited "exchange rate pass through".  In part, this is because consumer prices we pay reflect not only the price of the Chinese goods, but also the local retail and distribution costs, which are often a large portion of the retail price and not affected by the real exchange rate.  Of course, that means to effectively shift demand away from Chinese goods, the movements in the real exchange rate need to be even larger (somebody wrote a dissertation about this...).

A more important margin of adjustment may be substitution away from Chinese goods to those produced in other developing countries (i.e., this is great news for Mexico).  This Financial Times article by James Mackintosh discusses the problems created by the efforts other countries feel obligated to make in order to hold their own currencies down because of China.  Secretary Geithner raised this issue in a speech:
The undervaluation of the Chinese currency, the renminbi, and restrictions on capital flows in and out of China gave Chinese companies “a competitive advantage” and “impose substantial costs on other emerging economies that run more flexible exchange rates,” Mr. Geithner said.

“This is not a tenable policy for China or for the world economy,” he added. 
Politically, its sensible strategy for the US to try to frame China's currency policy as one that mainly hurts other developing countries rather than the US - it lets them be the bully, not us (as The Onion reported, China's closing the gap here, too). But the real appreciation also helps in terms of easing the pressure on the other countries that compete with China in export markets.

As David Leonhardt writes in his Times column:
Without taking inflation into account, the renminbi has risen 3 percent against the dollar since last summer, when China began letting it rise. Once inflation is accounted for, the real increase has been about 5 percent. At that pace, the renminbi could erase its artificial undervaluation — as some economists estimate it — in less than two years. 
Will this ease tension between the US and China?  Perhaps, but Leonhardt argues that there are bigger things to argue about:
For the United States, the No. 1 problem with China’s economy is probably intellectual property theft. Technology companies, for example, continue to notice Chinese government agencies downloading software updates for programs they have never bought, at least not legally.

No wonder China has become the world’s second-largest market for computer hardware sales — but is only the eighth-largest for software sales.

Next on the list, say people who work in China or do business there, is the myriad protectionist barriers China has put up. These barriers make this country’s recent efforts at “buy American” protectionism look minor league. In some cases, Beijing has insisted that products sold in China must not only be made there but be conceived and designed there.

There has been more interesting stuff written recently on the issue of "rebalancing" the current account relationship between the US and China - see Martin Feldstein, David Altig, Paul Krugman and Free Exchange.

Wednesday, December 22, 2010


Taiwan's next media animation illustrates Sino-American tensions over currency policy with a rap video:

Saturday, November 6, 2010

The Ultimate Response to "the Chinese Professor"

One unfortunate aspect of tough economic times is that the fear and anxiety that people feel can be exploited with appeals to tribalism.  For example, a group called "citizens against government waste" has been pushing a right-wing political agenda with this ad:

There are any number of substantive flaws in the ad's argument I could point out, but I could not hope to respond better than this hilarous parody, from Taiwan's Next Media Animation:

That comes to my attention via James Fallows (see also his post on the original ad).

Tuesday, June 8, 2010

What Happens to a Global Rebalancing Deferred?

Tim Duy notes that the shifts in relative global demand that would lead to a 'rebalancing' of current account deficits and surpluses seem to be on hold. With the crisis in Europe leading to a decline in the euro, which, in turn appears to have given China cold feet about letting the yuan rise, it looks like we may be back to the status quo ante where the US is the world's "consumer of last resort". He concludes:
Where does this all leave us? The rest of the world is intent on pursuing a begger thy neighbor strategy, with the US being the neighbor. I suspect US policymakers will eventually relent; it will be the only choice left. All we can do now is sit back and wait for the inevitable explosion in the US trade deficit, waiting idly by for the next crisis and the "chance" to bring some sanity to the global financial architecture.
Michael Pettis believes that the European crisis makes the yuan revaluation more urgent, but he is not optimistic that the powers-that-be see it that way. He worries the end result will be trade tension and protectionism:
Most policymakers around the world – while publicly excoriating the US for its spendthrift habits – are intentionally or unintentionally putting into place polices that require even greater US trade deficits.

