Revaluing China

It’s odd that I’ve ended up something of a China dove. My entrée into the fin/econ blogosphere was as a commenter at Brad Setser’s website, where some of my rantings verged on sinophobic. But somewhere along the line, I came to the conclusion that faulting China for America’s problems is a bit pathetic. While the jury is still out on the long-term wisdom of its dash to wealth, there’s a solid case that the China’s economic policies have served it well. The United States was and remains the world’s most powerful nation, not a fainting virgin. If China’s economic choices were indirectly harmful to the United States (they were and are), it was within the United States’ power to craft a response that would neutralize those effects. It is not China’s fault that the US did not look after its own interests. The United States’ self-destructive tolerance of unbalanced trade was relentlessly pushed by domestic groups — Wall Street and Wal-Mart — and was given plenty of cover by the economic establishment prior to the “Great Recession”.

Although I hold the United States responsible for its imbalances, I have no patience at all for the argument that “profligate Americans” were the root of the problem. American families responded quite reasonably to the price signals they encountered in goods, credit, and housing markets under an assumption that markets are stable and reasonably efficient. In making those assumptions, they were following the endlessly repeated advice of “experts”. Sure, you can toss out anecdotes about ugly Americans buying Hummers and taking cruises with cash-out refis. America has its share of credit-loving conspicuous consumers. But most families put their cash-out refis to more ordinary and defensible uses, as a supplement stagnant incomes. Absurd and unsustainable price signals (ungodly cheap imports, incredibly easy credit, monotonically rising home prices) were the failure for which the US must take reponsibility, and the blame for those falls squarely on the shoulders of lobbyists, politicians, and economists. It was a technocratic elite that fucked up, not Jane and Joe Six-Pack.

All of a sudden, though, part of that elite wants to make amends by forcefully confronting China. I think that’s a mistake, see here and here, or read Ryan Avent. The United States needs a comprehensive, nondiscriminatory balanced trade policy, not a bilateral trade spat with China.

But suppose the China hawks are right, that China’s mercantilism is uniquely harmful and must be forcefully addressed. The usual demand is that China let its currency appreciate sharply against the dollar. A depressed exchange rate functions as both a tariff on foreign goods and an export subsidy. The (accurate) case against China is that its currency policy amounts to protectionism in disguise. However, it is the real, not nominal, exchange rate that matters in this story. Most China hawks are agitating for a change in the nominal exchange rate, so that instead of buying 6.8 Yuan, a dollar should only be able to purchase 6 or even 5.5 Yuan. That approach has advantages: it would be a clear, visible change that can be implemented quickly. Holding wages in the US and China constant, a nominal appreciation becomes a real appreciation. However, there is another way that China’s real exchange rate could adjust: Chinese wages could rise more quickly than American wages while the nominal exchange rate stays put.

The US should prefer real appreciation via wage growth in China to appreciation via a sharp change in nominal exchange rates. Economically, the two approaches are similar, but politically they are quite different. The danger that the US might try to “inflate away its debt” is a live issue in China. A big nominal appreciation of the CNY implies huge paper losses on China’s hoard of dollar assets. That might create resentments, as China’s relatively modest losses on other US investments have. If China were to engineer a real appreciation while keeping the nominal exchange rate stable, it could avoid an accounting loss on its enormous investment. Avoiding such a loss is in the interest of both China’s economic managers and the United States.

It’s uncomfortable to make a policy recommendation based on what a cynic might claim to be deceptive spin. The economic effects of a revaluation via rising Chinese wages or via a nominal appreciation are similar. One could argue my suggestion amounts to colluding with China’s leaders to hide the degree to which they and we have expropriated wealth from China’s underpaid workers. (China’s workers are underpaid in international terms, for work of comparable productivity.) A nominal revaluation would render transparent the cost of China’s past subsidies to Western consumers and its own export tycoons. A wage-based revaluation would hide it.

But there is also a sense in which the paper losses that a nominal reval would occasion are misleading. The wealth represented by China’s reserves might never have been earned without its policy of exchange rate management. China’s development, in a broad sense, is much more valuable than its stock of reserve assets. Despite suffering a direct expropriation of international purchasing power from the policy, most Chinese are arguably better off than they would have been in the absence of that “theft”. Outrage over paper losses on reserve assets would be like shareholders in a business getting mad over a phenomenally profitable promotion because it involved selling goods at a discount.

