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Whither CNY Revaluation
Earlier we presented one side of the possible consequences of branding China a currency manipulator. In the realm of pundits nowhere is the China debate more pronounced than between Nobel (or is it Oscar) winner Paul Krugman and Morgan Stanley Asia Chairman Stephen Roach, in which the latter has proposed some amusing applied sporting goods suggestions vis-a-vis the former. Last night, the Morgan Stanley strategist made his case even clearer in an Op-Ed in the FT, titled "Blaming China will not solve America's problems." As we are fairly confident that the last thing America needs at this point is to antagonize its primary lender (sorry Ron Insana, the whole "if you owe a bank one trillion, you own the bank" is the most stupid thing one can say in this particular relationship), we would tend to agree that scapegoating at the national level, while easy to do (just ask Bill Lockyer and G-Pap), only shows the market that one is hopeless to actually fix the underlying problems and instead seeks to distract from the matter at hand. Roach's argument, by the way, is spot on: America is deflecting from the savings problem (which incidentally, after yesterday's PCE once again outpacing Consumer Incomes, slipped to 3.1% or the lowest levels since 2008). At this rate we will soon be back to negative savings, and the anger at China will be greater than ever. Why look to ourselves to fix a problem that so easily can be scapegoated onto others. And if it means purchasing a few more MaxiPads, pardon iPads, so much the better (out of curiosity, we wonder just where the components for the iPad are made, and just where it is assembled...).
America’s fixation on the “China problem” is now boiling over. From Google to the renminbi,
China is being blamed for all that ails the US. Unfortunately, this
reflects a potentially lethal combination of political scapegoating and
bad economics.
The political pressures are grounded in the angst
of American workers. After more than a decade of stagnant real
compensation and, more recently, a sharp upsurge in unemployment, US labour
is being squeezed as never before. Understandably, voters want answers.
It is all because of the trade deficit, they are told – a visible
manifestation of a major loss of production to foreign competition.
With China and its so-called manipulated currency
having accounted for fully 39 per cent of the US trade deficit in
2008-09, Washington maintains that American workers can only benefit if
it gets tough with Beijing.
However appealing this argument may seem, it is premised on bad
economics. In 2008-09, the US had trade deficits with more than 90
countries. That means it has a multilateral trade deficit. Yet aided and abetted by some of America’s most renowned economists, Washington now advocates a bilateral fix – either a sharp revaluation of the renminbi or broad-based tariffs on Chinese imports.
A
bilateral remedy for a multilateral problem is like rearranging the
deckchairs on the Titanic. Unless the problems that have given rise to
the multilateral trade deficit are addressed, bilateral intervention
would simply shift the Chinese portion of America’s international
imbalance to someone else. That “someone” would most likely be a
higher-cost producer – in effect, squeezing the purchasing power of
hard-pressed US consumers.
The US would be far better served if it faced up to why it is confronted with a massive multilateral trade deficit.
America’s core economic problem is saving, not China. In 2009, the
broadest measure of domestic US saving – the net national saving rate –
fell to a record low of -2.5 per cent of national income. That means
America must import surplus saving from abroad to fund its future
growth – and run current account and trade deficits to attract the
foreign capital. Thus, for a savings-short economy, there is no
escaping large multilateral trade imbalances.
Yes, China is the
biggest piece of America’s multilateral trade deficit. But that is
because high-cost US companies are turning to China as a low-cost
offshore efficiency solution. It also reflects the preferences of US
consumers for low-cost and increasingly high-quality goods made in
China. In other words, savings-short America is actually quite
fortunate to have China as a large trading partner.
No, China
is hardly perfect. Like the US, it, too, has a large imbalance with the
rest of the world – namely, an outsize current account surplus.
Just as responsible global citizenship requires America to address its
savings deficiency, the world has every reason to expect the same from
China in reducing its surplus saving.
But these adjustments must be framed in the multilateral
context in which the imbalances exist. Just as China is one of more
than 90 countries with which America runs trade deficits, US-China
trade now represents only 12 per cent of total Chinese trade. It is
wrong to fixate on a bilateral solution between these two nations to
address their multilateral imbalances.
Yet some of America’s most
prominent economists are claiming that a revaluation of the renminbi
vis-à-vis the dollar would not only create more than 1m jobs in the US
but that it would inject new vigour into an otherwise anaemic global
recovery. Economists should know better. Changes in relative prices are
the ultimate zero-sum game – they re-slice the pie rather than expand
or shrink it.
Currency, or relative price, adjustments between
any two nations are not a panacea for structural imbalances in the
global economy. What is needed, instead, is a shift in the mix of
global saving. Specifically, America needs deficit reduction and an
increase in personal saving, while China needs to stimulate internal
private consumption.
Washington’s scapegoating of China could
take the world to the brink of a very slippery slope. It would not be
the first time that political denial was premised on bad economics. But
the consequences of such a blunder – trade frictions and protectionism
– would make the crisis of 2008-09 look like child’s play.