This cannot be expected to happen without a great deal of anger and resistance in the US. The idea that suffering countries should regain growth by exporting more to the world, and that rapidly growing surplus countries should not absorb much of this burden, will only force the US into even greater deficits as US unemployment rises to reduce unemployment pressure in Europe, China, Japan and elsewhere.

I would be surprised if the US accepted this with equanimity. On the contrary, I expect it will only exacerbate trade tensions and ensure that next year the dispute will become nastier than ever.

Of course, real exchange rates can adjust due to price changes as well as exchange rate movements. Some of the recent wage gains by Chinese workers give some reason for optimism. In a story about rising prices of Chinese exports, the Times' David Barboza writes:

Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime.

And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

Also, other emerging market countries are providing another engine of demand. At project syndicate, Mohammed El-Arian and Michael Spence write:

Over the past two years, industrial countries have experienced bouts of severe financial instability. Currently, they are wrestling with widening sovereign-debt problems and high unemployment. Yet emerging economies, once considered much more vulnerable, have been remarkably resilient. With growth returning to pre-2008 breakout levels, the performance of China, India, and Brazil is an important engine of expansion for today’s global economy.

High growth and financial stability in emerging economies are helping to facilitate the massive adjustment facing industrial countries. But that growth has significant longer-term implications. If the current pattern is sustained, the global economy will be permanently transformed. Specifically, not much more than a decade is needed for the share of global GDP generated by developing economies to pass the 50% mark when measured in market prices.

(see also Mark Thoma's comments).

Saturday, April 24, 2010

The Daily Show on Global Rebalancing

The reduction in the trade deficit means a shift in tradable goods production to the US. Or, as the Daily Show's Aasif Mandvi puts it: "you're telling me that we Americans have to make our own cheap plastic crap?"
The Daily Show With Jon StewartMon - Thurs 11p / 10c
Wham-O Moves to America
Daily Show Full EpisodesPolitical HumorTea Party

Even before China's recent decision to allow the Yuan to resume appreciating, increasing costs due to higher inflation meant it was becoming less undervalued in real terms.

Looking at the factory in the background suggests that Wham-O's manufacturing in the US is very capital-intensive, as standard trade theory would predict since the US is, relative to China, a capital abundant country (however, this may be an example of a violation of the "no factor intensity reversals" assumption...).

See also this report on the Daily Show's visit from Wham-O's local paper.

Tuesday, April 6, 2010

Stiglitz Says Chill Out on China

At Project Syndicate, Joseph Stiglitz argues that it would be counterproductive for the US to confront China over the exchange rate. He concludes:
Since China’s multilateral surplus is the economic issue and many countries are concerned about it, the US should seek a multilateral, rules-based solution. Imposing unilateral duties after unilaterally labeling China a “currency manipulator” would undermine the multilateral system, with little payoff. China might respond by imposing duties on those American products effectively directly or indirectly subsidized by America’s massive bailouts of its banks and car companies.

No one wins from a trade war. So America should be wary of igniting one in the midst of an uncertain global recovery – as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere. Unfortunately, this global crisis was made in America, and America must look inward, not only to revive its economy, but also to prevent a recurrence.

Though he doesn't name names, he clearly seems to be answering Paul Krugman's recent column on the subject (discussed in this earlier post).

Update: Krugman responds.

Update #2: See also Martin Wolf, who agrees with Krugman.

Monday, March 15, 2010

Hardball with China?

A useful article by Keith Bradsher in the Times points out a weakness in international economic governance - while the WTO provides a system of rules and an enforcement mechanism for trade, the IMF does not have the power to do the same for exchange rate policies. China has made use of this asymmetry, he writes:
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.

China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

Paul Krugman argues that it is time for the US to confront China over its exchange rate policies:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

The Economist offers a more cautious view:

Will the administration’s new tough talk move things in the right direction? Those who argue in favour of sabre-rattling do so on two grounds: first, that it is likely to shift China’s position, and second, that a stronger stance against China’s currency from the White House will diffuse protectionist sentiment in Congress. Both are dubious. China’s reactions so far suggest that American complaints make an imminent currency shift less, not more, likely. And a row could spur rather than diffuse anti-China action in Congress.