Further, the US has not — yet — “inflated away” the value of a dollar in terms of domestic purchasing power. China’s reserve assets can be traded for roughly the same American goods and services as they could have on the day that they were purchased. America has changed over the past decade much less than China has. China’s workers have grown dramatically, incredibly, more productive, thanks to structural changes in their economy. So perhaps the most accurate way of accounting for these changes is to let the wages of Chinese workers increase to match that productivity growth, rather than restraining wage-growth but cheapening internationally-traded goods.

I don’t think there’s a clear case that one story is “truer” than any other. But I do know that a future in which the US and China are warm friends looks far better than a new cold war based on avoidable grievance. My first-best prescription for the US is to avoid singling out China at all, while using nondiscriminatory capital controls (or else “import certificates“) to unilaterally enforce a balance of trade. But if we must single out China, we should prefer revaluation via higher wages to nominal appreciation. If we are not stupid about how we frame the issue — if we don’t throw around accusations of sweatshops and slave labor as an offensive sort of cudgel — we might find that China’s leadership is more open to wage appreciation than currency appreciation. Higher wages balance the cost of reduced international competitiveness with the benefit of increased domestic demand. Giving ordinary people more money always has a political upside. Rising wages don’t attract self-defeating flows of “hot money”, like gradual nominal appreciation does. And China’s leadership, with its laser-focus on stability, prefers gradual experiments to bold, dramatic adventures.

As Joseph Wang used to point out (see e.g. his comments here), ultimately, the stability of America’s middle class depends upon the emergence of a wealthier middle class in China and other emerging countries. That’s what we should all be working towards.

 
 

33 Responses to “Revaluing China”

  1. Cardiff writes:

    Hi Steve, really interesting post, but there’s something I’m not quite getting about your argument. I just don’t have a clear understanding of the mechanism that would lead to this real appreciation through a higher relative rate of increase in Chinese wages.

    I understand (but probably disagree with) Stephen Roach’s position during his recent spat with Paul Krugman about how China should handle this. Roach considers a change in the nominal exchange rate to be a circuitous route to mending global imbalances, and thinks China should instead implement policies that would lead its middle class to increase consumption. Among his ideas are a bigger safety net, social security and private pension reform, more health insurance coverage, and tax policies that support rural wages.

    And if I’ve been reading Krugman correctly, he doesn’t have a problem with any of those policies—but he is adamant that they be done simultaneously with a (real) exchange rate adjustment. He cites one of his old research papers to make the case. The paper concludes: “There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes.” (Here’s the link to the post where he cited it: http://nyti.ms/cljRg5)

    But the real exchange rate adjustment that Krugman has been calling for in his columns and blog posts has been via an adjustment in the nominal rate, not via the relative rate of increase in Chinese wages.

    Is what you’re saying the same as, or similar to, the Roach position? If not, how does this work? If Chinese wages haven’t risen relative to US wages to this point, how would they start to do so without a nominal exchange rate adjustment? How would the Chinese government make this happen?

    I’ve been surprised by the complexity of this issue since I started trying to really understand it, and I really hope these questions aren’t stupid from my having missed something obvious. But even if they are, any response to make this a bit more clear would be much appreciated.

    My own, completely speculative view is that China probably won’t bow to pressure from the US or the G20 or anybody else, but it will allow a nominal adjustment either A) to get more of what it wants in other spheres of interest — http://bit.ly/aetKhw or B) because something happens that convinces the country that adjustment is in its own interest (for example if rampant inflation starts to threaten). I consider the latter possibility more likely.

    Apologies for the length of this comment. Cheers, Cardiff

  2. wjd123 writes:

    I don’t get this argument either. He blames the United States for not tending to its own interests and as soon as it does by stopping China from stealing American jobs suddenly the United States can’t act until it tends to China’s interests.

    This is about stealing jobs in a recession not only from the United States buy from countries around the world. And then he wants the very people who have been taking on the chin for a decade while their job skills deteriorate to wait around a few more years while we tend to China’s interest. And not only that he wants capital controls put on all countires so we don’t hurt the offenders feelings.

    This free trade regime that economists, elites, and multinational corporations thought up is robbing us of our democracy, and our middle class as the poor become poorer and the rich become richer here in the United States.

