Thursday, May 17, 2007

America´s fear of China / Economist

here is another good take on how heated the debate in congress in from stephen roach via tim . it will be interesting to see how this plays out and i think that almost every possible outcome will effect the us markets and $ assets negatively.

im link oben könnt ihr nachlesen wie ernst die debatte um china inzwischen im kongress geführt wird. es wird extrem spannend ein wie sich das ganze entwicklet. ich bin der meinung das fast jede änderung die usa und $ anlagen negativ beeinflussen wird.


China Widens Trading Band, Lets Yuan Rise Faster Against Dollar

China widened the yuan's daily trading limit against the U.S. dollar, allowing faster gains in the currency to cool the economy and cut a record trade surplus that has strained ties with the U.S. and Europe.

``Widening the band is to further improve the yuan's mechanism, but it doesn't mean the yuan will fluctuate by a lot or appreciate by a large magnitude,'' the People's Bank of China said in a statement in Beijing. The yuan will be allowed to move as much as 0.5 percent either side of a daily fixing rate against the dollar, up from 0.3 percent, the central bank said.


China Raises Rates for a Second Time This Year to Cool Growth

China raised interest rates for a second time this year to prevent a flood of cash from surging exports from fueling a stock market bubble and excessive investment in factories and real estate.

The one-year benchmark lending rate will be raised to 6.57 percent -- the highest in more than eight years -- from 6.39 percent, starting tomorrow, the People's Bank of China said today on its Web site. The one-year deposit rate will be increased to 3.06 percent from 2.79 percent.


China's central bank said it will raise banks' reserve requirement ratio by half a percentage point, effective June 5.

China and US trade / Lost in translation

If China sharply revalued the yuan, as American politicians are demanding, it could actually hurt the United States and help China

CHINA is being cast as the villain once again. By holding its exchange rate artificially low, it is stealing jobs and causing the United States to run a huge trade deficit. Beijing must therefore be forced to revalue the yuan. These are the arguments behind an increasingly protectionist mood in Washington. Yet they are largely flawed. A stronger Chinese currency would not much reduce America's trade deficit. Indeed, the irony is that China, not America, has more to gain from setting the yuan free. Without a more flexible exchange rate, there is a growing risk that China's sizzling economy will boil over.

America's anger at China is clearly growing. In February it filed a complaint to the World Trade Organisation (WTO) against Chinese export subsidies. In late March the Department of Commerce announced tariffs of 10-20% on glossy paper imported from China, to offset the impact of alleged government subsidies. This reversed a 23-year-old policy of not imposing countervailing duties on a non-market economy. Then in early April the Bush administration filed two more complaints: one on Chinese pirating of DVDs and CDs, and the other over restrictions on the sale of foreign films and music in China.

Although by themselves these actions are trivial, together they point to an increasing appetite for tougher action against China. The Bush administration is under increasing pressure, particularly from Congress.....

Meanwhile, the target of all this hostility looms ever larger: China's trade surplus with America increased to $233 billion last year, accounting for almost 30% of America's total deficit. China's total current-account surplus reached an estimated $250 billion, or 9% of GDP, up from only 1% in 2001. Worse still, in the first four months of 2007, its trade surplus jumped by 88% compared with the same period in 2006.

The making of myths
China officially abandoned its decade-long policy of pegging the yuan to the dollar in July 2005. Since then it has risen by only 8% against the greenback. Because the dollar itself has weakened, the yuan's trade-weighted exchange rate has barely budged. In real trade-weighted terms it is about 10% cheaper than at the dollar's peak in 2002. As a result, it is not just the usual protectionist suspects that demand action, but many mainstream American economists are now calling on China to revalue by 20% or more. Yet the standard arguments for a revaluation are based partly on a series of myths.

The first myth is that there is overwhelming evidence that the yuan is grossly undervalued. China's large bilateral trade surplus with America proves nothing.

>really? here is a good response from Brad Setser

It largely reflects Asia's changing supply chain. Much of what America buys from China today once came from Japan, South Korea and Taiwan. China now imports components from these countries, assembles them and exports the finished goods to America. Knock out these and America's bilateral deficit with China shrinks by more than half. Even so, China's overall current-account surplus is also huge.

The surge in its foreign-exchange reserves, to over $1.2 trillion, also suggests that the yuan is undervalued: without those massive purchases of dollars, the currency would have risen....

The devil to measure
Economists find it devilishly hard to define the “correct value” for a currency. On purchasing-power parity (PPP), the yuan is clearly undervalued against the dollar. Perhaps by as much as 50%. But PPP is not useful for determining the optimal exchange rate between two countries of such different levels of income. It is natural for average prices to be lower in poorer countries because wages are lower. As countries get richer and their productivity rises, their real exchange rates appreciate. And although the depreciation in the yuan's real trade-weighted value since 2002 looks perverse, this follows a real appreciation of 50% between 1994 and 2001 (see chart 1).