Rather than raising a bilateral ruckus, America would be far better off convincing other big economies in the G20 to press together for a yuan appreciation as part of the world’s exit strategy from the crisis. Cool and calm multilateral leadership will achieve more, with fewer risks, than a Sino-American currency spat.

Dani Rodrik, on the other hand, has suggested China's policy is a defensible development strategy.

Speaking of hardball and China, the Economist reports they're not taking to it.

Update: More on Krugman's blog. Free Exchange is harshly critical of his column, and he responds, and is answered. Scott Sumner also disagrees with Krugman. See also Ambrose Evans-Pritchard, who sees China spoiling for a fight it won't win.

Thursday, January 7, 2010


The economic kind, that is.

As the global economy recovers, the tension arising China's desire to restrain inflation while keeping the yuan undervalued through a de facto dollar peg is heightened. In an article about a small increase in interest rates, the Times' Keith Bradsher provides a nice explanation of the "sterilization" mechanism that China uses to reconcile the contradictory policy objectives:
Because China does not have a well-developed bond trading market, the yields on the weekly sales of central bank bills are widely watched as a barometer of the central bank’s intentions.

The central bank sells its bills mainly to banks, which pay in renminbi that the central bank then effectively takes out of circulation, slowing growth in the country’s money supply.

Weekly sales of central bank bills are part of a process that economists describe as “sterilization” of China’s extensive intervention in currency markets.

As U.S. dollars and other foreign currencies pour into China from its trade surplus and foreign investment, the central bank prints vast sums of renminbi and issues them to buy those dollars and other currencies.

To prevent all those extra renminbi from feeding inflation, the central bank then claws back the renminbi from the market through a series of measures that include the sale of central bank bills. China also requires commercial banks to keep large reserves on deposit at the central bank, partly to keep the banks from lending too recklessly but also so that the central bank can use that money to finance further purchases of dollars and other foreign exchange.

The goal of sterilization is to keep inflation under control in China while keeping the renminbi weak. That helps make China’s exports competitive overseas and preserves jobs in China, while contributing to unemployment in countries producing rival goods.

The U.S. dollars and other currencies go into China’s foreign exchange reserves, which stood at $2.27 trillion at the end of September; monthly figures through the end of December are due for release next week. China has the biggest foreign exchange reserves of any country, by far.

For this policy to be effective, China has to limit financial inflows, preventing speculators from putting pressure on the yuan by betting on an appreciation. Higher yuan interest rates increase the incentive to move funds to China. Surely, this cannot go on forever....

Friday, December 11, 2009

The Liberty of Insignificance

China no longer enjoys it, Martin Wolf writes:
A country’s exchange rate cannot be a concern for it alone, since it must also affect its trading partners. But this is particularly true for big economies. So, whether China likes it or not, its heavily managed exchange rate regime is a legitimate concern of its trading partners. Its exports are now larger than those of any other country. The liberty of insignificance has vanished.

Thursday, November 5, 2009

A New Cop on the Imbalances Beat?

The President's trip to China next week induces a bit of nostalgia for those famous "summit" meetings of the Cold War, when the "leader of the free world" would go "toe-to-toe with the Russkies."

Of course its far better, though perhaps less dramatic, that the meetings will deal with the "balance of financial terror" instead of nuclear terror. One element of reducing that terror will be convincing China to relax its de facto Dollar peg (but not too abruptly, please). Simon Johnson suggests an approach to deal with this issue:
Talking in public about big sticks never goes down well in Asia, and the administration should deny any inclination in this direction. But the mainstream consensus is starting to shift toward the idea that the World Trade Organization (W.T.O.), not the I.M.F., should have jurisdiction over exchange rates. The W.T.O. has much more legitimacy, primarily because smaller and poorer countries can bring and win cases against the United States and Western Europe in that forum. It also has agreed upon and proven tools for dealing with violations of acceptable trade practices; tailored trade sanctions are permitted.