    The truth is that just like China is a currency manipulator, it should have never been given normal trade status, or allowed into the WTO. Everything our politicians have done when dealing with China is based on lies, lies, and more lies.

    Now he wants us to lie once again, for whose sake.

    If the elites and the multinationals take in on the chin. Too bad. This has gone on long enough.

  3. On this matter, from my point of view, it looks that USA doesn’t feel at all comfortable when other countries don’t dance to their tune. Pampered child-emperor’s narcissistic rage. Chinese are really clever, and they know quite well what they are doing. After all, they studied the best there is: USA.

  4. wjd123 writes:

    “It’s uncomfortable to make a policy recommendation based on what a cynic might claim to be deceptive spin. The economic effects of a revaluation via rising Chinese wages or via a nominal appreciation are similar. One could argue my suggestion amounts to colluding with China’s leaders to hide the degree to which they and we have expropriated wealth from China’s underpaid workers. (China’s workers are underpaid in international terms, for work of comparable productivity.) A nominal revaluation would render transparent the cost of China’s past subsidies to Western consumers and its own export tycoons. A wage-based revaluation would hide it.”–interfluidity

    I would argue that since China doesn’t have independent unions that they have been stealing wages from us. Isn’t this just cementing price-factor equalization in place with a country that is perfectly willing to steal wages from its workers just as the elites have been willing to steal wages from American labor.

    Blue collar workers here used to have decent wages, health care, and pensions. Now they make minimum wages and are told to borrow $100,000 to get re-educated. They may as well be told to go buy a lottery ticket.

  5. nick writes:

    America should not delay taking the hit to US-Sino relations by holding back on the exchange rate. China will be emboldened by the US weakness and the next round will be tougher. The US has to take the blow sooner or later….waiting makes matters worse. Google knows that their prospects in China are actually better in 2015 by opting out today. The PRC has a grudging respect — and deep rooted fear — of a stubborn opposition based on moral grounds. A realist should take advantage of this, especially on economic “zero sum” matters.

    Moreover, the money that the PBOC (and SAFE) inevitably has to lose on their US dollar holdings (via inflation, selective default or confiscation) is an internal matter. China is financially astute enough, and dictatorial enough, to quell popular outrage on this matter. Chinese merely have to redirect the nationalist hoardes to greener pastures. Instead of Blackstone, Citi, and US dollar debt, get Caixun to focus on the evil Vietnamese (for devaluing) or Americans for preventing exports of sensitive military equipment, or other nonsense. The trillions of dollars they hold is a mirage. They will never get it. Because it is too costly to them to bring it back.

    America (and Europe and Japan and the rest of the BRICs) have little to lose by refusing to engage with China on their terms on this matter. And we have millions of jobs at stake.

    But leave trade deficits and capital accounts aside. I was in Tianjin two days ago. I had a banquet at Gobule restaurant (perhaps the finest in the city). It was $6 per person, including drinks. Need I say more about exchange rates?

    Nick R

  6. Indy writes:

    My one and only blogging experience was for about a year from late 2006 to late 2007. It was called “chinacoalwatch.com” and I started to collect, digest, and disseminate some basic economic and environmental analysis of what was going on over there and pay attention to key coal-related issues, conferences and events. I would be “covering” this one, if I could. If you’re skeptical about the political likelihood of tough global emissions restrictions, then CTL would be my top recommended long-term investment.

    Well, I got a surprise recall to Active Duty and was deployed to Afghanistan, so that meant the end of my blogging, but I’ve continues to collect my data points from the sources I learned of during that time.

    If I had to pick China’s greatest long-term vulnerability, it would be energy supplies. China simply doesn’t have significant (per-capita) domestic stocks of gas or petroleum (yet, they now build new vehicles faster than us, so their oil usage will necessarily skyrocket). At least those things can be transported efficiently and imported. What China does have is coal – and while their reserves are gigantic, compared to their massive population and their likely rate of future utilization, it isn’t as much a people think.

    China already consumes more coal than the next top ten consuming nations *combined* – about 80 tons a second, and you would think a 40 year reserve-to-production ratio means they’re good to go for a generations. However, they use most of it to power electrical plants, but their per-capita electricity usage is still only about one fourth the developed East-Asian (Japan, South Korea, Taiwan) average. If their usage “converges” and quadruples (say, at 7% growth a year for 20 years), then not only will global CO2-control be an utter fantasy, but they’ll only have a few years of the stuff left. And that magnitude of coal simply can’t be efficiently imported.