Myth number two is that the sharp increase in China's trade surplus is due to an explosion in cheap exports. Until 2004 China's surplus was relatively modest, but it soared over the next two years (see chart 2). Jonathan Anderson, chief Asia economist at UBS, points out that export growth actually slowed between 2004 and 2006 (see chart 3). The main reason for the bigger trade surplus was a sharp slowdown in the annual real growth rate in imports, from more than 30% in early 2004 to less than 15% last year.

The entire increase in China's trade surplus since 2004 has come from trade in heavy industrial materials and equipment. China used to import increasing amounts of steel, aluminium, chemicals and machinery, but import growth collapsed after 2004 when the government started to tighten policy, causing a sharp slowdown in construction, one of the biggest importers of machinery and materials. At the same time China continued to invest heavily in metals and equipment, creating substantial excess capacity, so import growth remained relatively weak last year. Mr Anderson argues that imports should recover as overcapacity is used up.

The third fallacy is that imports from China destroy jobs and harm the American economy. It is hard to see how China can be blamed for job losses when America's unemployment rate (4.5%) is close to its lowest for decades.

>that is the downside of sugger coated employment report..... schadenfeude :-)

>da paßt natürlich die geschönte us erhebeung der arbeitsmarktsituation nicht so recht in die argumentationskette.... schadenfreude sei erlaubt :-)

Trade with China may affect the composition of jobs in America, but it has little impact on total employment. It is true that some workers are harmed by trade with China, just as there are some losers from all international trade. But the American economy overall is better off, so in theory there is ample room to compensate any losers.

Trade with China helps, not harms the average American. Thanks to imports from China, prices are lower and real incomes higher. Commentators often refer to the “cheap” yuan as being an unfair subsidy for Chinese exporters. But it is a moot question who exactly is subsidising whom. Not only do cheap imports subsidise American consumers, but China's large purchases of Treasury bonds also hold down American interest rates, thereby subsidising home buyers.

Suppose that overnight the yuan rose by 30%, what would happen? American interest rates would rise as China needed to buy fewer Treasury securities and prices at Wal-Mart would increase. If consumer spending and imports then collapsed, this would certainly reduce America's trade deficit, but in a much more painful way than most Americans have in mind.

Wishful thinking
The biggest myth of all is that a revaluation of the yuan would greatly reduce America's trade deficit. The real cause of the deficit is that Americans spend too much and save too little. This means that the country has to import surplus savings from abroad by running a current-account deficit. If a stronger yuan did not cause Americans to save more, it would do little by itself to reduce the trade deficit.

Another reason why even a big rise in the yuan would do little to reduce America's deficit is that there is little overlap between American and Chinese production, so American goods cannot replace Chinese imports. Instead, other countries, such as Indonesia and Vietnam, would probably replace the Chinese. Shifting purchases to higher-cost producers amounts to imposing a tax on American consumers, says Stephen Roach, chief economist of Morgan Stanley.

Even where America and China do compete, as in electronics, the high import content of China's exports blunts the impact of exchange-rate movements on export prices, because a rise in the yuan reduces input costs. About half of China's exports consist of goods that have been assembled from imported components. And domestic wages and materials account for about 30% of the cost of those re-exports. Mr Anderson estimates that a 10% rise in the yuan would increase average export prices by only 3-5%.

If a yuan revaluation encouraged other Asian economies to follow suit, the impact on America's trade deficit would be larger, but still modest. If a 10% revaluation of the yuan were matched by all other Asian currencies, the dollar's trade-weighted index would fall by 4%. Yet, the 19% decline in the dollar's trade-weighted index since early 2002 has failed to trim the deficit. .......

Chinese whispers
Many of the arguments heard in America in favour of a big revaluation of the yuan are flawed or at least exaggerated. However, many of the arguments used in Beijing for why a revaluation would endanger China's economy are equally suspect. .......

By tying the yuan closely to the dollar, China has been forced to hold its interest rates lower than is prudent: higher rates would attract more “hot money” from abroad, putting upward pressure on the currency. The real rate of interest paid on bank deposits is negative and lending rates are far too low for such a fast-growing economy. Cheap money results in excessive bank lending and poor investment decisions, which could lead to an increase in non-performing loans. Excessively low interest rates are also fuelling stockmarket and property bubbles.
News that China's real GDP surged by a breathtaking 11.1% in the year to the first quarter and that consumer-price inflation had risen to 3.3% in March (it eased to 3% in April), stoked fears that the economy is out of control. But concerns about overheating in the usual sense of excess demand are exaggerated. China's widening current-account surplus and its strong investment imply excess supply. Excluding food, the inflation rate is only 0.9%. Instead, the real concern is that excess liquidity, as a result of the surge in foreign-exchange reserves and low interest rates, is flooding into shares (see article or !, ! ). Households are withdrawing money from low-yielding bank accounts to bet on the stockmarket. China needs much higher interest rates to cool its asset markets. To regain control over its monetary policy China needs to let the yuan rise. [shanghai-index.png]
thanks to mish !

make sure you read his story about exhuberance in china

A revaluation could also help the government succeed in shifting the balance of growth away from investment and net exports towards consumption. A stronger exchange rate would boost consumers' purchasing power, allowing them to buy more foreign goods. Excess saving in China is as much to blame for global imbalances as inadequate saving in America.