No one wants to take precipitate action in this direction, but extending the W.T.O.’s mandate in the direction of exchange rates would take time — and presumably warrant discussion at the G-20 level. The United States has great influence over the G-20 agenda, and Mr. Obama’s staff members should hint, ever so gently, that this is where they see the process going.
Hmmm... living in Middletown Connecticut and Oxford Ohio, I'd missed the shift in the "mainstream consensus." Very interesting...

Friday, October 23, 2009


After allowing a limited appreciation of the yuan from mid-2005 to mid-2008, China has tied its currency tightly to the dollar over the past year.

(note: the figure is the yuan price of $ so the fall represents a yuan appreciation)

In his Times column, Paul Krugman says China's policy of intervening to prevent the Yuan from appreciating is "outrageous" -
Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.
After a spike during the financial crisis, when it was (ironically) seen as a safe-haven, the dollar has resumed its decline:
(note: the figure is the $ price of euro, so a rise denotes a dollar depreciation)

Because the dollar is declining relative to the euro and other currencies, the yuan is following it downwards. As Dan Drezner points out, the real losers are other countries with "strong" currencies:
[T]he United States is not the country that's hurt the most by this tactic. It's the rest of the world -- articularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy. These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means they're products are less competitive in the U.S. market compared to domestic production and Chinese exports.
Ambrose Evans-Pritchard also sees signs of tension:
What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Indeed, as the Times reported last week, China's share of world trade has grown - while its exports have fallen in the recession, most other countries have seen bigger declines:
A recent Times story on the benefit to US exporters from the falling dollar also notes the pain in Europe, and Willem Buiter blames the ECB for overly-restrictive policies.

Also, Krugman explains the "yuan" / "renminbi" thing.

Friday, September 18, 2009

China's Cares for our (Fiscal) Health

The New Republic's Noam Scheiber reports that our largest creditor is, understandably, taking an interest in issues that affect the US government's future fiscal position:
To his surprise, when [Budget Director Peter] Orszag arrived at the site of the annual U.S.-China Strategic and Economic Dialogue (S&ED), the Chinese didn't dwell on the Wall Street meltdown or the global recession. The bureaucrats at his table mostly wanted to know about health care reform, which Orszag has helped shepherd. "They were intrigued by the most recent legislative developments," Orszag says. "It was like, 'You're fresh from the field, what can you tell us?'"

As it happens, health care is much on the minds of the Chinese these days. Over the last few years, as China has become the world's largest purchaser of Treasury bonds, the government has grown increasingly sophisticated in its understanding of U.S. budget deficits. The issue has become all the more pressing in recent months, as the financial crisis and recession pushed the deficit to record levels. With nearly half of their $2 trillion in foreign currency reserves invested in U.S. bonds alone, the Chinese are understandably concerned about our creditworthiness. And this concern has brought them ineluctably to the issue of health care.

The United States' dependence on foreign purchases of Treasury bonds means that no issue that affects the deficit is solely "domestic." The US has an interest in China's health care system, too, as it contributes to the high savings rate that fuels China's side of the current account imbalance. Scheiber writes:

The Chinese save such freakish amounts because consumer credit is scarce, insurance is rudimentary, and their social infrastructure is threadbare. They must often pay for houses in cash, and for medical procedures out of pocket.
Update (8/20): Ilian Mihov suggests (with evidence) that healthcare and education costs played a key role in the rise of US consumption.

Tuesday, September 15, 2009

A Tiresome Tariff?

President Obama has imposed "safeguard" tariffs for three years on Chinese tires, but at a lower level than the ITC recommended, the Times reports:
The International Trade Commission, an independent federal agency, ruled in late June that Chinese tire imports had indeed disrupted the domestic industry.