    I don’t mean to get all Malthus on everybody, but merely to remark that there is a harder-edge to China’s future growth and ability to sustain a high-level of prosperity in terms of a basic physical limit of their natural resources – and one that may very well become apparent and severe within our lifetimes.

    The existing coal resources of China act a stock, and their current economic growth is in part derived from a flow that is depleting and exhausting that stock (like the inflated GDP ‘wealth’ of Norway or Venezuela or other oil-exporters compared to their similar oil-less neighbors is largely a temporary stock-extraction phenomenon).

    So, in China, there are battalions of worried government officials who fret about “peak coal” and what that might mean to the future of political stability in that nation.

    Something to think about…

  7. wfrost writes:

    Steve,

    I really appreciate your approach, particularly in that you arn’t out to blame China for economic woes in the US. Your argument for me is somewhat academic, though it probably won’t be for much longer, because I am still not willing to concede that the China’s trade relationship with the US is predatory.

    Now that China has become a net importer, and as it still restricts domestic capital outflow, there is reason to argue that the RMB is not as undervalued as we’re led to believe by Krugman & Co. The RMB has appreciated by about 20% against both the Mexican Peso and the Indian Rupee over the last two years, and 18% against the dollar in the years before. At the same time, I believe about 50% of the value of goods that leaves China’s shores belongs to US companies, and that number goes up to about 80-90% in IT industries. The US gets a lot of value out of China-based production, to say nothing of lower consumer prices.

    It is important that we have that part of the conversation before we move on. The real issue in this trade relationship is market access for US companies, coupled with IPR.

    At the same time, manufacturing in China has become deceptively pricey – from on-site meals, to housing, to social security, to a pension that allows for retirement at 55. With the new China labor law, firing workers is an expensive endeavor. I think we are seeing a real appreciation of the RMB in China. Over the last few years, inflation has been uncharacteristically low despite nominal rises in total compensation and disposable income.

    The US has much bigger issues than China’s currency practices. Here are my top two: the deficit (and rising military expenditures) and a high-school graduation rate at about 75%.

    Disclaimer: I work for a China-based company that does manufacturing in China, among other more developed countries.

  8. […] Revaluing China – interfluidity […]

  9. Guillaume writes:

    Hi Steve,

    I agree that we should blame US importers and American elites in general for this global mess. China is only part of the problem: dozens of countries are pursuing the exact same strategy on a smaller scale and singling out China would be disastrous.

    You have pointed out half of a big problem to rebalancing trade flows: the influence of US importers at the expense of exporters. The obverse problem is that Chinese exporters are also incredibly influential in Chinese politics, at the expense of importers. The rebalancing will be very painful for Chinese exporters…

    Where you go wrong, though, is when you assimilate reserves to wealth. A common trap if there is one, but it is at best a cushion protecting against external crises (of the Asian crisis variety, fittingly). You cannot “spend” these dollars at home à la Hugo Chavez, you can only back domestic currency with it. You can use these reserves to set up sovereign wealth funds or buy foreign debt, as China does, but reserves will be useless if a crisis hits internally with a homegrown credit crisis let’s say.

    Thank you for your analysis

  10. Ritwik writes:

    Steve,

    Let me have another go at it here. Sorry if I sound confused. Let’s say that today 1$ = 10 RMB and that it costs US 1$ to produce a widget while it costs China 5 RMB to produce a widget. Thus, China is twice as cost-effective as the US. Let’s say this is an ‘artificial’ imbalance and that the true or desired rate is cost(1 US widget) = cost(1.6 Chinese widgets), without increasing the $ cost of producing an American widget. Thus, cost of producing a US widget remains $1.

    This can happen in two ways – either RMB appreciates to 1$ = 8 yuan, or the Chinese cost of producing widget increases to 6.25 yuan. The former is the nominal rate way and one method to achieve the latter is to increase Chinese real wages. Your preferred way is neither – you’d prefer a multilateral management of the capital account. So, instead of being a perpetual issuer/seller of dollar assets, the US buys some foreign assets. Let’s say the ‘world currency’ is WC, and earlier, 1$ = 2 WC (or, 1 WC = 5 yuan). Now, let’s say that due to KA intervention, 1$ = 1.5 WC and 1 WC = 6.67 yuan.

