It's all Bush's fault, the sky is falling.

Sorry about that, I meant to say BushCo's fault.

Wait a minute... Devaluing the RMB will not have a significant effect on trade with the US, but it will devastate sectors of China's economy? Well, which is it?

As with most politicized arguments, the truth is NEITHER. The Chinese are not giving us any gifts with this change in policy. They merely recognize the reality that holding their currency artifically low effectively subsidizes US consumers. It was useful for them for a time to get a foothold in US markets, but now its time to gradually move to slightly freer trade.

I'm not sure that i'm reading the China's central bank's announcement correctly, but there appears to be a much larger potential for appreciation. As I read it, the band of 0.3% is not going to be set around 8.11, but will be reset every day around that day's close. So, potentially, yuan per dollar value can drop by 0.15% a day until these rules are changed. Am I reading this incorrectly?

i meant to say that yuan per dollar value can drop by 0.3% a day, not 0.15%.

Greg, I think you were right the first time. I think a .3% band means +/- .15%. We'll see what the Chinese do if they see a .15% drop every day for several days.

dan -- the 10% rule of thumb is for the broad dollar. China is maybe 15% of the index. 2% or even more v. 15% is not much -- but China's move probably augers a broader move in a range of asian currencies.

Drew Brick,Jun Yuan - MS - 21/04/2005
Not much has changed and it will take time:
"Beijing is entirely sincere when it says interest-rate liberalization is a necessary precondition for currency liberalization. A central bank has three choices in running monetary policy. It can target the exchange rate; it can target interest rates; or it can target inflation. If it gives up a measure of control over one of these targets, it must gain control over another. In China, the post-USD peg currency regime means monetary policy will target interest rates virtually by default. The People’s Bank of China will tell you straight out that this is because China’s inflation statistics are still several years away from being reliable guides to monetary policy. This is why Beijing has moved so assiduously to reform and restructure its capital account over recent months, noting with each change that the move was a necessary component in progressing towards “a market-based interest rate system.” To have an interest rate system, instead of setting interest rates by fiat as it does now, the central bank must be able to intervene in the money market to fix a benchmark interest
rate, knowing that the market will then set other interest rates according to supply and demand. China does not yet have a liquid money market, but it has moved a good distance in establishing one since its liberalization of bank lending and
deposit rates last October. All of this should remind investors that many of the details
necessary to alter China’s currency mechanism and make way for prospective revaluation really are symptoms of larger issues at hand."

Two things
One the Chinese clearly have not heard of that old Chinese curse may you live in interesting times. the USA has not heard the one be careful what you wish for.

Two, the lack of transparency in PRC legal, business and political codes will not stop those whom do not care for the transfer of dual use technology esp where it is clear in terms of national security:
http://www.c4ads.org/node/164?PHPSESSID=3ac7042f483b7e0d8e71cf7e6f1ba3b1
Thus China bashing will continue. as the link points out it is necessary and correct sometimes

Love that last part from the FT article, with the sop to foreign competitors in the garment industry. Right, that's what's going to happen!

And then there is this:

Stormy's great post

I do not see a conundrum at all. Every time the Fed raises short term rates, the long term rates flatten: Not a conundrum.

Industry is not a place for investment; it already is cash rich and labor plentiful. The only place now is in government bills. The reason why investment does not flow elsewhere is that it is simply not needed, thus driving down long term interest rates. Complicating and adding to this problem is that many of the factories of the west simply have move. A solid proportion of industry has not created new, additional factories; they have simply relocated. Their total output has not changed, only their profits have.

Does this not explain why there are interest-only mortgages? There is a cash glut. Bernanke, to some extent, is absolutely right.

There is an enormous flow of capital and money out of the industrialized world. Some of it does return in terms of profits and salaries, but a good percentage of those profits never find their way into public coffers. The rich get very rich. There is no way longer any way of really getting a slice of those profits to pay the national bills. In addition, downward pressure on average wages continues.

Cheap labor has been substituted for investment. Credit is cheap. With profits and cheap labor at these quantities, who needs credit? I do not see this as a conundrum. The pump has been primed from every conceivable direction: tax incentives and cheap labor abroad, tax cuts at home.

Ten million Chinese work for a foreign enterprise. The size of that cheap labor force is staggering. And it is only a tip of the Chinese iceberg. And we have yet to touch India. We are living through a boom economy, except the boom is not really heard here. We are paying for it. The dimensions of that boom cause Chinese entrepreneurs to open fake off-shore businesses, pose as foreign investors, and then be eligible for all the goodies--roundtrip investors, they are called. With credit like this, is there any wonder that capital returns cannot be measured by real interest rates? Hell, I should start such a business. Bet doing so is dirt cheap. No loans required. And, you do not need real investment in automation or equipment when labor is dirt cheap. Look at what the Egyptians did with the pyramids, or the Chinese with the Great Wall.

Normal Keynesian economics was not prepared for anything like globalization of this magnitude or style. There is a glut of capital and credit and labor. And it is coming at the American taxpayer's expense. The average American consumer is going deeper and deeper into debt. Average credit card debt in the U.S. is over $9000. And the interest rates are hefty there! And then place that number against the median wage: credit card debt then becomes one-fourth of the median wage. Some are living on a knife's edge here.

When the bubble does burst, who will pay the bills, personal and national?

The knot that has been tied is Gordian, as Volcker says. There is no easy way out of this one. We cannot wait until China becomes a "consumer society"-- a ten or fifteen year pipe dream. After China, there is India. After India, who knows.

Written by Stormy on 2005-07-24 00:16:41, Brad Setser's web log.

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