Monday, March 16, 2009
LIVING AND DYING BY THE SWORD
According to a Washington Post dispatch today from Shanghai, Chinese exports plummeted by 25 percent in February. Economists reportedly were “shocked” by the news.
Shocked? Like Captain Renault in Casablanca? No, really shocked. Two Merrill Lynch economists called the $64.9 billion export level an “ugly number” and lamented that “the export slowdown has finally come to China.”
Now, wait a minute! One of my intellectual heroes, Herb Stein, said famously that “if a thing cannot go on forever, it will stop.” A mercantilist trade boom predicated on artificially cheap export prices and the recycling of dollars into consumer debt for buyers of the same goods cannot go on forever. It is stopping now. Not a shock. Not even a surprise. A certainty.
Even the New York Times editorial page got it partly right today I opining that China’s leaders “need to understand that export-led growth no longer works for them or the world.” Of course, the Times went on to urge the Obama administration to back off on China’s undervalued currency, one of the pistons driving the country’s export machine.
The China-based economists don’t see everything as lost, however. They credit Beijing for vigorous – one expert calls them ”drastic” -- measures to help the domestic economy. Aside from a 5 percent tax break on small autos, however, much of the stimulus is aimed at more investment rather than more domestic consumption. More investment in production facilities will only add to the burden of overcapacity, deflating prices and creating surpluses that will seek a market outside of China. If that’s what easy credit results in, China’s “drastic” measures might just be making a bad situation worse.
Live by the sword, die by the sword. The current global economic model is broken. Export-led growth won’t work for large economies. As the Times correctly said, neither China nor the world benefits. At least from this time forward, there is absolutely no basis for anyone, not even professional economists and editorial writers, to be “shocked” by perfectly predictable developments.
Charles Blum
Shocked? Like Captain Renault in Casablanca? No, really shocked. Two Merrill Lynch economists called the $64.9 billion export level an “ugly number” and lamented that “the export slowdown has finally come to China.”
Now, wait a minute! One of my intellectual heroes, Herb Stein, said famously that “if a thing cannot go on forever, it will stop.” A mercantilist trade boom predicated on artificially cheap export prices and the recycling of dollars into consumer debt for buyers of the same goods cannot go on forever. It is stopping now. Not a shock. Not even a surprise. A certainty.
Even the New York Times editorial page got it partly right today I opining that China’s leaders “need to understand that export-led growth no longer works for them or the world.” Of course, the Times went on to urge the Obama administration to back off on China’s undervalued currency, one of the pistons driving the country’s export machine.
The China-based economists don’t see everything as lost, however. They credit Beijing for vigorous – one expert calls them ”drastic” -- measures to help the domestic economy. Aside from a 5 percent tax break on small autos, however, much of the stimulus is aimed at more investment rather than more domestic consumption. More investment in production facilities will only add to the burden of overcapacity, deflating prices and creating surpluses that will seek a market outside of China. If that’s what easy credit results in, China’s “drastic” measures might just be making a bad situation worse.
Live by the sword, die by the sword. The current global economic model is broken. Export-led growth won’t work for large economies. As the Times correctly said, neither China nor the world benefits. At least from this time forward, there is absolutely no basis for anyone, not even professional economists and editorial writers, to be “shocked” by perfectly predictable developments.
Charles Blum
Labels: China, World Economy
Wednesday, January 14, 2009
TOO MUCH OF A GOOD THING
In a remarkably off-kilter story in the January 14 Wall Street Journal (“China’s Capital Outflow Forces Country’s Officials to Try to Rebuild Confidence in Yuan”), Andrew Batson reports sympathetically on Chinese officials’ professed concerns over recent capital outflows and their consideration of a depreciation of its undervalued currency. The article is notable in several ways.
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
First, it lacks any sense of proportion. After noting that China’s official foreign exchange reserves fell by $25.9 billion in the month of October – a large drop to be sure – Batson writes that they recovered by “only” $5.02 billion in November and $61.31 billion in December. If a $25.9 billion decrease is a large number, then how should an increase of more than double that amount be characterized? Whatever the proper term, the December explosion in reserves was enough to bring the net increase for the quarter to a robust $40.45 billion.