    Earlier, the Chinese cost of producing a widget was 5 yuan = 1 old WC = 0.75 new WC. Now, you’re hoping that this KA management by the US increases this to 6.25 yuan = 0.94 WC. Which is to say, that the Chinese cost of producing a widget should be relatively fixed in terms of the world currency (drops only from 1 WC to 0.94) as compared to the USD rate in terms of the world currency (2 WC to 1.5 WC). Why should this be so?

    And if it isn’t so, will the rest of the world have enough consumption demand to accommodate both the cheaper US as well as the cheaper Chinese goods?

  11. wjd123 writes:

    Indy,

    As I recall just before the recession hit the price of natural resources were going through the roof: oil over $150 a barrel.

    The establishment wants to return to business as usual as fast as possible. Why? The price of goods will go up and competition will collect around the price of labor. Labor will take a double hit: high prices and low wages. The global economy will slow down once again. Economist will come up with some name for the concept. The paradox of something.

  12. […] Steve Randy Waldman, “The US should prefer real appreciation via wage growth in China to appreciation via a sharp change in nominal exchange rates.”  (Interfluidity) […]

  13. Obvious One writes:

    Why are we over thinking this problem. It is clear. China is greating these enormous distortions with its policies. The US is losing its ability to work as time goes by. The US must act now. I do agree that the issue should be addressed unilaterally. The US is large enough to force better trade terms now. If we wait until later, it will be too late.

  14. I agree with this. We are married to China thanks to that peg, “for better or worse.”

  15. Larry Signor writes:

    This is the most reasonable approach to the US current account imbalance with China I have encountered. Macroeconomic change takes an extended amount of time. Dr. Krugman is attempting to decrease the time frame(and by extension, the economic damage)of this imbalance by advocating a nominal revaluation complementary to a wage inflation. This seems to be an unwise, bullying and ultimately irrelevant macro response. Little waves raise all boats, tsunamis drown everyone.
    Do not remove a fly from your friend’s forehead with a hatchet.
    Chinese Proverb

  16. Cedric Regula writes:

    I’ve been wondering how a minimum wage law has escaped the leadership of a “communist” country. The only thing I can conclude is they like “robber barons”, or whatever they call them in China. But the developed world discovered back in the early 1900s that having the government do the heavy lifting in wage growth was necessary for the development of a middle class.

    I’m not convinced that this will be a good thing for the US however, due to the huge gap in other “overhead factors” when you look at competitiveness of entire countries.

    Then there seem to be resource and environmental limits too, and maybe 7 billion people on the planet living middle class lifestyles is too many!

  17. wjd123 writes:

    I don’t see any of this as a reasonable approach. We have reasoned with China for too long and to no avail. I see all these proposals from capital controls, to wage adjustments as just another excuse not to act.

    Will China react badly to tariffs? It probably will. God knows they have been stoking the fires of nationalism against the west for just such an occasion long enough.

    Will multinationals tie themselves into knots to keep tariffs at bay? They probably will. God knows they have been shipping industries and jobs out of country with the idea that it was safe for long enough.

    Will the powers at Treasury find an excuse, any old excuse, not to declare China a currency manipulator? They probably will. God knows they have been in Wall Streets pocket long enough.

    Will our politicians go along? They probably will. God knows they have been caving in to big money pressure long enough.

    Will economist try to save the day with their suggestions? They probably will? God knows they never get writers cramp.

    It is time to stop all the temporizing and all the fear tactics. It’s time to act.

  18. Steve Randy Waldman writes:

    Hi. Thanks for the comments, which are really sharp. I’d like to respond, but I’ve a Wednesday deadline that is rapidly falling from my grasp. Hopefully I’ll weigh in by Thursday, for those foolish enough to care and patient enough to check back. Thanks to all again, for reading and writing so well.

  19. Drscroogemcduck writes:

    It will be china that gets burned in the end. They have swapped real goods for US dollar IOUs and they have swapped their US dollar IOUs for US treasury IOUs squared. If someone gets hurt it will be china.

  20. glory writes:

    this would be a good memo to martin wolf (+ remember to cc: geithner ;) vis-à-vis Evaluating the renminbi manipulation: “real renminbi appreciation is necessary … The US was right to give talking a chance. But talk must lead to action.”

