Archive for the ‘Pegged yuan’ Category

Stiglitz presents a very different perspective on US-China trade:



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I thought this Economist article contained an interesting combination of ideas.  First, it’s astonishing to note that although the level of our trade deficit with China has decreased, over the same period, our trade with China has grown to represent a greater portion of our total trade deficit.  The article presents several plausible explanations of why China’s share of global exports is rising but I am left wondering why the US/China trade relationship has changed so dramatically.

Even more interesting to me is Paul Krugman’s endorsement of currency-adjusting tarriffs as an appropriate response to Beijing’s stubbornly pegged Yuan.  Although I strongly believe China’s subsidized currency has created massive damaging distortions in world trade and capital flows, which are disturbingly ignored in Washington as senators seemingly prefer berating Wall Street “barons” to seeking actual cause,  it is ironic to me that Krugman, the borrow and stimulate Keynesian, doesn’t seem to realize that trade is a two way street.  America has completely lost touch with the reality that wealth is created through parsimony and hard work.  As much as I agree with Krugman’s diagnosis, Greenspan is also on board in spirit (see Greenspan’s March 2009 WSJ piece), I wish Krugman would recognize his part in the problem.

‘China takes an even bigger slice of America’s market. In the first ten months of 2009 America imported 15% less from China than in the same period of 2008, but its imports from the rest of the world fell by 33%, lifting China’s market share to a record 19%. So although America’s trade deficit with China narrowed, China now accounts for almost half of America’s total deficit, up from less than one-third in 2008.

Foreign hostility to China’s export dominance is growing. Paul Krugman, the winner of the 2008 Nobel economics prize, wrote recently in the New York Times that by holding down its currency to support exports, China “drains much-needed demand away from a depressed world economy”. He argued that countries that are victims of Chinese mercantilism may be right to take protectionist action.

Some forecasters, such as the IMF, expect China’s trade surplus to start widening again this year unless the government makes bold policy changes, such as revaluing the yuan. However, Chris Wood, an analyst at CLSA, a brokerage, argues that China is doing more for global rebalancing than America. Rebalancing requires that China spends more and America saves more. Mr Wood argues that China is doing more to boost domestic consumption (for example, through incentives to stimulate purchases of cars and consumer durables, and increased health-care spending) than America is doing to boost its saving. America’s total saving rate fell in the third quarter of last year to only 10% of GDP, barely half its level a decade ago. Households saved more, but this was more than offset by increased government “dissaving”.’


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More interviews with Soros on the FT’s website:


Also in today’s headlines, Soros ‘has pledged $50m to back a new think-tank with the mission of reconceiving the field of economics, which he describes as “a dogma whose time has passed”.

The group, to be called the Institute of New Economic Thinking, will gather luminaries in the field of economics to reflect on the ideas that allowed the latest economic crisis to transpire and to bring new ideas to a profession that some argue has become too deeply entrenched in free-market ideology.

The group’s advisory board will be studded with economists such as Jeffrey Sachs, George Akerlof, Kenneth Rogoff and Joseph Stiglitz as well as public commentators such as Anatole Kaletsky and John Kay, a Financial Times columnist. Mr Soros is pledging $5m a year for 10 years.

Mr Soros, who has long been a critic of economic “fundamentalism”, blames the unwavering belief in unchecked free markets, which remains pervasive in universities, for allowing financial markets and asset prices to melt down. Through INET, he will be indirectly funding his philosophy of“reflexivity” – that markets tend to influence perceptions of reality, which in turn feed back into markets.

“The ideologists in the free markets are still in command and I think they’ll be very difficult to remove because they have tenure,” Mr Soros said in an interview with the Financial Times.

A side-effect of the crisis has been a deep bout of self-doubt in the economics profession, which largely failed to predict the downturn. Even Alan Greenspan, one of the most faithful believers in the efficiency of markets, said he had found a “flaw” in the free-market model that defined his world view.

“The financial crisis has caused a moment of deep reflection in the economics profession, for it has put many long-standing ideas to the test,” Mr Stiglitz, winner of the 2001 Nobel prize in economics, said in a statement. “If science is defined by its ability to forecast the future, the failure of much of the economics profession to see the crisis coming should be a cause of great concern.”

Mr Soros, who has called for limits on risk, leverage and compensation at big banks, said he realises it will be difficult to uproot the predominant strain of economic thinking. He hopes, however, to inspire a groundswell of support from students that will “shift demand” at universities to include economic ideas that are more reality based and less focused on rigid mathematical models.