China is hardly running short of reserves. In fact, China’s reserves – by far the largest in world history -- are more than ample to cover its import financing requirements and its modest external debt. China’s reserves are not inadequate, but grossly excessive.
Second, Batson himself notes the notorious opacity of official Chinese data. He might have taken a moment to explain that, even if they are entirely accurate, Beijing’s data on official reserves exclude its sovereign wealth fund (the $200 billion China Investment Corporation), China’s social security investment fund, and dollar holdings by Chinese commercial banks. The total size and composition of these holdings are unknown but probably amount to several hundreds of billions of dollars and other hard currencies.
Third and most important, Batson has apparently accepted the proposition that China needs and is entitled to a perpetual increase in its official reserves perpetually. Anyone with a serious interest in the health of the international monetary and financial system should study the language of International Monetary Fund Article IV. Citing as one objective the “continuing development of the underlying conditions that are necessary for financial and economic stability, ” Art. IV sets forth several obligations of all IMF members. China, of course, is a member, one that wants a bigger say in the governance of the world economy.
Specifically, Art. IV obligates members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members ….” China has ignored this obligation for years, despite advice to the contrary from the IMF, sometimes strident demands from the US Treasury, and entreaties from other trading partners, developing as well as developed.
The treasury secretary-designate, Timothy Geithner, warned in a speech in June 2007 that the buildup of official reserves in Asia might have gone too far. Asian mercantilism (my word) was resulting in “too much of a good thing” when it came to export-led growth and the amassing of hard-currency reserves. Note that when Geithner made this statement, China’s official reserves were “only” 1.2 trillion dollars. Since that summer, they have exploded by an additional $700 billion.
Why then is the Wall Street Journal continuing to make excuses for illegal behavior by China and other mercantilists? Why does the Journal turn a blind eye to one of the root causes of the global financial instability that now threatens the livelihood and retirement funding of millions of Americans and others around the globe?
Charles Blum
Labels: China, Currency, Currency Manipulation, mercantilism
Thursday, December 11, 2008
SECOND KICK OF THE MULE
The outgoing treasury secretary, Henry Paulson, came back from Beijing last week empty handed on the currency problem. Again. He’s tried everything – charm, logic, a magnificent scholarly discourse by Ben Bernanke on currency misalignment as an export subsidy, protests and pressure from Congressional leaders – to convince China to “accelerate the pace” of the appreciation of the renminbi against` the dollar. Nothing’s worked. In fact, the RMB has actually weakened since the opening of the Olympic Games, and some Beijing officials talk about a 6-7 percent further depreciation next year.
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
To make matters worse, the Treasury this week closed the book on eight years of missed opportunities by once again – for the sixteenth time – issuing a semiannual report to the Congress that failed to cite a single country for mercantilist currency practices. To be fair, the Clinton administration record after 1994 was no better. We might know obscenity when we see it, but some people just can’t detect currency manipulation anywhere by anybody despite a mountain of factual and statistical evidence.
In the meantime, Beijing seems paralyzed by internal dissensus on monetary policy. There is open talk from the top of the government about the need to stimulate domestic growth, to reduce the dependence on export-led growth, to keep inflation in check, and to meet the rising expectations of average Chinese for a viable social safety net, affordable homes, and more. The government constantly fiddles with tax rebates, export taxes, price controls, and credit restrictions; it loosens and tightens these crude policy tools in a frantic effort to keep Chinese economic growth on a stable path. Yet it constantly refuses to make use of the one sensible and available macroeconomic tool -- the rate of exchange for the renminbi.
There are many things about the Chinese I may not understand all that well, but I do know they respect strength. Not brute force, but a clear sense of national purpose and a willingness to stand up for legitimate rights and interests. Lacking that, diplomacy is just an empty exercise in rhetoric. Until and unless the US is ready and willing to back its often strong words with some meaningful leverage, “negotiations” over currency matters will produce no meaningful and lasting result.
As I’ve tried to express in earlier postings, five years of diplomatic dithering has produced no real progress toward rebalancing a dangerously out of kilter world economy. Rather, it has allowed a problem that in 2003 was essentially a bilateral trade problem to mushroom into a mammoth mercantilist threat to the world economy.
