A self-denominated "currency capitalist", Evaldo Albuquerque, who seems to be a Brazilian, has some interesting things to say about this exchange struggle:
Why the Yuan Could Replace the Dollar By 2015
By Evaldo Albuquerque
THE SOVEREIGN INVESTOR, September 3, 2010
Dear Paulo Roberto,
Do you know anyone who speaks “Esperanto?”
If not, don’t worry. I never heard of the language until my recent trip to Brazil. Over the summer, I spent a couple weeks traveling around South America on a research mission.
While I was traveling, I met with the heads of major companies and important government leaders in Latin America. As a currency guy, I wanted to know how these major players in Latin America feel about the U.S. dollar.
Of all the business leaders I met with, Maria Ramos, head of investor relations at Brazilian oil-giant Petrobras, had the most interesting opinion on the dollar.
Instead of answering right away, Ms. Ramos told me a story about Esperanto. It was designed in the 19th century to serve as a universal second language.
“Trying to come up with an alternative to the dollar today is like trying to impose Esperanto as an international language. It doesn’t work like that,” she said.
“The same way English has evolved naturally to become the international language, the dollar has become the world’s reserve currency. The dollar is the currency everyone has access to!”
Of course she’s right.
At the moment, there is no alternative to replace the dollar as a world reserve currency.
But there is something happening right now that can easily change that.
A couple of weeks ago, McDonald’s became the first foreign non-financial company to sell yuan-denominated bonds in Hong Kong. Wal-Mart has already revealed its intention to do the same. In my opinion, it’s one of the greatest developments of our time.
The Only Real Threat to the Dollar's Supremacy
Empires don’t suddenly end. There are always warning signs that can sometimes last for years leading up to an empire’s collapse.
Out-of-control debt levels have historically been a major red flag. This debt can signal an empire’s end.
Look at what happened with the Spanish Empire in the 17th century or the British Empire in the 20th. Excessive debt effectively crumbled both empires. Given its massive deficits, America may soon become another good example.
And there’s a viable threat to the dollar’s supremacy in Asia. It’s the rise of the Asian market and the internationalization of China’s currency, the yuan.
China is Planting the Seeds of a Powerful Reserve Currency
Right now, Chinese leaders are making strides toward effectively capturing the dollar’s place as a reserve currency.
In the past two months, China’s leaders allowed the yuan to trade offshore in Hong Kong. They announced opening their bond market to foreign banks.
The yuan also started trading in the domestic Forex market vs. the Malaysia’s ringgit. Soon the yuan will be trading against other currencies, including the Russian ruble and the Korean won.
Hong Kong's securities regulator also just approved a new fund of yuan-denominated fixed-income products, such as bonds and commercial paper.
Chinese financial officials are also planning to introduce “junk” bonds to provide smaller private companies with new funding channels.
As other companies follow McDonald’s and Wal-Mart’s lead in tapping into China’s bond market, the yuan will play a significant role in global commerce.
Big banks around the globe such as HSBC, BBVA, JPMorgan Chase and Citigroup are all doing road shows in Latin America to encourage the use of the yuan in trade with China.
Do you see the pattern? The development of China’s currency is here to stay.
U.S. Dollar Crisis in the Making
What does that all mean for the U.S. dollar? One word: crisis!
One important reason the U.S. dollar remains the reserve currency is the U.S. bond market. Our bond market is the most-liquid of its kind.
But a well-developed Chinese capital market will provide strong support to the yuan. And the faster this process advances, the faster the dollar will lose status in the international market.
I agree with Ms. Ramos that the U.S. dollar won’t lose its reserve status tomorrow. It may take five years or more.
But China is planting the seeds of a powerful international currency that may become this alternative to the dollar. Without any serious fiscal reform in the U.S., the buck is looking more and more like a disaster waiting to happen.
Personally, I’m not waiting. I have already diversified part of my savings into stronger foreign currencies for my family. You can buy yuan through an exchange-traded fund (NYSE: CYB). Or you can even hold yuan (aka, renminbi) in a WorldCurrency Access Deposit Account at EverBank*. Learn more here.
It’s best to do diversify your currency holdings now while the dollar is still strong to get the most for your money. I’m grabbing all the foreign currency I can at a discount and I urge you to do the same.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
Contributor, Currency Capitalist
P.S. I’ll be talking more about the yuan and about exotic currencies at the Offshore Advantage Academy in November. Thought you might be interested in learning more. For event details, click here.
Showing posts with label exchange policy. Show all posts
Showing posts with label exchange policy. Show all posts
Saturday, September 4, 2010
Saturday, June 19, 2010
China to G20: stay away from the yuan
China tells world stay out of yuan
Simon Rabinovitch and Jeff Mason
Shanghai Daily, June 19, 2010
CHINA yesterday told the rest of the world not to meddle with the way it manages the yuan, setting the stage for a clash with its biggest trading partners at next week's G20 summit.
United States President Barack Obama released a letter to his Group of 20 colleagues that zeroed in on prickly policy differences over China's currency stance and debt-wary Europe's rush to rein in bulging budget deficits.
World leaders gathering in Toronto next week are struggling to maintain the crisis-forged unity that has been credited with preventing another Great Depression. Now that the global economy is on the mend, divisions are beginning to show.
Cui Tiankai, a vice foreign minister who is China's official in charge of preparing for the G20 summit, said the yuan was "China's currency, so I don't think it is an issue that should be discussed internationally."
China has kept the yuan at around 6.83 per US dollar for almost two years amid the global financial crisis.
Obama, under pressure from some lawmakers who accuse his administration of soft-pedaling on China, said free-floating currencies were "essential" to global economic activity, a thinly veiled reference to the yuan.
His administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of Congress have urged.
US Treasury Department delayed its regular currency report to Congress, which was due in April, angering some lawmakers who think the administration is dragging its feet.
Obama also directed stern words at Europe. In the letter to G20 colleagues dated Wednesday, he pointed out the highest priority at next week's meeting must be to safeguard the recovery and not succumb too quickly to demands to reduce government debt.
Simon Rabinovitch and Jeff Mason
Shanghai Daily, June 19, 2010
CHINA yesterday told the rest of the world not to meddle with the way it manages the yuan, setting the stage for a clash with its biggest trading partners at next week's G20 summit.
United States President Barack Obama released a letter to his Group of 20 colleagues that zeroed in on prickly policy differences over China's currency stance and debt-wary Europe's rush to rein in bulging budget deficits.
World leaders gathering in Toronto next week are struggling to maintain the crisis-forged unity that has been credited with preventing another Great Depression. Now that the global economy is on the mend, divisions are beginning to show.
Cui Tiankai, a vice foreign minister who is China's official in charge of preparing for the G20 summit, said the yuan was "China's currency, so I don't think it is an issue that should be discussed internationally."
China has kept the yuan at around 6.83 per US dollar for almost two years amid the global financial crisis.
Obama, under pressure from some lawmakers who accuse his administration of soft-pedaling on China, said free-floating currencies were "essential" to global economic activity, a thinly veiled reference to the yuan.
His administration has stopped short of accusing China of manipulating its currency to give it a trade advantage, something that some members of Congress have urged.
US Treasury Department delayed its regular currency report to Congress, which was due in April, angering some lawmakers who think the administration is dragging its feet.
Obama also directed stern words at Europe. In the letter to G20 colleagues dated Wednesday, he pointed out the highest priority at next week's meeting must be to safeguard the recovery and not succumb too quickly to demands to reduce government debt.
Wednesday, April 28, 2010
410) China: Exchange and Trade Policies
China's Exchange Rate Policy and Trade Imbalances
Nicholas R. Lardy
Peterson Institute for International Economics, April 28, 2010
Testimony before the Hearing of the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy
April 22, 2010
China and the United States each contributed massively to the large global economic imbalances that emerged in the middle of the last decade. China was far and away the largest global surplus country by the middle of the decade. Its current account surplus reached an astonishing 11.0 percent of GDP in 2007 and for the four years from 2005 through 2008 China accounted for about a fifth of the total global surplus. China's emergence as a large surplus country reflects the rise of domestic savings relative to investment over this period.
The United States was far and away the world's largest deficit country in recent years, hitting a peak of 6 percent of GDP in 2006. For the same four-year period the United States accounted for almost 60 percent of the total global deficit. These very large US deficits reflected our low national savings relative to our national investment.
The imbalances in both countries contributed to the global financial crisis, though lax financial regulation in the United States was undoubtedly a more important underlying cause.
But this situation has changed significantly over the past two to three years. The external imbalances of both the United States and China have declined dramatically. From its 2007 peak China's current account fell by almost half to 6.1 percent of GDP in 2009 and in the first quarter of this year was running at an annual rate of only 1 percent of GDP. Similarly, the pace of official intervention, which prevents the value of the renminbi from appreciating, fell by three-fifths in the first quarter of this year compared to last year. The US current account imbalance also has fallen sharply; the deficit fell to only 2.9 percent of GDP last year, about half the level of 2006.
Given these developments it may appear that the renewed focus by the US Congress on China's currency and its external imbalance is misplaced. In China the Ministry of Commerce now argues that the collapse of China's trade surplus shows that its currency is no longer undervalued and thus appreciation is not warranted. However, I believe that this conclusion is not well founded since the decline in China's external surplus in large part was caused by three factors that are likely to be transitory or already have been reversed.
First, China was the first globally significant economy to begin to recover from the global recession. China's growth bottomed out in the fourth quarter of 2008 and then accelerated very strongly starting in the first quarter of 2009. Thus China's recovery predates that of the United States, its largest trading partner, by half a year and predates European recovery by an even longer period. China's early growth resurgence compared to the rest of the world boosted its imports relative to its exports, cutting the external surplus. But this factor will wane if the US recovery gains traction and Europe begins to recover.
Second, China's terms of trade have deteriorated dramatically over the past year, reflecting a sharp rise in commodity prices. Since China is the world's largest importer of a number of key commodities, sharply rising prices for these goods have added substantially to China's import bill, thus reducing its external surplus. This is unlikely to continue to be such a major factor going forward.
Third, the renminbi appreciated 15 to 20 percent in real effective terms from late 2007 through the first quarter of 2009. This was a major factor contributing to the sharp reduction in China's surplus in 2008 and 2009. But since the first quarter of 2009 the renminbi has depreciated in real effective terms by about 5 percent. This factor is likely to contribute to a rise in China's surplus, probably beginning in the second half of 2010.
Thus I disagree with those who argue that China's currency is no longer undervalued. It seems more likely that China's external surplus will turn upward and that China's contribution to global economic imbalances should continue to be a focus of US policy.
However, the extraordinarily sharp and unexpected reduction in China's current account surplus over the past year surely suggests that there is substantial uncertainty surrounding most estimates of the degree of renminbi undervaluation. Moreover, we should recognize that the virtual disappearance of China's trade surplus, even if only temporary, means that within China it will be politically difficult for the government to quickly resume a policy of appreciation vis-à-vis the US dollar. It also means that if this policy is adopted we are likely to see a slow pace of appreciation, at least until the global recovery strengthens and China's external surplus widens significantly.
