Tuesday, December 19, 2006
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The China mystery
The great Henry Paulson-led expedition to China ended a few days ago, and beyond the purchase of a few nuclear reactors, it's not clear that any policy movement took place. Indeed, the most notable event of the trip was what Fed Chairman Ben Bernanke planned to say but did not actually say:
Federal Reserve Chairman Ben S. Bernanke urged China to let its currency gain at a faster pace to end a "distortion'' that benefits exporters.Brad Setser decides to tread where Bernanke does not:
Bernanke doesn’t connect the surge in China’s exports to the real depreciation of the dollar, and the real depreciation of the RMB, but I will. The RMB's link to the dollar is a bigger political issue in the US than in Europe, but China’s exports to Europe have actually grown faster than its exports to the US over the past few years....However, it's what Setser says in this post that caught my attention:
Right now, China is worried about too much growth and an overheated economy, not too little growth. A stronger RMB could substitute for administrative controls on investment. Rather than leading to slower growth, a stronger RMB might help to rebalance the basis of Chinese growth.My take is similar to Brad's -- China's economy would be better diversified if more of its growth came from domestic consumption, China's environment would be better off if growth slowed down by a percentage point or two, and the exchange rate is one of the few non-administrative policy options available.
So, the question is, why isn't China pursuing this course of action? A few possibilities:
1) Interest group politics exist in China, and the export lobby is very powerful. That's the implicit argument in this Steven Weisman piece for the NYT:American officials and specialists on China have said that Wu Yi, a vice prime minister and the country’s highest-ranking female official, might not have the inclination, or the influence, to challenge the party apparatus that is tied to the sprawling state-owned export industries....2) The Chinese leadership is worried about domestic political stability: Howard French's story about Shenzen in today's New York Times
Readers are encouraged to offer their answers to the China puzzle.posted by Dan on 12.19.06 at 09:08 AM
It's all about performance legitimacy. The CCP worries that if growth drops, more people - especially East coast urban people - will lose confidence and grow more sympathetic to political reform ideas. While we will probably not have a repeat of 1989/Tiananmen protests, we are watching a growing wave of smaller scale demonstrations among farmers and dispossessed urbanites. If people with money and ideas - i.e. the current "winners" of economic growth - start to feel pinched and link up with existing oppositional forces, we could see a much more concerted and powerful anti-Party push. It's not about the environment, it's not about the Yuan; it's about the Party's power.posted by: Sam on 12.19.06 at 09:08 AM [permalink]
If the blue collar sector of the Us economy continues to deteriorate, and China appears to be part of the problem, there will be a huge backlash.
Take a look at the Ohio elections to see what happens to politicans who push more trade deals while the locals are losing their jobs.
Schumer-Graham could happen yet.posted by: save_the_rustbelt on 12.19.06 at 09:08 AM [permalink]
That would be (4) All of the above.
This has been another edition of simple answers...posted by: Doug on 12.19.06 at 09:08 AM [permalink]
YOUR KIDS FUTURE
December 21st, 2006 by JohnKonop
PREPARE YOUR KIDS FOR THE FUTURE — AS A SERVANT
EC-In 1994, more than 1 in 8 jobs in America was in manufacturing. In 2014, if US government (Bureau of Labor Statistics) projections are to be believed, that figure will have slipped to less than 1 in 12.
The government is actually telling us in black and white that the policies that they are enacting will decrease absolute and relative manufacturing employment to levels below that of the 1950’s – over 2 million jobs below. In the 1950’s, 30% of US employees were in manufacturing – almost one in three jobs! This country was a relative manufacturing superpower.
In less than 20 years since America put in place some of its most self-devastating policy decisions (NAFTA, WTO, CAFTA, etc.), this country will have almost completely converted from a self-sufficient sovereign state, capable of manufacturing what it needs to sustain and protect itself, to a country of servants – serfs, working at the behest of foreign employers or engaged in the sales, marketing, and distribution of foreign-made goods – working at their discretion, for wages they determine, and forced to pay their prices for needed goods. This is the definition of a servant.posted by: John Konop on 12.19.06 at 09:08 AM [permalink]
Dan -- thanks for the love. Sorry about chiming in a bit late. i would note that the set of interests that benefit from the peg is in no way limited to the "export sector." The peg requires keeping interest rates low to discourage inflows -- and lots of folks (just not depositors) benefit from low interest rates. Real estate developers most obviously. Moreover, since the government rations access to credit to keep the economy from over-heating, there is more demand for cheap credit than the banks can supply ... which effectively gives the party lots of opportunities to influence the allocation of bank credit at the local level.
bottom line: I would discount the impact of non-export interests that indirectly benefit from the peg ... they may now understand why the peg helps them, but they know that the current system is working for them -- and don't want change.posted by: brad setser on 12.19.06 at 09:08 AM [permalink]
Don't forget the wealth effects of a renminbi revaluation. The PBC isn't the only one in China holding dollar assets. Of course the PBC's balance sheet has been severely eroded by the yet unfinished restructuring of non-performing loans in the big 4 state owned commercial banks. A 20-30% loss on 1 trillon in dollar assets is sure to sting the balance sheet, too.
Then there's also the threat of a zero-interest rate deflationary liquidity trap. That wouldn't be too good for employment and social stability either.posted by: Globalize This on 12.19.06 at 09:08 AM [permalink]
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