Thanks to a beloved former client, I have on my desk a small momento quoting Abraham Lincoln: “There is no lesson in the second kick of a mule.” I’ve been pondering this small bit of wisdom from our sixteenth president, wishing that somehow our forty-fourth president, an open admirer and close student of Lincoln, will benefit from the abject failure of his immediate predecessor to confront the currency problem. Let’s hope we don’t have to relive the past before we can escape it.
Charles Blum
Labels: China, Currency Manipulation, Henry Paulson, mercantilism
Thursday, November 13, 2008
APPRECIATING THE RENMINBI
Sometimes a development signifies more than meets the eye and sometimes, less. China took an important step in July 2005 to free up its currency, variously called the yuan or the renminbi (RMB), from its longtime peg to the US dollar. Since then, the RMB has strengthened by a nominal 17 percent. That is, Chinese buyers need to pay fewer RMB for each dollar of imports, and Chinese exporters receive fewer RMB for each dollar of exports.
One would think that such a change would produce substantial effects in the real world. In theory, at least, currency appreciation is expected to reduce trade and current account surpluses and to slow growth in the domestic economy. That’s why overheated economies often seek to strengthen their currencies.
In the case of China, these results have been extraordinarily slow in materializing. In fact, as summarized in the table below, China’s appreciating currency has actually led over the past 39 months to substantially larger imbalances in its bilateral trade with the United States, its overall trade with all trading partners, its current account surplus, and – most shockingly – in the build up of official reserves, which have grown by 168 percent as the RMB was strengthening.
Now by far the largest in the world, China’s reserve position is a matter of concern for the rest of the world. China’s hard currency glut is a destabilizing factor in the shaky world economy. As we discussed in the previous post (“The Mercantilist Menace vs. The Protectionist Peril,” November 11), China’s recently announced stimulus package will not reduce these imbalances unless and until there is a much greater appreciation of the RMB.
Unfortunately, appreciation of the RMB stalled out around the end of July, freezing its value at around 6.85 to the dollar. Since then, foreign money has continued to pour into China by means of its trade surplus (more than $35 billion in October), foreign investment and speculative “hot money.” While the growth in official reserves has tapered off, China is stashing dollars in places not captured by that statistic: the China Investment Corporation (China’s sovereign wealth fund), the Social Security Investment Fund, and commercial banks that are still largely under government control.
When China tries to take credit for its ”stable” currency policy at this weekend’s G-20 meeting, it would be on point if someone would remind China of its obligations under the IMF Articles of Agreement. Article 4 binds China and every other IMF member to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” To maintain an exchange rate that does not reflect market values is to be part of the problem, not the solution.
China may object, but the reality behind these numbers seems to be precisely what meets the eye: Its “stable” currency policy has destabilizing effects for the rest of the world and needs to be abandoned if we are to work our way out of the global financial mess.
Charles Blum
One would think that such a change would produce substantial effects in the real world. In theory, at least, currency appreciation is expected to reduce trade and current account surpluses and to slow growth in the domestic economy. That’s why overheated economies often seek to strengthen their currencies.
In the case of China, these results have been extraordinarily slow in materializing. In fact, as summarized in the table below, China’s appreciating currency has actually led over the past 39 months to substantially larger imbalances in its bilateral trade with the United States, its overall trade with all trading partners, its current account surplus, and – most shockingly – in the build up of official reserves, which have grown by 168 percent as the RMB was strengthening.
Now by far the largest in the world, China’s reserve position is a matter of concern for the rest of the world. China’s hard currency glut is a destabilizing factor in the shaky world economy. As we discussed in the previous post (“The Mercantilist Menace vs. The Protectionist Peril,” November 11), China’s recently announced stimulus package will not reduce these imbalances unless and until there is a much greater appreciation of the RMB.
Unfortunately, appreciation of the RMB stalled out around the end of July, freezing its value at around 6.85 to the dollar. Since then, foreign money has continued to pour into China by means of its trade surplus (more than $35 billion in October), foreign investment and speculative “hot money.” While the growth in official reserves has tapered off, China is stashing dollars in places not captured by that statistic: the China Investment Corporation (China’s sovereign wealth fund), the Social Security Investment Fund, and commercial banks that are still largely under government control.