Furthermore, even if the degree of undervaluation of the renminbi is very large, a rapid appreciation of the renminbi is not optimal from the Chinese perspective and probably not from the US perspective either. With about 50 million people employed in China's export-oriented manufacturing, the Chinese government will eschew rapid appreciation since that would result in a sharp fall in the output of these industries and eliminate many of these jobs. Their optimal strategy will be a gradual appreciation that would eliminate the growth of China's trade surplus and thus tend to stabilize the output and employment of these industries. In 2008, when my colleague Morris Goldstein and I believed the renminbi was very substantially undervalued, we argued the optimal time frame for eliminating currency undervaluation would be four to six years.1 Our colleague, Michael Mussa, points out that a very rapid elimination of China's currency undervaluation would not be desirable from the perspective of the United States since it would likely "disrupt China's economic growth in ways and to an extent that could not plausibly be offset by other policy adjustments."2 A rapid deceleration in the growth of the world's second largest economy is not likely to enhance global economic recovery, nor would it likely contribute to the recovery of employment in the United States. Indeed, the opposite is more likely.
Ultimately reducing imbalances, whether in the United States or China, requires structural reforms that reduce the gap between national rates of saving and investment. The exchange rate is an important factor that can contribute to this process. But without supporting reform policies in both countries, the results of exchange rate adjustment alone are likely to be disappointing.
In China some progress has been made over the last couple of years to advance this broader rebalancing agenda. This progress is spelled out in greater detail in my policy brief The Sustainability of China's Recovery from the Global Recession, which was distributed by the Peterson Institute in March. The government has taken steps to reduce some of the factor market distortions that have artificially subsidized the production of export goods and goods that compete with imports and at the same time have inhibited the output of services, which are largely consumed at home. In 2009 the government raised the prices of some important inputs, notably fuels, which are predominantly consumed in the industrial sector. This reduced the bias of investment toward manufacturing, contributing to a larger increase in investment in services than in industry in 2009. This is a reversal from the pattern that had dominated Chinese investment for many years. Similarly the government continued to accelerate its build out of the social safety net by massively increasing expenditures on health, education, and pensions. This should contribute to a reduction in households' precautionary demand for savings and thus a reduction in China's large savings surplus. Finally, bank lending to consumers grew dramatically last year, facilitating a remarkable increase in household consumption expenditures.
In addition to allowing its currency to appreciate, the Chinese government should adopt a number of other policy reforms to insure a sustained reduction in its global current account surplus and a successful transition to more consumption-driven growth. Low interest rates on bank loans continue to favor manufacturing (tradable goods) over services and thus contribute to China's external surplus. To address this problem China's central bank should end its policy of imposing a broad range of deposit and lending rates in favor of allowing supply and demand in the market to determine interest rates. Further price reforms would also contribute to sustaining the reduction in China's global current account surplus. For example, while the government last year raised the prices of gasoline and diesel fuel, electric power remains underpriced, continuing to provide an advantage to China's exports. And, after years of discussion, the government should introduce realistic environmental taxes and fees, which would help to level the playing field between industrial growth and exports versus services and consumption.
Notes
1. Goldstein, Morris, and Nicholas R Lardy. 2008. China's Exchange Rate Policy: An Overview of Some Key Issues [pdf]. In Debating China's Exchange Rate Policy, eds.Morris Goldstein and Nicholas R. Lardy. Washington: Peterson Institute for International Economics. Pages 54–55.
2. Mussa, Michael. 2010. Global Economic Prospects for 2010 and 2011: Global Recovery Continues [pdf]. Paper presented at the 17th semiannual meeting on Global Economic Prospects (April 8).
RELATED LINKS
Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010
Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010
Peterson Perspective: A Growing US-China Rift January 6, 2010
Book: China's Rise: Challenges and Opportunities (hardcover) September 2008
Book: Future of China's Exchange Rate Policy, The July 2009
Book: Debating China's Exchange Rate Policy April 2008
Testimony: China's Role in the Origins of and Response to the Global Recession February 17, 2009
Op-ed: China's Currency Needs to Rise Further July 22, 2008
Testimony: The Dollar and the Renminbi May 23, 2007
Speech: Is China a Currency “Manipulator”? January 28, 2009
Paper: China Energy: A Guide for the Perplexed May 2007
Paper: China and Economic Integration in East Asia May 2007
Paper: China: Rebalancing Economic Growth May 2007
Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006
Op-ed: The Yen Beckons China’s Dollars March 12, 2007
Nicholas R. Lardy
Peterson Institute for International Economics, April 28, 2010
Testimony before the Hearing of the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy
April 22, 2010
China and the United States each contributed massively to the large global economic imbalances that emerged in the middle of the last decade. China was far and away the largest global surplus country by the middle of the decade. Its current account surplus reached an astonishing 11.0 percent of GDP in 2007 and for the four years from 2005 through 2008 China accounted for about a fifth of the total global surplus. China's emergence as a large surplus country reflects the rise of domestic savings relative to investment over this period.
The United States was far and away the world's largest deficit country in recent years, hitting a peak of 6 percent of GDP in 2006. For the same four-year period the United States accounted for almost 60 percent of the total global deficit. These very large US deficits reflected our low national savings relative to our national investment.
The imbalances in both countries contributed to the global financial crisis, though lax financial regulation in the United States was undoubtedly a more important underlying cause.