    Given the country’s flexible prices and high savings, movements in the nominal exchange rate might have only modest effects on external balances. Without alterations in consumption and saving… The investment of more than $1,800 per head in low-yielding foreign assets is a spectacular waste of resources. It should not be impossible to persuade the Chinese that higher levels of domestic consumption and less lending to irresponsible foreigners make sense.

    This, then, is unquestionably an issue for frank and intense discussion. Fortunately, that is what is under way … say something like: “We are not going to make a finding against your currency policy, not because we do not believe we have a case, but because you have made a big effort to expand demand and reduce your surpluses since the crisis began. We appreciate this highly. We are also engaged in what we believe to be a serious dialogue on global adjustment, under the auspices of the Group of 20. Moreover, we expect the appreciation of the renminbi against the dollar to restart soon.

    “Furthermore, we also trust that you see the domestic benefits in halting your currency interventions and rebalancing your economy. We understand this will take time. We can give you such time, so long as we share an understanding of the destination that will be reached. We are not going back to the wild party of the years before 2007. You must not build your future on hopes that we might. That way would lie disaster.”

    So, indeed, it would. Former high-deficit countries, such as the US, need much lower current account deficits if their economies are to recover vigorously. If China were to seek to return to the massive surpluses of its past, a collision would be inevitable. But such a collision is not inevitable. Far from it. The journey towards rebalancing has apparently started. It is vital to ensure that it continues successfully in the years ahead.

    like, iirc, chinese wage growth is still somewhere in (the low?) teens — outpacing productivity! — versus 0-2% (negative ex transfers) in the US, so like a REER revaluation taking into consideration differential standards of living would seem to be already well underway :P

    cf. mpettis’ latest: “[Chinese] households have ‘paid’ in form of excessively low rates on their deposits a minimum of 5% of GDP every year, and possibly up to two times that amount, during the past decade.”

    cheers!

  21. Cedric Regula writes:

    I have to laugh whenever I read that the developed OECD countries have a “plan” for re-balancing. I suspect as soon as the politicians and citizenry figure out what “re-balancing” really means, we all start sounding and acting like Greeks.

    The “happy” version of the “re-balancing” story is we buy less from China and sell them more things, and this is set in motion thru exchange rates. This results in the softest landing possible for economies that have grown by means of credit expansion, at consumer and government level, rather than mercantilism.

    But the devil is in the details. I doubt that the US will ever see tennis shoe manufacturing within our borders again, and our solid export industries, ag, semis, tech, aircraft, medical products, would need market size growth since market share is already high. Maybe we pick up something in marginal industries, but that’s where things get very iffy whether a small re-val is enough.

    The Chinese plan is to move up the value chain, and if they can’t do it on their own, OECD multi-nationals are happy to help and localize manufacturing in China. As far as I can tell, the only thing slowing this down is a shortage in China of skilled technical and managerial workers. However, China says they still have 400 million unskilled unemployed, and The Party still endorses the “asian export model”. This is quite scary since that is about the population of Germany, France and Japan combined. Or the US and our NAFTA allies, Mexico.

    I almost expect that it will become common for S&P 500 companies to tell their white collar workers that the job is in China. Of course this won’t bother you if you have a state, local, or federal government job…or are lucky enough to be an economist.

  22. glory writes:

    market share is already high. Maybe we pick up something in marginal industries

    menzie chinn picked up on this in the economist:

    … between 1993 and 2003 [t]he increase in any given year came almost entirely from existing exporters, but over time new ones played an increasing part. For example, in 1993 alone firms exporting existing products to existing markets accounted for 91% of total export growth. But over the entire ten-year period they made up a relatively modest 35% of the total, with new firms contributing 24% and firms with new products or entering new markets as much as 42%.

    of course also from the article: “Yet pinpointing those firms in advance is almost impossible.”

    The Chinese plan is to move up the value chain

    here’s somewhat of a case study:

    …the latest in a string of offshore contracts for China’s state-controlled rail companies. They have been winning rail projects across the world, including in the Middle East, Southeast Asia, Latin America, Africa and Australia. Chinese companies have also been snapping up global coal assets for the country’s power stations…

    Beijing has made the transfer of sophisticated technology a prerequisite for international rail companies trying to enter the huge Chinese market and in the process, Chinese companies have rapidly become technologically competitive while offering much lower prices than their global rivals. State-owned Chinese financial institutions usually offer favourable financing terms for projects such as the coal transport line in South Sumatra, making Chinese bids even more attractive… Indonesia is the world’s largest exporter of thermal coal. Last year 15 per cent of its coal exports went to China.

    also btw, fwiw, the africa angle is intriguing to me!