“I think that the financial crisis has proven that is unrealistic,” Mr Soros said of the prevailing economics literature, which assumes that people behave rationally. “The dogma has lost touch with reality.”

INET will fund research, fellowships and workshops aimed at explaining the flaws in the current financial system.’


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“Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.”

“The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.”

‘In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

‘“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”’


Apparently China feels that it’s currency peg is less threatened as the fall of the Thai Bhat fades into the past and their reserves continue to bloat.  Hopefully their new found confidence will lead to a more free floating Renminbi soon.

I’m also starting to smell a shift.  As the Chinese continue to gobble up the worlds natural resources, a shift from China the producer to China the consumer can’t be more than a generation away.

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By Richard McGregor in Beijing

Published: July 15 2009 06:33 | Last updated: July 15 2009 11:44

Beijing’s foreign reserve holdings have surged through the $2,000 billion mark, as money pours back into China to take advantage of faster economic growth and rapidly inflating asset prices.

The flow of funds threatens to renew pressure for a further revaluation of the renminbi at a time when the government and domestic business are focused on financial stability.

An economist at a state think-tank said Beijing was caught in a squeeze similar to the one that bedeviled policymakers earlier this century, with a flood of hot money trying to force the government’s hand on the currency.

“The same expectations of a renminbi appreciation will start to accumulate all over again,” said the economist, who asked not be named.

The hot money is betting China’s economic recovery, already evident in record or near-record levels of output of steel and other industrial goods in June, will be sustained.

The second quarter GDP figures, due to be released on Thursday, are expected to record strong growth, of just under 8 per cent for the last three months.

The People’s Bank of China, the central bank, announced on its website that foreign reserves reached $2,132bn at the end of June after a rapid accumulation of funds in the second quarter.

The reserve build up in the second quarter was $177.9bn, including a monthly record in May of $80.6bn.

The quarterly figure far outstrips China’s trade surplus and inbound foreign direct investment for the same period, proof that the accumulation of funds inside the country is being driven by other factors.

“China’s foreign exchange reserve headache has returned,” said Stephen Green, of Standard Chartered, in Shanghai.

The latest figures also represent an abrupt reversal of an emerging trend of the previous two quarters.

Foreign reserves increased by just $7.7bn in the first three months of the year, and $40.4bn in the fourth quarter of 2008, as foreign firms sent profits home and banks demanded repayment of loans.

Chen Xingdong, of BNP-Paribas, in Beijing, calculated that after taking account of the trade surplus, foreign investment and the impact of changes in global currency valuations, about $70bn in hot money came into China in the second quarter.

In the first quarter, by contrast, about $65bn in funds flowed out, he said.

China maintained a virtual US dollar peg for more than a decade until mid-2005, prompting complaints from its major trading partners that Chinese exporters held an unfair pricing advantage.

Beijing’s move to a slightly more flexible exchange rate in mid-2005 and a 20 per cent revaluation against the US dollar over the following three years, relieved much of the political pressure over the currency.

Since mid-2008, however, the renminbi has barely moved against the greenback as Chinese exporters’ sales overseas have dropped sharply because of the global economic downturn,

“We have now moved back to a virtual US dollar peg,” said the think-tank economist.

The central bank, in order to keep the renminbi stable, buys US dollars and other foreign currencies coming into China, and then holds the funds on its balance sheet.

Copyright The Financial Times Limited 2009


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China continues to extoll its desire to see the dollar replaced as the international reserve currency without any mention of the pegged yuan as a problem.  I still see it as THE problem.  If China allowed its exhange rate to float and rebalance, they would no longer be forced to stockpile dollar denominated assets.  China needs to evolve beyond its export led growth strategy and cultivate sustainable domestic demand, for both both its own sake and everyone else’s.


“Both the SDR plan and measures to internationalise the yuan also seem to assume that China’s problem is simply that too many of its reserves are in dollars. But China’s real problem is that it is running a persistent current-account surplus; in order to keep the yuan closely tied to the dollar it has to keep buying more dollar assets. If China really wants to reduce its exposure to the greenback it must allow the yuan to rise. It would incur a loss on its existing reserves but stem future losses. But so long as China maintains its current exchange-rate policy, it is, ironically, helping keep the dollar dominant.”

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