But this situation has changed significantly over the past two to three years. The external imbalances of both the United States and China have declined dramatically. From its 2007 peak China's current account fell by almost half to 6.1 percent of GDP in 2009 and in the first quarter of this year was running at an annual rate of only 1 percent of GDP. Similarly, the pace of official intervention, which prevents the value of the renminbi from appreciating, fell by three-fifths in the first quarter of this year compared to last year. The US current account imbalance also has fallen sharply; the deficit fell to only 2.9 percent of GDP last year, about half the level of 2006.
Given these developments it may appear that the renewed focus by the US Congress on China's currency and its external imbalance is misplaced. In China the Ministry of Commerce now argues that the collapse of China's trade surplus shows that its currency is no longer undervalued and thus appreciation is not warranted. However, I believe that this conclusion is not well founded since the decline in China's external surplus in large part was caused by three factors that are likely to be transitory or already have been reversed.
First, China was the first globally significant economy to begin to recover from the global recession. China's growth bottomed out in the fourth quarter of 2008 and then accelerated very strongly starting in the first quarter of 2009. Thus China's recovery predates that of the United States, its largest trading partner, by half a year and predates European recovery by an even longer period. China's early growth resurgence compared to the rest of the world boosted its imports relative to its exports, cutting the external surplus. But this factor will wane if the US recovery gains traction and Europe begins to recover.
Second, China's terms of trade have deteriorated dramatically over the past year, reflecting a sharp rise in commodity prices. Since China is the world's largest importer of a number of key commodities, sharply rising prices for these goods have added substantially to China's import bill, thus reducing its external surplus. This is unlikely to continue to be such a major factor going forward.
Third, the renminbi appreciated 15 to 20 percent in real effective terms from late 2007 through the first quarter of 2009. This was a major factor contributing to the sharp reduction in China's surplus in 2008 and 2009. But since the first quarter of 2009 the renminbi has depreciated in real effective terms by about 5 percent. This factor is likely to contribute to a rise in China's surplus, probably beginning in the second half of 2010.
Thus I disagree with those who argue that China's currency is no longer undervalued. It seems more likely that China's external surplus will turn upward and that China's contribution to global economic imbalances should continue to be a focus of US policy.
However, the extraordinarily sharp and unexpected reduction in China's current account surplus over the past year surely suggests that there is substantial uncertainty surrounding most estimates of the degree of renminbi undervaluation. Moreover, we should recognize that the virtual disappearance of China's trade surplus, even if only temporary, means that within China it will be politically difficult for the government to quickly resume a policy of appreciation vis-à-vis the US dollar. It also means that if this policy is adopted we are likely to see a slow pace of appreciation, at least until the global recovery strengthens and China's external surplus widens significantly.
Furthermore, even if the degree of undervaluation of the renminbi is very large, a rapid appreciation of the renminbi is not optimal from the Chinese perspective and probably not from the US perspective either. With about 50 million people employed in China's export-oriented manufacturing, the Chinese government will eschew rapid appreciation since that would result in a sharp fall in the output of these industries and eliminate many of these jobs. Their optimal strategy will be a gradual appreciation that would eliminate the growth of China's trade surplus and thus tend to stabilize the output and employment of these industries. In 2008, when my colleague Morris Goldstein and I believed the renminbi was very substantially undervalued, we argued the optimal time frame for eliminating currency undervaluation would be four to six years.1 Our colleague, Michael Mussa, points out that a very rapid elimination of China's currency undervaluation would not be desirable from the perspective of the United States since it would likely "disrupt China's economic growth in ways and to an extent that could not plausibly be offset by other policy adjustments."2 A rapid deceleration in the growth of the world's second largest economy is not likely to enhance global economic recovery, nor would it likely contribute to the recovery of employment in the United States. Indeed, the opposite is more likely.
Ultimately reducing imbalances, whether in the United States or China, requires structural reforms that reduce the gap between national rates of saving and investment. The exchange rate is an important factor that can contribute to this process. But without supporting reform policies in both countries, the results of exchange rate adjustment alone are likely to be disappointing.
In China some progress has been made over the last couple of years to advance this broader rebalancing agenda. This progress is spelled out in greater detail in my policy brief The Sustainability of China's Recovery from the Global Recession, which was distributed by the Peterson Institute in March. The government has taken steps to reduce some of the factor market distortions that have artificially subsidized the production of export goods and goods that compete with imports and at the same time have inhibited the output of services, which are largely consumed at home. In 2009 the government raised the prices of some important inputs, notably fuels, which are predominantly consumed in the industrial sector. This reduced the bias of investment toward manufacturing, contributing to a larger increase in investment in services than in industry in 2009. This is a reversal from the pattern that had dominated Chinese investment for many years. Similarly the government continued to accelerate its build out of the social safety net by massively increasing expenditures on health, education, and pensions. This should contribute to a reduction in households' precautionary demand for savings and thus a reduction in China's large savings surplus. Finally, bank lending to consumers grew dramatically last year, facilitating a remarkable increase in household consumption expenditures.
In addition to allowing its currency to appreciate, the Chinese government should adopt a number of other policy reforms to insure a sustained reduction in its global current account surplus and a successful transition to more consumption-driven growth. Low interest rates on bank loans continue to favor manufacturing (tradable goods) over services and thus contribute to China's external surplus. To address this problem China's central bank should end its policy of imposing a broad range of deposit and lending rates in favor of allowing supply and demand in the market to determine interest rates. Further price reforms would also contribute to sustaining the reduction in China's global current account surplus. For example, while the government last year raised the prices of gasoline and diesel fuel, electric power remains underpriced, continuing to provide an advantage to China's exports. And, after years of discussion, the government should introduce realistic environmental taxes and fees, which would help to level the playing field between industrial growth and exports versus services and consumption.