When China tries to take credit for its ”stable” currency policy at this weekend’s G-20 meeting, it would be on point if someone would remind China of its obligations under the IMF Articles of Agreement. Article 4 binds China and every other IMF member to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” To maintain an exchange rate that does not reflect market values is to be part of the problem, not the solution.
China may object, but the reality behind these numbers seems to be precisely what meets the eye: Its “stable” currency policy has destabilizing effects for the rest of the world and needs to be abandoned if we are to work our way out of the global financial mess.
Charles Blum
Effects of Appreciation of Chinese RMB:
Selected Indicators
Selected Indicators
Labels: China, Currency, Trade
Tuesday, November 11, 2008
THE MERCANTILIST MENACE VS. THE PROTECTIOIST PERIL
This week China finally got around to offering its beleaguered citizens some of the largesse stored up in the State Administration of Foreign Exchange (SAFE). It cobbled together a mammoth economic stimulus package valued at $586 billion. In typical Chinese fashion, details are scarce.
A few things seem clear:
• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).
We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.
But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.
Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.
This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.
Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.
Charles Blum
A few things seem clear:
• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).
We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.
But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.
Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.
This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.
Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.
Charles Blum
Labels: China, mercantilism, Protectionism, Recovery
Wednesday, October 29, 2008
REAL MONEY
The venerable New York Times editorial page mangled a basic fact a couple of days ago (“As China Goes, So Goes …,” October 27). I take the time for this nit-picking not just because some of us expect the American newspaper of record Times to get everything right, but because the correction may be illuminating.
Here’s what the Times said: As the rest of the world “tips into recession,” China should give up its “old export strategy” and reorient its economy in the direction of satisfying domestic demand. The Times argued that “by raising Chinese imports and reducing its dependence on exports, it would also help the rest of the world” while reducing its own “overwhelming” vulnerability to changes in world markets. The key is to “unlock the savings of its citizens and encourage them to spend.” To facilitate that, China should step up public works, reduce taxes on housing and rebuild the tattered social safety net. Doing so wouldn’t be that difficult, The Times suggested, because Beijing is “running a huge budget surplus.”
The advice to the Chinese is basically sound and certainly welcome. The basic problem I see with it is that China’s new-found budget surpluses are not “huge.” After years of running budget deficits, China has in the past two years run modest surpluses on the order of one percent of its GDP – about $23 billion of black ink at current exchange rates. Compared to America’ s going-on-one-trillion dollar deficit, that might sound like the promised land. But a social safety net for 1.3 billion people cannot be stitched together for such paltry sums.
What is huge – and I suspect what the Times meant to say – are China’s official foreign exchange reserves. China admits to having over $1.9 trillion, the largest in the world and far in excess of what it or any other country would need. As impressive as that figure sounds, it’s just the beginning of the story. When you include China’s sovereign wealth fund, its social security investment fund, and unknown quantities squirreled away in China’s state-owned commercial banks, the available hard currency surely approaches 2.5 trillion dollars. A trillion here, a trillion there, and pretty soon you’re talking about real money, as Everett Dirksen might say. China could use a portion of these vast sums to build safe schools, rebuild its health care system, accelerate urbanization, clean up its polluted water supply, put scrubbers on every coal-fired power plant – and more.
But it’s not just the size of the funds that matters. Consider the differential economic impact of budget and current account surpluses. A budget surplus is based on tax revenues in excess of expenditures; the government taking out of the economy more than it puts back in. A current account surplus comes from surpluses in trade, foreign investment and other international payments; more local currency goes into the economy than goes out. While a budget surplus is deflationary and helps to cool an overheated economy, the current account surplus is inflationary and helps ensure an excessive reliance on exports and too little domestic consumption – the very problems The Times correctly wants China to solve.
Better advice to China would start with a substantial revaluation of its currency. That would move China’s import and export prices more in line with their real value and allow market forces, as imperfect as they are in China, to reshape its economy in ways that have thus far eluded Beijing’s bureaucrats.