....The good news is that the mix of growth is starting to become more balanced: over the past year, investment has slowed while retail sales have quickened, rising by 15.5% in the year to April. In other words, consumer spending is now growing faster than GDP.

Dragonomics, a Beijing-based research firm, estimates that consumption rose from 37% to 40% of China's nominal GDP growth in 2006 and is set to rise again this year.

>here is another chart that is including houisng and services in the consumption and voila....the number is much higher

>hier eine andere erhebung die sinnvllerweise wesentliche dinge wie services und die hauskomponente miteinbezieht und siehe da....ein esentlich anderes bild.

In the long run, stronger domestic consumption could trim China's trade surplus. The government can encourage this by spending more. Its spending on health care and education rose by an average of 50% last year and it is budgeted to rise by more than 60% this year—but from such low levels that it could take years to increase social spending by enough to encourage households to save a lot less. ...

Mirror image
This turns the whole debate about China's exchange-rate policy on its head. It is China that has the most to gain from allowing the yuan to rise. If the spat between America and China were to ignite protectionism or financial instability, it could endanger the whole world economy. All the more foolish, therefore, that economic relations are based on misperceptions on both sides. America needs to stop making China a scapegoat for the failures of American policy. Only if it gets its own economic house in order, by boosting domestic saving, will its “advice” to Beijing seem credible. Likewise, China has no right to criticise American policy when its own economy remains unbalanced.

America is right that China needs to revalue, but for the wrong reasons. And arguing that a revaluation helps America's economy makes it less likely that Beijing will act. Moreover, if George Bush foolishly slapped harsh trade sanctions on China, America's economy would be the biggest loser. Likewise, China is foolish to resist a more flexible exchange rate partly because it does not want to be seen as caving in to America's demands, when it is in its own interest. If the world's two leading engines of growth remain at loggerheads, everyone will pay the price.

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Blogger Crabman said...

if George Bush foolishly slapped harsh trade sanctions on China, America's economy would be the biggest loser

So China keeps their currency undervalued, their trade surplus soars, they plow their surplus into the US which keeps bond rates low, which creates an asset bubble, which results in huge MEW, which results in a bigger trade deficit...

And the Economist says the US should do nothing about it?????

10:37 AM  
Blogger abbottmd said...

>> So China keeps their currency undervalued, their trade surplus soars, they plow their surplus into the US which keeps bond rates low, which creates an asset bubble, which results in huge MEW, which results in a bigger trade deficit...

by whose standard?
it is what it is
no regime can hold a peg infinitely if the market wanted otherwise.... the black market and smuggling always will overwhelm it in the end

there is no bigger currency manipulator than the US, via the federal reserve


10:49 AM  
Blogger jmf said...


i think that the us has much more to lose than to gain.

we have seen a 5 basis point rise in the yield in part on the china news (the other part was a break in the charts).

the deficit etc won´t go away. then countries like vietnam etc would step up and produce the things china has produced.

and remember....

Yet, the 19% decline in the dollar's trade-weighted index since early 2002 has failed to trim the deficit. .......

and i agree 100% on the fed :-)

10:05 PM  
Blogger jmf said...

from bloomberg

Chinese Investment

A stronger yuan may reduce the flow of U.S. dollars to China as Chinese products become more expensive, slowing the accumulation of dollar reserves that can be invested in Treasuries. China is the second-largest foreign holder of U.S. government debt after Japan.

``If they were eventually to float their currency, the curve would steepen dramatically'' as yields on 10- to 30-year Treasuries ``would go back to more normal levels,'' said Charles Comiskey, head of U.S. government bond trading in New York at HSBC Securities USA Inc. A floating yuan is unlikely, he said.

1:42 AM  
Blogger jmf said...

Revalued Yuan?

China abolished its dollar peg back in July of 2005, but has allowed only a modest appreciation of the yuan vs. the greenback and other foreign currencies. Trade critics abroad believe the yuan is massively undervalued given China's torrid growth and its explosive rise in exports. Yet Beijing is loath to change its policy given that exporters and farmers would be hurt by a stronger currency and unemployment would likely result. The government recently estimated that a 5% to 10% appreciation of the yuan from present levels would eliminate 3.5 million export jobs and hurt 10 million farmers.

2:09 AM  
Blogger jmf said...

make sure you get this from paul kasriel!

People's Bank of China Takes With One Hand, Gives With The Other?

1:03 AM  
Blogger David said...

I'm particularly interested in your quote about a 5% to 10% appreciation of the Yuan eliminating 3.5 million export jobs and hurting 10 million farmers - I think too little commentary on the Yuan Dollar situation actually focuses on what is best for the Chinese government and people. I think numbers like this are key to understanding what Beijing will do in the next few years - that is not a lot probably. I've written more on this in my own blog:

Why the Chinese Will Not Revalue the Yuan.

2:20 PM  
Blogger vishnuprasath said...

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11:23 PM  

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