Friday, September 8, 2006
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Today's debate about the yuan
In his "Economic Scene" column for the New York Times, Tyler Cowen makes a counterintuitive argument:
Contrary to popular opinion, China may be good for our trade balance. American consumers seem determined to spend money, and Chinese businessmen have made the bill cheaper.This column has caused something of a ripple in the economics portion of the blogosphere. See Greg Mankiw for a supportive post.
I had to write about this issue in a white paper for U.S. Trade Strategy, so a few quick thoughts on the matter:
1) Debating about what happens to the yuan if China liberalizes its capital markets is pretty much a red herring at this point, because it's not happening anytime soon. I lean towards Tyler's view that the yuan would likely fall, because the amount of Chinese savings that would leave would dwarf the amount of investment capital that would flow in (one of the scarier facts about the Chinese economy is that to my knowledge no one has any idea of how to gauge the efficiency of recent Chinese investments). Again, though, it's a red herring.I fully expect my readers to weigh in on the matter. posted by Dan on 09.08.06 at 08:39 AM
We are working on a post about this topic. Just a heads up that your trackback function does not seem to be working.
Good job on picking this up so quickly and bringing the arguements together here! Would welcome your input as well.posted by: Dan on 09.08.06 at 08:39 AM [permalink]
Dan -- I think the question is not so much whether portfolio and bank flows out of China would dwarf portfolio and bank flows into China as whether the net portfolio and bank flows would dwarf China's $250b (@10% of GDP) surplus in China's basic balance (current account + net FDI flows). Technically, portfolio flows count in the basic balance, but in China's case, they are usually considered hot money.
Depending on your estimate of the current net inflow of portfolio/ bank flows now (I would say @ $50b over the past four quarters, but the total is sensitive to your assumptions and it has been declining as US rates rose and Chinese rates stayed low), the needed net swing to push the RMB down is around $300b -- from a net inflow of $50b to a net outflow of $250b. i am by no means a big fan of china's bankings system (tho bad investments financed by banks are usually more of a problem for taxpayers than depositors), but i find that kind of swing inplausible.posted by: brad setser on 09.08.06 at 08:39 AM [permalink]
p.s. I think you meant revaluation rather than devaluation ... the US certainly doesn't want a weaker RMB. That may explain how liberals (soros) are end doing better as currency traders than liberatarians ...posted by: brad setser on 09.08.06 at 08:39 AM [permalink]
Well my reasons for being a stiff WRT with china are multifold.
2nd fold is as an American i dont want to see falsely branded products in america, I dont care what is the norm elsewhere.
How does it add to Yuan revaluation you may ask?
At this point, isn't it a question of belling the cat?
The chinese are in a position to do pretty much whatever they want, and we aren't in a position to stop them. We could ask them pretty pretty please for a revaluation, and they might choose to do it in exchange for concessions that might be even worse.
If we want to do something effective, our choices are limited to:
1. Reduce imports, reduce american standards of living to the point that we don't need to devalue. (Also we could reduce our trade deficit by 40%? half? by getting out of iraq.) There would be big international implications of such a choice, but no need to consider them -- I can't imagine any Uncle Sugar politician making that choice before January 2009, and by then the situation will have changed considerably.
2. Military action. Everybody now sees that there are limits to the US military, but still we can defeat any navy in a blue ocean, and we can defeat any army in the world provided we have six months to a year to preposition supplies. There might be some way to leverage from that.
3. Nukes. We might have more than half the world's nukes by now. Probably between the USA and israel we have more than half. Maybe we could do some kind of nuclear blackmail?
4. Maybe we can bluff and the chinese won't know we're bluffing?
Is there some other possibility, some way we can keep the chinese from doing whatever they want?
People who're powerless naturally make arguments about why the powerful can't do what we fear. I remember people explaining why Greenspan couldn't keep dropping interest rates. It turned out he could and he did. Then when we got to the bottom where he really couldn't drop them further without paying people to take the money, there were lots of arguments why he couldn't raise rates. But he did. Before iraq I heard arguments that Bush wasn't really going to invade. It would be a quagmire, we'd lose international standing, all kinds of things. The claim was that he was just bluffing Saddam so Saddam would back down. Then it turned out he wouldn't let Saddam back down, he invaded regardless. All the reasons he couldn't do it have come back to bite us, but he did it anyway.
I don't understand china. You don't understand china. Nobody understands china. Probably nobody in china understands china. Eventually we will get some outcomes that somebody predicted, and they will think this validates their opinions. It doesn't really. Talking about why china can't do this or that serves no purpose except to reduce our anxiety levels.
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