Notes
1. Goldstein, Morris, and Nicholas R Lardy. 2008. China's Exchange Rate Policy: An Overview of Some Key Issues [pdf]. In Debating China's Exchange Rate Policy, eds.Morris Goldstein and Nicholas R. Lardy. Washington: Peterson Institute for International Economics. Pages 54–55.
2. Mussa, Michael. 2010. Global Economic Prospects for 2010 and 2011: Global Recovery Continues [pdf]. Paper presented at the 17th semiannual meeting on Global Economic Prospects (April 8).
RELATED LINKS
Testimony: Correcting the Chinese Exchange Rate: An Action Plan March 24, 2010
Policy Brief 10-7: The Sustainability of China's Recovery from the Global Recession March 2010
Paper: Submission to the USTR in Support of a Trans-Pacific Partnership Agreement January 25, 2010
Peterson Perspective: A Growing US-China Rift January 6, 2010
Book: China's Rise: Challenges and Opportunities (hardcover) September 2008
Book: Future of China's Exchange Rate Policy, The July 2009
Book: Debating China's Exchange Rate Policy April 2008
Testimony: China's Role in the Origins of and Response to the Global Recession February 17, 2009
Op-ed: China's Currency Needs to Rise Further July 22, 2008
Testimony: The Dollar and the Renminbi May 23, 2007
Speech: Is China a Currency “Manipulator”? January 28, 2009
Paper: China Energy: A Guide for the Perplexed May 2007
Paper: China and Economic Integration in East Asia May 2007
Paper: China: Rebalancing Economic Growth May 2007
Book: US-China Trade Disputes: Rising Tide, Rising Stakes August 2006
Op-ed: The Yen Beckons China’s Dollars March 12, 2007
Friday, April 9, 2010
394) Renminbi undervaluation - Arvind Subramanian (IIE)
New PPP-Based Estimates of Renminbi Undervaluation and Policy Implications
Arvind Subramanian
Peterson Institute for International Economy, Policy Brief 10-8
New estimates by Arvind Subramanian for the undervaluation of the Chinese currency based on the purchasing power parity (PPP) approach find that the renminbi is undervalued by approximately 30 percent rather than the 12 percent that has been widely reported. Subramanian applies new insights about the way PPP data are compiled, uses new data that have become available, and corrects existing estimates for the biases in the data in order to attain a more accurate estimation of China's currency undervaluation.
Corrective action must be taken not only to help China itself but to prevent its currency undervaluation from harming the rest of the world. The real victims of China's currency policies, argues Subramanian, are other emerging-market and developing countries because they compete more closely with China. It is crucial that the subject be broached delicately and with humility and that a multilateral approach be taken with China, most likely by going through the World Trade Organization.
>> Read full policy brief [pdf]
>> See also related event
Arvind Subramanian
Peterson Institute for International Economy, Policy Brief 10-8
New estimates by Arvind Subramanian for the undervaluation of the Chinese currency based on the purchasing power parity (PPP) approach find that the renminbi is undervalued by approximately 30 percent rather than the 12 percent that has been widely reported. Subramanian applies new insights about the way PPP data are compiled, uses new data that have become available, and corrects existing estimates for the biases in the data in order to attain a more accurate estimation of China's currency undervaluation.
Corrective action must be taken not only to help China itself but to prevent its currency undervaluation from harming the rest of the world. The real victims of China's currency policies, argues Subramanian, are other emerging-market and developing countries because they compete more closely with China. It is crucial that the subject be broached delicately and with humility and that a multilateral approach be taken with China, most likely by going through the World Trade Organization.
>> Read full policy brief [pdf]
>> See also related event
Thursday, April 8, 2010
381) China: revalorizacao do yuan?
China parece disposta a mudar política cambial
Editorial
Valor Econômico, Quinta-feira, 8 de abril de 2010
A China voltou a dar sinais de que pode flexibilizar a política cambial, permitindo a valorização da sua moeda, o yuan. A possibilidade já havia sido levantada no início do ano sem que nenhuma mudança ocorresse de fato. Há indicações, porém, de que agora pode ser diferente. Um dos principais motivos é que a sinalização está sendo dada pouco antes do encontro, na próxima semana, dos presidentes dos Estados Unidos, Barack Obama, e da China, Hu Jintao, em Washington. O encontro vai ocorrer paralelamente à reunião de cúpula sobre segurança nuclear, patrocinada por Obama, e o câmbio será naturalmente um tema.
A ação chinesa foi uma resposta à boa vontade do governo americano, que adiou a decisão de manifestar em documento que a China manipula sua moeda. Uma declaração desse tipo abre teoricamente espaço para disputas no âmbito da Organização Mundial do Comércio (OMC). Ao evitar esse passo, os Estados Unidos indicam que podem resolver a questão no âmbito diplomático, alternativa preferida pela China. Provavelmente será esse o recado que dará pessoalmente ao governo chinês o secretário do Tesouro, Timothy Geithner, hoje, em Pequim.
Favorecida pela moeda depreciada e baixos custos de produção, a China vem dominando o comércio internacional. Seu superávit em conta corrente chegou perto de US$ 400 bilhões em 2007, cerca de 11% do Produto Interno Bruto (PIB). Mesmo durante o auge da crise internacional, em 2009, foi de surpreendentes US$ 275 bilhões, ou mais de 5% do PIB. Esse dinamismo puxa a economia internacional e tem um impacto positivo, especialmente em países emergentes como o Brasil, grande fornecedor de matérias-primas para a China.