The panel recommended that the president impose tariffs for three years, starting at 55 percent and then declining. Mr. Obama, who was required by law to decide on the recommendation by Sept. 17, announced slightly lower tariffs that will start at 35 percent and drop to 25 percent in the third year.
Economists are mostly nonplussed... Brad DeLong says "really stupid." But not unusual, notes Douglas Irwin:
Regardless of party, every president, at some point, and often for political reasons, has imposed restrictions on imports. George Bush did, Bill Clinton did, Ronald Reagan did (a lot), Jimmy Carter did, and so get the drift. With some exceptions, most of these restrictions were not too costly or too important: they usually involved small industries, and the restrictions eventually expired. So on the broad canvas of presidential trade policy, Obama’s decision is unexceptional. Of course, the timing of the administration’s action, coming off the economic crisis and increasing fears of protectionism, makes it a bit riskier than most. And China’s response could make a bad situation worse; let us hope that it is posturing for its domestic audience. Still, the disruption to world trade is significantly less than Bush’s steel safeguard action early in his term.
Also, Dean Baker notes:
When China was admitted to the WTO it agreed to allow the United States to impose tariffs to temporarily counteract the disruptive effects of an import surge. The agreement did not require the United States to show that China had in any way acted unfairly, simply that the growth of imports had seriously disrupted the domestic market.

This clause was an important factor in selling China's entry to the WTO to interest groups in the United States. Therefore, it should not be surprising that the government would occasionally take advantage of a clause that it had demanded.

Real Time Economics rounds up more reaction.

Sunday, May 17, 2009

How Much Carbon Does a Dragon Emit?

In his Times column, Paul Krugman argues that if China won't control its carbon emissions, we should impose a tariff:
China’s emissions, which come largely from its coal-burning electricity plants, doubled between 1996 and 2006. That was a much faster pace of growth than in the previous decade. And the trend seems set to continue: In January, China announced that it plans to continue its reliance on coal as its main energy source and that to feed its economic growth it will increase coal production 30 percent by 2015. That’s a decision that, all by itself, will swamp any emission reductions elsewhere.

So what is to be done about the China problem?

Nothing, say the Chinese. Each time I raised the issue during my visit, I was met with outraged declarations that it was unfair to expect China to limit its use of fossil fuels. After all, they declared, the West faced no similar constraints during its development; while China may be the world’s largest source of carbon-dioxide emissions, its per-capita emissions are still far below American levels; and anyway, the great bulk of the global warming that has already happened is due not to China but to the past carbon emissions of today’s wealthy nations.

And they’re right. It is unfair to expect China to live within constraints that we didn’t have to face when our own economy was on its way up. But that unfairness doesn’t change the fact that letting China match the West’s past profligacy would doom the Earth as we know it.

Historical injustice aside, the Chinese also insisted that they should not be held responsible for the greenhouse gases they emit when producing goods for foreign consumers. But they refused to accept the logical implication of this view — that the burden should fall on those foreign consumers instead, that shoppers who buy Chinese products should pay a “carbon tariff” that reflects the emissions associated with those goods’ production. That, said the Chinese, would violate the principles of free trade.

Sorry, but the climate-change consequences of Chinese production have to be taken into account somewhere.
James Fallows thinks Krugman misreads what's going on in China:
While his conclusion -- that China has to be part of global efforts to control carbon emissions -- is obviously correct and important, his premise -- that no one in China admits this -- does not square with my observation over these past three years.* As it happens, I spent this very day at a conference in Beijing where the first five presentations I heard were about emissions-reductions and sustainability in one specific domestic industry. (Also, I wrote in the magazine, a year ago, about Chinese people and organizations making similar efforts in a variety of other fields.)

If blunt-instrument outside pressure like this column makes it more likely that Chinese authorities will keep making progress, then as a pure matter of power-politics I say: fine. But my guess and observation is that it is just as likely to get their back up -- and encourage the ever-present victimization mentality that makes it less rather than more likely that Chinese authorities will behave "responsibly" on the international stage.

As I've written a million times (most recently here and here and generally here), arguably the most important thing that will happen on Barack Obama's watch is reaching an agreement with China -- or not -- on environmental and climate issues. We'll see what's the best means toward that end.
Tyler Cowen also has objections. Gary Clyde Hufbauer and Jisun Kim discussed the idea of using tariffs as an instrument of climate policy in a Vox post last year.