Charles Blum
Here’s what the Times said: As the rest of the world “tips into recession,” China should give up its “old export strategy” and reorient its economy in the direction of satisfying domestic demand. The Times argued that “by raising Chinese imports and reducing its dependence on exports, it would also help the rest of the world” while reducing its own “overwhelming” vulnerability to changes in world markets. The key is to “unlock the savings of its citizens and encourage them to spend.” To facilitate that, China should step up public works, reduce taxes on housing and rebuild the tattered social safety net. Doing so wouldn’t be that difficult, The Times suggested, because Beijing is “running a huge budget surplus.”
The advice to the Chinese is basically sound and certainly welcome. The basic problem I see with it is that China’s new-found budget surpluses are not “huge.” After years of running budget deficits, China has in the past two years run modest surpluses on the order of one percent of its GDP – about $23 billion of black ink at current exchange rates. Compared to America’ s going-on-one-trillion dollar deficit, that might sound like the promised land. But a social safety net for 1.3 billion people cannot be stitched together for such paltry sums.
What is huge – and I suspect what the Times meant to say – are China’s official foreign exchange reserves. China admits to having over $1.9 trillion, the largest in the world and far in excess of what it or any other country would need. As impressive as that figure sounds, it’s just the beginning of the story. When you include China’s sovereign wealth fund, its social security investment fund, and unknown quantities squirreled away in China’s state-owned commercial banks, the available hard currency surely approaches 2.5 trillion dollars. A trillion here, a trillion there, and pretty soon you’re talking about real money, as Everett Dirksen might say. China could use a portion of these vast sums to build safe schools, rebuild its health care system, accelerate urbanization, clean up its polluted water supply, put scrubbers on every coal-fired power plant – and more.
But it’s not just the size of the funds that matters. Consider the differential economic impact of budget and current account surpluses. A budget surplus is based on tax revenues in excess of expenditures; the government taking out of the economy more than it puts back in. A current account surplus comes from surpluses in trade, foreign investment and other international payments; more local currency goes into the economy than goes out. While a budget surplus is deflationary and helps to cool an overheated economy, the current account surplus is inflationary and helps ensure an excessive reliance on exports and too little domestic consumption – the very problems The Times correctly wants China to solve.
Better advice to China would start with a substantial revaluation of its currency. That would move China’s import and export prices more in line with their real value and allow market forces, as imperfect as they are in China, to reshape its economy in ways that have thus far eluded Beijing’s bureaucrats.
Charles Blum
Labels: China, Currency, Recession
Saturday, October 25, 2008
TOY STORIES
The press reported earlier this week that more than half the toy exporters in China -– 3,621 in all -- had gone out of business this year. Last week, hundreds of angry workers protested for three days outside one closed factory in Dongguan in Guangdong Province, the heartland of China’s consumer products industries. Some of them blamed economic conditions in the U.S. for the loss of their jobs. A report by China’s General Administration of Customs issued October 13 also blamed the US credit crisis for what the Chinese see as a slump in their toy industry, still the world’s largest. Certainly, the global financial meltdown and the rapidly deteriorating American economy will bring grief to many Chinese workers in many industries, along with millions in this country. It would be a mistake, however, to leap too far in tying the closure of toy factories in China to sinking US economy.
In fact, the available evidence points to other causes. Most importantly:
• The timing is off. The credit crisis and stock market meltdown erupted in September, too late to affect orders, production and exports in the long toy trade pipeline for this Christmas retail season.
• After a series of product recalls last year, the Chinese government revoked the licenses of 600 exporters at the beginning of 2008. One-sixth of this year’s attrition thus was the result of Chinese government action nine months ago.
• The cost of plastics has risen strongly this year, largely driven by the dizzying spiral in petroleum costs over the first nine months of the year. China’s weak currency compounds the problem by forcing importers to pay extra renminbi for each extra dollar in the world price.
• China’s toy production has actually increased this year. Read the press items carefully: they report that the rate of increase in export sales has fallen (to “only” 1.3 percent over the first eight months of 2008), not the actual sales. Far fewer factories are in fact producing more toys. Overwhelmingly, the closures involve smaller, less efficient, less well run companies that lacked adequate capitalization and could not meet customer or environmental standards. Their disappearance is a sign of progress, not distress.
• The China Customs report speaks of “protectionism,” as a problem. Wait just a minute! Where in the world do Chinese toy exports face increased tariffs or quotas? To refer to product recalls as “protectionism” is unfounded, illogical and destructive of China’s image as a supplier to the world market.