Mas os aspectos negativos se sobressaem. Para o economista americano Fred Bergsten, do Peterson Institute for International Economics, a China está exportando grandes doses de desemprego para o resto do mundo, incluindo Estados Unidos, Europa e muitos mercados emergentes como o Brasil, Índia, México e África do Sul.
De fato, nesta semana, o presidente Lula mostrou-se irritado com o avanço chinês na Argentina, tradicional mercado brasileiro. Reportagem publicada pelo Valor, terça-feira, mostra que o país perde espaço para os chineses na briga por mercado em todo o mundo, a começar pelos vizinhos da América Latina. De acordo com estudo da Comissão Econômica para a América Latina e Caribe (Cepal), a China conseguiu ampliar em US$ 17 bilhões as vendas de produtos que competem com os brasileiros na América do Sul, entre 1995 e 2008, passando de fornecedora de quinquilharias a exportadora de bens de maior valor agregado, como eletrodomésticos. Já o Brasil ampliou em apenas US$ 665 milhões as vendas de bens que competem com os chineses.
A mudança mais significativa na política cambial chinesa ocorreu em julho de 2005, quando o país trocou o dólar como referência cambial por uma cesta de moedas. Apesar disso, o yuan pouco se fortaleceu nos dois anos seguintes, enquanto o país ia acumulando elevados superávits em conta corrente e astronômicas reservas internacionais. Entre novembro de 2007 e o fim de 2008, o ritmo de desvalorização do yuan aumentou. Com o aprofundamento da crise, porém, o câmbio praticamente estacionou. A China compraria US$ 1 bilhão por dia para sustentar a cotação.
A depreciação cambial foi uma das medidas chinesas para enfrentar a crise. O país tem que manter o estrondoso ritmo de crescimento econômico para dar emprego à sua gigantesca população - e essa expansão tem sido basicamente sustentada pelas exportações.
Tornar o câmbio flexível também é uma tarefa difícil por causa da inexistência de instrumentos de hedge e da falta de experiência das empresas chinesas em conviver com uma taxa flutuante, disse Zhang Yansheng, diretor-geral do Institute for International Economic Research, think tank, ligado ao governo.
Calcula-se que a moeda chinesa precise de um ajuste de 15% a 25% em termos reais. É praticamente impossível que isso ocorra de uma penada só. Como em um transatlântico, todas as mudanças na China são graduais.
Editorial
Valor Econômico, Quinta-feira, 8 de abril de 2010
A China voltou a dar sinais de que pode flexibilizar a política cambial, permitindo a valorização da sua moeda, o yuan. A possibilidade já havia sido levantada no início do ano sem que nenhuma mudança ocorresse de fato. Há indicações, porém, de que agora pode ser diferente. Um dos principais motivos é que a sinalização está sendo dada pouco antes do encontro, na próxima semana, dos presidentes dos Estados Unidos, Barack Obama, e da China, Hu Jintao, em Washington. O encontro vai ocorrer paralelamente à reunião de cúpula sobre segurança nuclear, patrocinada por Obama, e o câmbio será naturalmente um tema.
A ação chinesa foi uma resposta à boa vontade do governo americano, que adiou a decisão de manifestar em documento que a China manipula sua moeda. Uma declaração desse tipo abre teoricamente espaço para disputas no âmbito da Organização Mundial do Comércio (OMC). Ao evitar esse passo, os Estados Unidos indicam que podem resolver a questão no âmbito diplomático, alternativa preferida pela China. Provavelmente será esse o recado que dará pessoalmente ao governo chinês o secretário do Tesouro, Timothy Geithner, hoje, em Pequim.
Favorecida pela moeda depreciada e baixos custos de produção, a China vem dominando o comércio internacional. Seu superávit em conta corrente chegou perto de US$ 400 bilhões em 2007, cerca de 11% do Produto Interno Bruto (PIB). Mesmo durante o auge da crise internacional, em 2009, foi de surpreendentes US$ 275 bilhões, ou mais de 5% do PIB. Esse dinamismo puxa a economia internacional e tem um impacto positivo, especialmente em países emergentes como o Brasil, grande fornecedor de matérias-primas para a China.
Mas os aspectos negativos se sobressaem. Para o economista americano Fred Bergsten, do Peterson Institute for International Economics, a China está exportando grandes doses de desemprego para o resto do mundo, incluindo Estados Unidos, Europa e muitos mercados emergentes como o Brasil, Índia, México e África do Sul.
De fato, nesta semana, o presidente Lula mostrou-se irritado com o avanço chinês na Argentina, tradicional mercado brasileiro. Reportagem publicada pelo Valor, terça-feira, mostra que o país perde espaço para os chineses na briga por mercado em todo o mundo, a começar pelos vizinhos da América Latina. De acordo com estudo da Comissão Econômica para a América Latina e Caribe (Cepal), a China conseguiu ampliar em US$ 17 bilhões as vendas de produtos que competem com os brasileiros na América do Sul, entre 1995 e 2008, passando de fornecedora de quinquilharias a exportadora de bens de maior valor agregado, como eletrodomésticos. Já o Brasil ampliou em apenas US$ 665 milhões as vendas de bens que competem com os chineses.
A mudança mais significativa na política cambial chinesa ocorreu em julho de 2005, quando o país trocou o dólar como referência cambial por uma cesta de moedas. Apesar disso, o yuan pouco se fortaleceu nos dois anos seguintes, enquanto o país ia acumulando elevados superávits em conta corrente e astronômicas reservas internacionais. Entre novembro de 2007 e o fim de 2008, o ritmo de desvalorização do yuan aumentou. Com o aprofundamento da crise, porém, o câmbio praticamente estacionou. A China compraria US$ 1 bilhão por dia para sustentar a cotação.