Alternatively, Zero Hedge has long been contending that the Renminbi is, gasp, not really undervalued. We provide some additional color on the whole CNY fair value situation, as well as some commentary on Wen Jiabao's last week press conference from Bank of America. Pay particular attention to the last part.
Highlights of Premier Wen’s press conference
Much more interesting than the government report
As always, there are no major surprises from these kinds of press conferences. But compared with the presentation of government report a week ago, it’s a nice summary of Premier Wen’s views in a slightly more personal and casual way. We can highlight two points which might have policy implications:
- China’s policymakers do have their own currency reform plans even they believe renminbi is not undervalued. But coercions from other countries will only do disservice to this cause. We take this as signs that there will be no one-off revolutions in coming months. We reiterate our view that this year China will likely copy the Singapore model by letting renminbi move within a band determined by a basket of currencies instead of the dollar alone.
- Chinese policymakers are quite concerned about those uncertainties in the global economy (such as sovereign debt risks). They believe the risk of a double-dip is still there, so we believe it’s unlikely for China to reverse all those stimulus policies rapidly. We are more convinced that there will be no rate hike in the first half this year.
The citation of “Lisao” (
)
Premier Wen started the Q&A with a phrase “
” from Lisao, a poem by Qu Yuan, one of the greatest poets in China living in more than 2000 years ago. To understand this phrase, we must know the context. In China, Qu Yuan is a symbol of patriotism and caring for people. One phrase preceding the cited one is
, which means “I sigh deeply because I am sad about how poor people’s living conditions are”. So the citied phrase literally means that “I am determined to serve the people; I won’t regret even if I need to die nine times”.
Macro: Inflation, income inequality and corruption
Unsurprisingly, China is to maintain stability of macro economic policies by continuing current “proactive fiscal policy and relatively loose monetary policy” to solidify the economic recovery. However, China will increase policy flexibility to stay in tune with changing conditions.
He reiterated three policy goals: economic growth, restructuring and managing inflation expectations. He agreed it’s very hard to do meet all these goals, but they will do it. Monetary policies will be the key to these goals. He is very concerned about inflation, asset bubble and overheating. Inflation, income inequality and corruption could result in social instability and CCP’s ruling status.
Global economy: double dip is possible
The global economy has posted some signs of recovery, but those major economic and financial problems are not fully corrected. A double dip of the global economy is possible. There are still a lot of uncertainties around the globe. Wen mentioned the following problems: (1) Sovereign debts in some countries lead to fiscal and financial risks; (2) Big volatilities in commodity prices and exchanges rates; (3) Rising inflation expectations make policy choices difficult; (4) Unemployment rates in some major economies are still high.
Currency: renminbi not undervalued
China opposes finger-pointing or even coercions on currency issues, which will only do disservice to China’s currency reforms. China will push forward its exchange rate regime reforms anyway. China will maintain broad stability of renminbi’s exchange rates at a reasonable and equilibrium level. Here are evidences on why renminbi is not undervalued:
- Renminbi’s real effective exchange rate (REER) appreciated 14.5% from July 2008 to Feb 2009 when the global economy was in its most difficult.
- In 2009, China exports contracted 16% while imports only fell by 11%. China’s trade surplus declined by US$102bn. The stable renminbi during the global financial crisis made significant contributions to the global recovery.
- Germany’s exports to China in 2009 reached a record high at EUR76bn. US exports to China dropped only 0.22%, though US exports on the whole slumped by 17% in 2009. EU’s exports to China dropped 15.3%, compared with 20.3% decline in its total exports.
- Of the 37 countries which China already has statistics for 2009, 17 countries posted gains in exports to China.
Lastly, in order to grasp as comprehensive picture of China as possible, here is a recently declassified CIA report from September 1989, titled "The Chinese Economy in 1988 and 1989; Reforms on Hold, Economic Problems Mount" focusing on the event surrounding the Tiananmen Square events and shortly prior. It is amusing what 20 years of a rampant credit bubble, and the need to export inflation will do to the countries' relations. The report comes courtesy of Operations Officer (no illegal downloads from Wikileaks were performed in the creation of this post).
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i'll wait for a refurbished iPad..
...used MaxIpad.
Desk of Bill Gates
If China's currency isn't undervalued, then why do they have to buy treasuries to to keep rates constant? This is pretty basic math here, TD.
China's currency is correctly valued, when the printing presses are factored in. If they stopped printing Yuan to buy dollar assets, then the value would start rising. I can't even begin to understand the kind of mental gymnastics that one must undergo to think the ceasing to print more currency will cause the value of a given currency unit to fall.
Walmart demand
Care to expound?
FYI, only 12% of Chinese exports are destined for the US these days.
China has not been buying Treasuries since '07, unless it has been through Britain and offshore (CIA) hedge funds.
What planet do you live on and how do I get there (because any fantasyland is better than here)?
http://www.ustreas.gov/tic/mfh.txt
http://3.bp.blogspot.com/_EZMGVwURo3M/SWKumCUK8GI/AAAAAAAAAYc/nGYcWm-g1C...[2]-792219.png
Planet REAL.