    This is quite scary

    i like the way the yellow peril red menace is depicted here :P

    it will become common for S&P 500 companies to tell their white collar workers that the job is in China

    this was also (albeit anecdotally ;) addressed in that economist article: “The ease of exchanging information around the world has fuelled fears that even service jobs will be outsourced away from America. But those information flows also make it easier for firms like KPF to do business overseas.”

    cheers!

  23. Cedric Regula writes:

    Glory,

    Yes, I guess that means the Economist missed out on the Microsoft-Intel-Qualcom-IBM-HP-Sun? stock play. Usually if you wait long enough the Economist manages to put together a reasonably accurate view out the rear view mirror, but I’m disappointed that they never used the term “Information Age” as the driver for US exports in the 90s.

    Unfortunately, after putting in the trans-pacific cable, Global Crossing went bankrupt and sold it for almost nothing to a Hong Kong investor. Now the data highway to Asia-India is a penny a minute, and we have re-done the landscape for service and info jobs. Bangalore got a Vegas sized make-over, and English is the official language in India.

    As far as moving up the value chain, a major impediment for Chinese firms is the formidable patent portfolio of established multi-nationals. The Party is well aware of this and does extract “intellectual property” in exchange for cheap labor. This is going on in many industries besides just rail.

    My personal hope is that the Chinese teach the Africans to farm, so that when the RMB does inevitably rise, we in the US don’t find out that all our corn, pigs, chickens, and cows leave the country for China.

  24. doggyDish Party writes:

    Aloha Steve, Aloha Kaauna
    !


    first-best prescription for the US is to avoid singling out China

    ~~Steve Randy Waldman~

    Is death merely nature’s way of telling you to slow down? Is trade deficit less a diplomatic crisis but more a warning from nature that politicians should now stop earmark spending financed with underlying treasury bonds being rolled over by Chinese? Is our addiction to Oriental T-bond funding about to leave us at the bitter end of another opium war? When will Chinese prescribe for us a large capsule of Cold Turkey? Did we prescribe for Germany a Cold Turkey of War Reparations? Is the devil in the poison but the poison in the dose? Is our dose looming large in near future, larger than Germany’s dose of reparations? Should we pass the turkey to our children?

    You want less frequent and smaller earmarks?

    Vote for gridlock
    !

    Do it for your children
    !

  25. vlade writes:

    Steve,
    one problem with your argument is that rising wages in China will likely mean higher Chinese inflation – which, with locked real rate will still translate to lower (real) value of the US investment.
    So to me it’s instead of US inflating away the debt, China does it for US. If I was Chinese state, I’d prefer US to do it so that I have a clear enemy to point out rahter than face angry domestic crowds (especially if they would start think that China gov’t did it as a favour to the US – and you can never tell with the the conspiracy theory freaks).

    China has to recognize that the reserve they built is not really a reserve but a cost (sunk cost to be more specific) for the fast development. Unfortunately we human are loath to write off sunk costs, especially if the sunk costs look at the first glance like a huge balance on our account.

  26. JKH writes:

    SRW,

    If you haven’t seen it, very interesting and worthwhile analysis of the Chinese balance sheet effects of nominal FX appreciation, by Michael Pettis here:

    http://mpettis.com/2010/02/what-the-pboc-cannot-do-with-its-reserves/

    By balance sheet analysis, I mean his decomposition of the total China effect to PBOC and non PBOC balance sheets – except that he takes liberties in effectively capitalizing the future income/wealth effect for Chinese households, which is a slippery slope in terms of balance sheet analysis (i.e. capitalizing future income flows that are not currently reflected in existing financial claims).

    Regarding your alternative approach, you do have to make sure the nominal wage adjustment gets reflected in pricing, don’t you? It’s an obvious assumption, but pricing rather than wages is the direct determinant of the REER, no?

  27. Sergei writes:

    There is one aspect to wage appreciation which is very much ignored. Any increase in purchasing power of emerging markets will lead to increased demand to any commodities out there which will push prices for all products higher. Will developed markets (citizenry) be happy with this outcome? I bet they will NOT.