A depreciação cambial foi uma das medidas chinesas para enfrentar a crise. O país tem que manter o estrondoso ritmo de crescimento econômico para dar emprego à sua gigantesca população - e essa expansão tem sido basicamente sustentada pelas exportações.
Tornar o câmbio flexível também é uma tarefa difícil por causa da inexistência de instrumentos de hedge e da falta de experiência das empresas chinesas em conviver com uma taxa flutuante, disse Zhang Yansheng, diretor-geral do Institute for International Economic Research, think tank, ligado ao governo.
Calcula-se que a moeda chinesa precise de um ajuste de 15% a 25% em termos reais. É praticamente impossível que isso ocorra de uma penada só. Como em um transatlântico, todas as mudanças na China são graduais.
378) Should China devalue its currency? - Gary Becker
Should China revalue its currency?
By Gary S. Becker
China Daily, February 24, 2010
US President Barack Obama has apparently complained to President Hu Jintao about the yuan's low value and urged him to revaluate it substantially.
Two of the most important and closely related economic issues today are the value of the yuan and the huge assets accumulated by China, mainly in the form of United States Treasury bills and other US government assets.
China's central bank had the yuan's value fixed at a little over 8 per US dollar during the 1990s and until 2005. It then allowed the yuan to rise gradually to less than 7 a dollar until 2008, when it again fixed the rate of exchange at about 6.9 yuan per dollar. This exchange rate is considerably above a free market rate that would be determined in a regime of flexible exchange rates. So there is no doubt that China is intentionally holding the value of its currency below the rate that would equate supply and demand.
The value of the greenback has fallen substantially against other currencies since May 2009. Since the yuan is tied to the dollar it's value, too, has declined in the same ratio: 16 percent against the euro, 34 percent against the Australian dollar, 25 percent against the Korean won, and 10 percent against the Japanese yen. This substantial devaluation of the yuan has made many countries angry with China's policy of pegging it to the US dollar.
The US and other countries are worried that the undervaluation of the yuan increases the demand for Chinese exports and reduces China's demand for imports from countries like the US because China keeps the dollar and the currencies of other countries artificially expensive compared to its currency.
The US and other countries hope that greater demand from China for their exports, resulting from a higher value of the yuan, will help them resume sizable economic growth as they recover from severe recession. Their governments especially want to reduce the high levels of unemployment.
Indeed, in good part due to the low value of its currency, China has run substantial surpluses in its current trade account because it imports fewer goods and services than it exports. As a result, it has accumulated enormous reserves of assets in foreign currencies, especially US government assets denominated in dollars. At the end of last year, China had an incredible more than $2 trillion in foreign currency reserves, which included US Treasury bills. This is by far the largest reserve in the world and its ratio to China's GDP is huge: a quarter of about $8 trillion (purchasing power parity adjusted).
I doubt the wisdom of the US for complaining against China's currency policy and of China for its response. On the whole, I believe most Americans benefit rather than being hurt by China's long-standing policy of keeping the yuan at an artificially low exchange value. The policy makes the goods imported from China, such as clothes, furniture and small electronic devices, much cheaper than they would have been if China revaluated its currency substantially. The main beneficiaries of China's current policy are poor and lower middle class Americans and people in other countries who buy made-in-China goods at remarkably cheap prices in stores such as Wal-Mart that cater to cost-conscious families.
US companies that would like to export more to China have indeed been hurt by China's currency policy. They employ fewer people than their capacity and thus contribute to the high rate of unemployment in the US. But I believe the benefits to American consumers far outweigh any losses in jobs, especially because the US economy continues its recovery.
Since the opposite effects hold for China, I cannot justify the country's policies from the viewpoint of its interests. Its consumers and importers are hurt because the government has kept the cost of foreign goods artificially high for them. Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the well-being of the average Chinese family.
I have reached a similar conclusion on China's excessive reserves. The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling inexpensive goods to the US and other countries. China's willingness to save so much reduces the need for the Americans and others to save more. But are not differences in savings rates part of the specialization that global markets encourage? It is difficult to understand why China is doing this because it is giving away goods made with hard work and capital for paper assets that carry little returns.
One common answer is that China hopes to increase its influence over international economic and geo-political policies by holding so many foreign assets. Yet it seems to me just the opposite is true - that China's huge levels of foreign assets put it more at the mercy of American and other countries' policies. China can threaten to sell large numbers of the US Treasury bills and other US assets it holds, but what will it buy instead? Presumably, it would buy European Union or Japanese government bills and bonds. That will put a little upward pressure on the interest rates of other governments. But to a considerable extent, the main effect in our integrated world capital market is that sellers to China of euro and yen-denominated assets would then hold the US Treasuries sold by China.
On the other hand, the US can threaten to inflate some of the real value of its dollar-denominated assets - not an empty threat because of the large US government fiscal deficits and the sizable growth in US bank excess reserves. Inflation would lower the exchange value of the dollar, and also of the yuan as long as China keeps it tied to the greenback. That would further increase the current account surpluses of China, and thereby induce it to hold more US and other foreign assets, which is not a very attractive scenario for Beijing.
So my conclusion is that the US in its own interest should not urge China to revaluate its currency - countries such as India have a much greater potential to gain from such a revaluation. On the other hand, I see very little sense at this stage of China's development for Beijing to maintain a very low value of its currency and accumulate large quantities of reserves. Paradoxically, presidents Obama and Hu should have been arguing each other's position on these economic issues.
The author is an Economics Nobel laureate (1992) and professor of economics and sociology at Chicago University.