You should join me, as planet NOMINAL, your planet, is, well, crap.
If you are saying that they have only been increasing their positions in nominal terms, then fine, but you need to say as much, or it makes you look like a crazy person or a liar.
the consequences of financial responsibility is an anathema in the world of the 'haves'. who needs the pain. "i say brand dem darn chinese as manipulators! damn chinese! where is my torch and pitchfork". hey has anyone seen my credit card anywhere?
As I have no idea what will happen, if and when China unpegs, I will say it is of the most importance in my studies! Apriciate or depriciate, I really don't know. To make matters worse Reggie is saying it will lose value, but Marc Faber is saying it will gain value. Krugman (Damn you Kkkrugman!) says they need to unpeg, but it has been also said by fellows on ZH that it is the finger in the dike. I will say I have been anticipating all considerations for some time now. I am very excited to see what happens. The currentseas are easily the most important issue out there, especially now that Keiser is saying BaceFook will be the new reserve...Jesus Max! I still think the IMF and World Bank want to issue loans to ALL countries of the world, after dismantling the governments and annointing the corperations as the authorities of man. We will see what happens....very soon.
I would also like to point out that the doelarr is spinning at 81.50, the number it hit right before this recent rally broke. Doelarr is at home at 80-82, but do not be decieved by numbers, NOMINAL terms mean little, get REAL!
Also, full moon tonight...just sayin'.
Sorry, but Insana has a point.
China walks around puffing its chest out, bragging about its unlimited "FX Reserves", and its vast horde of U.S. Treasuries.
Unfortunately, most of those items are basically "Airball" assets.
Nothing more than I.O.U.'s and paper promises.
The U.S. could simply "vaporize" these assets by telling China to "stuff up you know where", otherwise, they will simply end up empty handed, prisoners at the beck and call of whether or not the Bernanke, Geithner, LLP will pay up or not.
On the other hand, the U.S. Consumer has a vast horde of toys and gadgets purchased from China, thanks to China's generous financing.
At least these are "hard assets" that cannot be taken away.
Such as:
- iPads, iPhones, iPods, iMacs, et al
- Motorcycles, scooters, jet skis, snowmobiles
- Bras, panties, garters, stockings from Victoria's Secret
- Dell, HP, Toshiba, Lenovo computers, servers, etc.
- Whirlpool washing machines, Frigidaire refrigerators, Magic Chef ranges, various and assorted brands of outdoor barbecues.
- Virtually everything in your house purchased from Wal-Mart, Kohl's, Target, etc.
What is China going to do? Come over to the states on giant container ships and "repo" these items from us?
Heh, unless they quickly transfer all those "cash and notes" into gold, oil, companies, or entire countries, they got nuthin'....
LOL......
"I told you to control your arrogance against those U.S. Congressmen!!!"
The problem is that we need a continuous supply of that stuff, they don't need a continuous supply of worthless paper.
What you are describing is like an unemployed consumer defaulting on their credit cards. Sure, you can stop paying, but your ass is unemployed, and now you can't even afford groceries. The grocery store isn't hurting for your hot checks as much as you seem to think they are.
Chinese imports are required to keep the US ticking. Could you imagine what would happen in this country if every major retailer in this country suddenly had nothing (affordable) to put on their shelves?
People would start making things here in the US and adjust to the new reality of higher-quality goods.
That may be the case, so long as they can also get used to the new reality of ridiculously higher priced goods.
The U.S. could simply "vaporize" these assets by telling China to "stuff up you know where", otherwise, they will simply end up empty handed, prisoners at the beck and call of whether or not the Bernanke, Geithner, LLP will pay up or not.
What do you think the chances of that are? Gotta be close to zero. Is that even feasible? Half the world would unite against us. Freeze their assets, maybe.
I'm just sitting back and waiting for everyone to get junked like the last thread on this topic.
"The citation of Lisao"
Who f'ing cares. That bullshit is just like when politicians here talk about "the american spirit" or other nationalistic BS. It matters more what these clowns do than what they say.
They care and that's all that matters. The average Chinese may not really like their govenment that much, but they really, really love CHINA and all that means. All the government needs is an enemy to rally the people around. Obama and the US is beginning to emerge as the leading candidate.
On China
Yeah and I heard Bin Laden is hiding out there. Oh yeah they have oil too.
Just bring on the label, tariffs(including any diversion to non-US countries), and let the chips fall where they may.
At the very least it would resolve the issue, even if it results in a collapsed China and somewhat battered (but intact) US.
Simply just do the math
Yuan last two years is printing money at a 30%+ to sustain a 8% GDP growth
another word M+ growth at a 30%+ annual rate
they print more money than the US QE does
if that rate sustain just for few more years, how would Yuan be valueable
There are reasons why the US gov is forcing a unpeg and Yuan increase in value vs. USD
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