• US imports of Chinese toys did in fact decrease by 5 percent over the first seven months, reflecting shifts in consumer demand (traditional toys like Barbie are declining in popularity) and perhaps some concerns about the quality and safety of Chinese-made toys but not the credit crisis. Moreover, China’s loss of sales to America has been more than offset by increased Chinese shipments to Europe.
• The biggest American toy “makers” – actually marketing companies, first and foremost – have enjoyed a terrific year thus far, despite the looming retail slump. Mattel and Hasbro, which together account for more than 13 percent of the world’s annual sales of toys – are enjoying stronger sales through the first nine months. About half those sales are international. A global recession may leave them with no good market for a while, of course, but thus far they have repositioned themselves quite effectively.
So, let’s not shed too many tears for the 3,500 surviving members of China’s toy industry. In a future post, I’ll address the larger issue of the slowdown of China’s growth. Please keep the instructive story of the toy industry in mind when you read that.
Charles Blum
In fact, the available evidence points to other causes. Most importantly:
• The timing is off. The credit crisis and stock market meltdown erupted in September, too late to affect orders, production and exports in the long toy trade pipeline for this Christmas retail season.
• After a series of product recalls last year, the Chinese government revoked the licenses of 600 exporters at the beginning of 2008. One-sixth of this year’s attrition thus was the result of Chinese government action nine months ago.
• The cost of plastics has risen strongly this year, largely driven by the dizzying spiral in petroleum costs over the first nine months of the year. China’s weak currency compounds the problem by forcing importers to pay extra renminbi for each extra dollar in the world price.
• China’s toy production has actually increased this year. Read the press items carefully: they report that the rate of increase in export sales has fallen (to “only” 1.3 percent over the first eight months of 2008), not the actual sales. Far fewer factories are in fact producing more toys. Overwhelmingly, the closures involve smaller, less efficient, less well run companies that lacked adequate capitalization and could not meet customer or environmental standards. Their disappearance is a sign of progress, not distress.
• The China Customs report speaks of “protectionism,” as a problem. Wait just a minute! Where in the world do Chinese toy exports face increased tariffs or quotas? To refer to product recalls as “protectionism” is unfounded, illogical and destructive of China’s image as a supplier to the world market.
• US imports of Chinese toys did in fact decrease by 5 percent over the first seven months, reflecting shifts in consumer demand (traditional toys like Barbie are declining in popularity) and perhaps some concerns about the quality and safety of Chinese-made toys but not the credit crisis. Moreover, China’s loss of sales to America has been more than offset by increased Chinese shipments to Europe.
• The biggest American toy “makers” – actually marketing companies, first and foremost – have enjoyed a terrific year thus far, despite the looming retail slump. Mattel and Hasbro, which together account for more than 13 percent of the world’s annual sales of toys – are enjoying stronger sales through the first nine months. About half those sales are international. A global recession may leave them with no good market for a while, of course, but thus far they have repositioned themselves quite effectively.
So, let’s not shed too many tears for the 3,500 surviving members of China’s toy industry. In a future post, I’ll address the larger issue of the slowdown of China’s growth. Please keep the instructive story of the toy industry in mind when you read that.
Charles Blum
Labels: China, Currency, product safety
Monday, August 18, 2008
TWO VOICES, ONE NATIONAL INTEREST
Lip synching is no mortal sin, although it can be deceptive and unethical. Through no fault of her own, Lin Miaoke was tabbed to give a phony rendition of “Paean to the Motherland” during the spectacular opening ceremony for the Beijing Olympic Games ten days ago. Poor little Yang Peiyi , who thrilled the vast global audience with her voice, was heard but not seen, turning a traditional child rearing maxim on its head.
This is not an earthshaking episode in international entertainment history; nothing like the infamous wardrobe malfunction, let’s admit. But it does tell us a lot abut the Chinese system. Astoundingly, this was a high-level political decision in China. The Politburo – the highest body of the Chinese Communist Party -- intervened with Chen Qigang, the musical director of the opening night extravaganza, to make clear that getting cute little Miaoke on TV was, as he told the media, a “matter of national interest.”