  28. doggyDish Party writes:


    Sergei writes:

    There is one aspect to wage appreciation which is very much ignored. Any increase in purchasing power of emerging markets will lead to

    Not only but also

    Increment of purchasing power will be partially funneled into yet more investment. The residual, not reinvested but consumed for comfort health and convenience could easily increase productivity and innovation from workers and middle management. I am not talking bankster innovation of how to squeeze liquidity out of the hapless public but socially beneficial innovation through increased productivity.

    Granted, competition for resources and unfinished goods would be felt worldwide. Is China a large geographical area? With lot of mountains with lot of minerals? With lot of geothermal energy in valley between mountains? Those mountains are gigantic insulators which hold geothermal heat in situ for use by valley-drilled geothermal installations. Would more Chinese innovation generate more natural resource for the world? On balance would people within our hemisphere end up wealthier when Chinese Coolies convert to Chinese Gourmets and Cantonese Tycoons?

    U B Judge

    U B 太君

  29. Jeff MacKenzie writes:

    It seems to me the real issue here is international labor standards, which are given lip service to in UN proclamations but are in fact largely ignored in favor of higher profits and trading volumes.
    If the world were to agree on pegging wages to basic minimum living standards such as adequate dwelling space denominated in sf/person, clothing based on say, seven entire changes per week, transport, either public or private pegged to distance, mph and per cent of total wage, food based on a minimum calorie intake, medical and dental services to include immunizations, catastrophic care, annual checkups, etc.,–if these and other aspects of civilized survival(access to computers, telephones,parks, clean air and water?) can be standardized and applied to labor the world over then competition becomes less about sweatshops and more about quality production. Countries with lower living standards would naturally be more competitive but still have to hew to basic survival standards which would greatly slow the giant sucking sound of industry disappearing from the western world.

  30. Cedric Regula writes:

    While we’re at it , lets give ‘em a piece of the US National Debt to pay off. That’ll slow ‘em down!

  31. I don’t think China’s exporting goods for T-Bills to “steal” our jobs. China is “pre-flighting” capital from it’s own banking system.

    China has a pathologically politicised banking system with terrible bad debts. It also lacks tight central control over much of the countryside. People just sort of get on with stuff in most of the country without Beijing having any real knowledge. The CCP have much better control over international trade which has to go through ports and crossing-points.

    Forcing the economy to export goods allows the PBoC to accumulate a huge bailout fund offshore. When the big banks start wobbling, the PBoC can use it to take over the banks and make whole China’s small savers. Imports of basic consumables from the West would cushion the fall in output from China’s internal crises.

    High exports generate short-term rents for officials on the coast who can influence shipping, air flights and foreign exchange. This makes a strategy of “capital pre-flight” from the Chinese banking system acceptable to local officials.

    All in all, it’s a fairly sensible strategy for central bureaucrats trying to manage a country with incredible growth potential, entrenched interests against reform and a population who save a lot. It just breaks down when your offshore partner’s economy can no longer absorb your capital flows productively or export enough goods to repay you.

    At some point China will be forced to accept that white people are also corrupt and unreliable at times, and that the US isn’t big enough to act as their banker’s bank.

  32. […] Revaluing China – via Bronte Capital -It’s odd that I’ve ended up something of a China dove. My entrée into the fin/econ blogosphere was as a commenter at Brad Setser’s website, where some of my rantings verged on sinophobic. But somewhere along the line, I came to the conclusion that faulting China for America’s problems is a bit pathetic. While the jury is still out on the long-term wisdom of its dash to wealth, there’s a solid case that the China’s economic policies have served it well. The United States was and remains the world’s most powerful nation, not a fainting virgin. If China’s economic choices were indirectly harmful to the United States (they were and are), it was within the United States’ power to craft a response that would neutralize those effects. It is not China’s fault that the US did not look after its own interests. The United States’ self-destructive tolerance of unbalanced trade was relentlessly pushed by domestic groups — Wall Street and Wal-Mart — and was given plenty of cover by the economic establishment prior to the “Great Recession”. […]

  33. failed_state writes:

    I am pretty sure the US would need to balance its own budget (e.g., cease running net current account deficits) in order to have an even balance of trade. Attempting to restrict imports misses the point. Cutting spending and dramatically increasing tax rates is the only logical way to accomplish this. Walmart is a red herring. I’m a little surprised this isn’t better understood given the usual smart posts and comments on this site.