That’s like the national committee of one of our major parties “suggesting” to the networks who should sing the national anthem at next year’s Superbowl. That’s a matter of “national interest”? Any network eager to recoup its investment in the event will of course make that decision on its own without regard to the wishes of the government or any political party.
That hypothetical comparison might suggest two important lessons to be learned from an otherwise inconsequential blip. First and most obvious, the Chinese Communist Party still tries to micromanage its vast and complex country. Not just the economy or news coverage, but which little girl scores higher on its cuteness scale. You don’t have to be a Westerner to see the ridiculous excess in that. The second lesson is more subtle. If Beijing goes too far in asserting the national interest, Washington stops way short of what’s needed. On this side of the Pacific, the “national interest” seems to begin and end with national and homeland security.
I’m happy to let the networks decide who shall sing the anthem while I’m still in the kitchen getting ready for kick-off, but I’m eager to see someone in Washington accept responsibility for defining the American national interest in economic terms. Somewhere between the excesses in Beijing and the deficiencies in Washington lies a happy medium that would serve each country far better.
Charles Blum
This is not an earthshaking episode in international entertainment history; nothing like the infamous wardrobe malfunction, let’s admit. But it does tell us a lot abut the Chinese system. Astoundingly, this was a high-level political decision in China. The Politburo – the highest body of the Chinese Communist Party -- intervened with Chen Qigang, the musical director of the opening night extravaganza, to make clear that getting cute little Miaoke on TV was, as he told the media, a “matter of national interest.”
That’s like the national committee of one of our major parties “suggesting” to the networks who should sing the national anthem at next year’s Superbowl. That’s a matter of “national interest”? Any network eager to recoup its investment in the event will of course make that decision on its own without regard to the wishes of the government or any political party.
That hypothetical comparison might suggest two important lessons to be learned from an otherwise inconsequential blip. First and most obvious, the Chinese Communist Party still tries to micromanage its vast and complex country. Not just the economy or news coverage, but which little girl scores higher on its cuteness scale. You don’t have to be a Westerner to see the ridiculous excess in that. The second lesson is more subtle. If Beijing goes too far in asserting the national interest, Washington stops way short of what’s needed. On this side of the Pacific, the “national interest” seems to begin and end with national and homeland security.
I’m happy to let the networks decide who shall sing the anthem while I’m still in the kitchen getting ready for kick-off, but I’m eager to see someone in Washington accept responsibility for defining the American national interest in economic terms. Somewhere between the excesses in Beijing and the deficiencies in Washington lies a happy medium that would serve each country far better.
Charles Blum
Labels: China, national interest
Thursday, June 12, 2008
CURRENCY SWAP
Knee-jerk critics of the WTO might have overlooked an intriguing exchange that took place in Geneva on June 11. If I understand it correctly, the China flipped and the US flopped.
The exchange arose in the course of the annual trade policy review of the United States conducted this week. China challenged the US to explain the “causal link between dollar depreciation and food price hike, and possibly global wide inflation,” according to a text used by the Chinese representative at the June 11 session.
The US took an obdurate stance in response. First, the dollar exchange rate is “wholly market determined.” China didn’t challenge this.
Second, the USTR-led delegation would not comment on activities of the Federal Reserve, referring the Chinese to the Fed’s Web site. The Chinese understandably found this irritating. The spokesman carped: “it has been the practice of the Review Mechanism that leading agency of a Member would coordinate with and seek response from all other relevant authorities, including those in charge of monetary policies.” That seems not only reasonable but essential to any sort of meaningful policy discussion.
Third, China says the US took the position that “international discussion of these topics would occur in the IMF and the WTO is not the appropriate forum to discuss the US monetary policy.” On this point, the Chinese took great umbrage. They noted that “a continuous depreciation of the US dollar … would obviously affect economy and trade of other [WTO] Members, particularly the developing ones.”
Recalling our comment on Steve Hanke’s analysis of the dollar/rice nexus, that point seems entirely fair. But then the Chinese unloaded on the American “double standard,” noting that at last month’s review of Chinese trade policies, the US had insisted repeatedly on tying to draw China into a defense of its currency policy. The US position, he chided, seemed to be that the “WTO is an appropriate forum to discuss monetary policies of other Members including China, but not of the US.” Ouch!
The WTO’s predecessor was sometimes derided as the Gentlemen’s Agreement to Talk and Talk. The Trade Policy Review Mechanism is one of the best features of the Uruguay Round reforms of the GATT. It forces each country to expose itself periodically to world public opinion. That’s not legally binding, of course, but it does have its uses.
In this case, it has helped China abandon its unreasonable position that exchange rates are “internal matters” that “fall within a country’s sovereignty.” Now, perhaps playing to the developing country majority in the WTO, Beijing takes the sounder position that exchange rates do affect commodity prices and trade and as such fall within the purview of the WTO. That is, exchange rates are a trade as well as a monetary issue. The Treasury would be wise to seize on this opening – whether completely sincere or not-- and convene a closed door meeting with China and other countries with undervalued currencies. An acceptable solution can only be found through negotiation. China’s new position has cracked open the door to real progress. Will the US be pragmatic enough to respond positively?
Charles Blum
The exchange arose in the course of the annual trade policy review of the United States conducted this week. China challenged the US to explain the “causal link between dollar depreciation and food price hike, and possibly global wide inflation,” according to a text used by the Chinese representative at the June 11 session.
The US took an obdurate stance in response. First, the dollar exchange rate is “wholly market determined.” China didn’t challenge this.
Second, the USTR-led delegation would not comment on activities of the Federal Reserve, referring the Chinese to the Fed’s Web site. The Chinese understandably found this irritating. The spokesman carped: “it has been the practice of the Review Mechanism that leading agency of a Member would coordinate with and seek response from all other relevant authorities, including those in charge of monetary policies.” That seems not only reasonable but essential to any sort of meaningful policy discussion.
Third, China says the US took the position that “international discussion of these topics would occur in the IMF and the WTO is not the appropriate forum to discuss the US monetary policy.” On this point, the Chinese took great umbrage. They noted that “a continuous depreciation of the US dollar … would obviously affect economy and trade of other [WTO] Members, particularly the developing ones.”
Recalling our comment on Steve Hanke’s analysis of the dollar/rice nexus, that point seems entirely fair. But then the Chinese unloaded on the American “double standard,” noting that at last month’s review of Chinese trade policies, the US had insisted repeatedly on tying to draw China into a defense of its currency policy. The US position, he chided, seemed to be that the “WTO is an appropriate forum to discuss monetary policies of other Members including China, but not of the US.” Ouch!
The WTO’s predecessor was sometimes derided as the Gentlemen’s Agreement to Talk and Talk. The Trade Policy Review Mechanism is one of the best features of the Uruguay Round reforms of the GATT. It forces each country to expose itself periodically to world public opinion. That’s not legally binding, of course, but it does have its uses.
In this case, it has helped China abandon its unreasonable position that exchange rates are “internal matters” that “fall within a country’s sovereignty.” Now, perhaps playing to the developing country majority in the WTO, Beijing takes the sounder position that exchange rates do affect commodity prices and trade and as such fall within the purview of the WTO. That is, exchange rates are a trade as well as a monetary issue. The Treasury would be wise to seize on this opening – whether completely sincere or not-- and convene a closed door meeting with China and other countries with undervalued currencies. An acceptable solution can only be found through negotiation. China’s new position has cracked open the door to real progress. Will the US be pragmatic enough to respond positively?
Charles Blum
Tuesday, June 10, 2008
COMPOUNDING THE CURRENCY PROBLEM
Charles Blum
Tuesday, April 22, 2008
“We Can’t Live Like This”:
Earth Day Wisdom of a 13-Year Old
One unbearably muggy, smoggy summer day several years ago, I met a young Chinese girl and her father on then brand-new magnetic levitation train that runs to the
Annie and her dad, a monolingual environmental engineer, drove home several lessons that are quite apt for today, Earth Day. First, it’s just plain wrong, as some like to assert, that the Chinese have no ecological conscience.
Second, these efforts by themselves are patently inadequate. The evidence of that is everywhere. From air and water unfit for human consumption to dry river beds across
Third, there is hope. There’s no lack of money in
But this problem is not only Chinese. All the big polluters – including the
Charles Blum
Labels: China
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