By Gary S. Becker
China Daily, February 24, 2010
US President Barack Obama has apparently complained to President Hu Jintao about the yuan's low value and urged him to revaluate it substantially.
Two of the most important and closely related economic issues today are the value of the yuan and the huge assets accumulated by China, mainly in the form of United States Treasury bills and other US government assets.
China's central bank had the yuan's value fixed at a little over 8 per US dollar during the 1990s and until 2005. It then allowed the yuan to rise gradually to less than 7 a dollar until 2008, when it again fixed the rate of exchange at about 6.9 yuan per dollar. This exchange rate is considerably above a free market rate that would be determined in a regime of flexible exchange rates. So there is no doubt that China is intentionally holding the value of its currency below the rate that would equate supply and demand.
The value of the greenback has fallen substantially against other currencies since May 2009. Since the yuan is tied to the dollar it's value, too, has declined in the same ratio: 16 percent against the euro, 34 percent against the Australian dollar, 25 percent against the Korean won, and 10 percent against the Japanese yen. This substantial devaluation of the yuan has made many countries angry with China's policy of pegging it to the US dollar.
The US and other countries are worried that the undervaluation of the yuan increases the demand for Chinese exports and reduces China's demand for imports from countries like the US because China keeps the dollar and the currencies of other countries artificially expensive compared to its currency.
The US and other countries hope that greater demand from China for their exports, resulting from a higher value of the yuan, will help them resume sizable economic growth as they recover from severe recession. Their governments especially want to reduce the high levels of unemployment.
Indeed, in good part due to the low value of its currency, China has run substantial surpluses in its current trade account because it imports fewer goods and services than it exports. As a result, it has accumulated enormous reserves of assets in foreign currencies, especially US government assets denominated in dollars. At the end of last year, China had an incredible more than $2 trillion in foreign currency reserves, which included US Treasury bills. This is by far the largest reserve in the world and its ratio to China's GDP is huge: a quarter of about $8 trillion (purchasing power parity adjusted).
I doubt the wisdom of the US for complaining against China's currency policy and of China for its response. On the whole, I believe most Americans benefit rather than being hurt by China's long-standing policy of keeping the yuan at an artificially low exchange value. The policy makes the goods imported from China, such as clothes, furniture and small electronic devices, much cheaper than they would have been if China revaluated its currency substantially. The main beneficiaries of China's current policy are poor and lower middle class Americans and people in other countries who buy made-in-China goods at remarkably cheap prices in stores such as Wal-Mart that cater to cost-conscious families.
US companies that would like to export more to China have indeed been hurt by China's currency policy. They employ fewer people than their capacity and thus contribute to the high rate of unemployment in the US. But I believe the benefits to American consumers far outweigh any losses in jobs, especially because the US economy continues its recovery.
Since the opposite effects hold for China, I cannot justify the country's policies from the viewpoint of its interests. Its consumers and importers are hurt because the government has kept the cost of foreign goods artificially high for them. Their exporters gain, but as in the US, that gain is likely to be considerably smaller than the negative effects on the well-being of the average Chinese family.
I have reached a similar conclusion on China's excessive reserves. The US has little to complain if China wants to hold such high levels of low interest-bearing US government assets in exchange for selling inexpensive goods to the US and other countries. China's willingness to save so much reduces the need for the Americans and others to save more. But are not differences in savings rates part of the specialization that global markets encourage? It is difficult to understand why China is doing this because it is giving away goods made with hard work and capital for paper assets that carry little returns.
One common answer is that China hopes to increase its influence over international economic and geo-political policies by holding so many foreign assets. Yet it seems to me just the opposite is true - that China's huge levels of foreign assets put it more at the mercy of American and other countries' policies. China can threaten to sell large numbers of the US Treasury bills and other US assets it holds, but what will it buy instead? Presumably, it would buy European Union or Japanese government bills and bonds. That will put a little upward pressure on the interest rates of other governments. But to a considerable extent, the main effect in our integrated world capital market is that sellers to China of euro and yen-denominated assets would then hold the US Treasuries sold by China.
On the other hand, the US can threaten to inflate some of the real value of its dollar-denominated assets - not an empty threat because of the large US government fiscal deficits and the sizable growth in US bank excess reserves. Inflation would lower the exchange value of the dollar, and also of the yuan as long as China keeps it tied to the greenback. That would further increase the current account surpluses of China, and thereby induce it to hold more US and other foreign assets, which is not a very attractive scenario for Beijing.
So my conclusion is that the US in its own interest should not urge China to revaluate its currency - countries such as India have a much greater potential to gain from such a revaluation. On the other hand, I see very little sense at this stage of China's development for Beijing to maintain a very low value of its currency and accumulate large quantities of reserves. Paradoxically, presidents Obama and Hu should have been arguing each other's position on these economic issues.
The author is an Economics Nobel laureate (1992) and professor of economics and sociology at Chicago University.
Wednesday, March 17, 2010
348) US raises Europe to exchange complaint
Will China Listen?
Editorial New York Times
March 17, 2010
The drumbeat of complaints in Washington about China’s manipulation of its currency — and the deafening silence pretty much everywhere else — might lead one to think that this is just an American problem. It isn’t.
China’s decision to base its economic growth on exporting deliberately undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.
After treading lightly on the subject of China, President Obama vowed last month to “get much tougher” about China’s cheap currency. On Monday, 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner, demanding that the Obama administration designate China as a currency manipulator in a report due to Congress next month. On Tuesday, a bipartisan group of senators introduced a bill aimed to force the administration’s hand. This would ease the way to imposing retaliatory trade barriers against Chinese goods.
So far, China has been defiant. On Sunday, after the close of the annual National People’s Congress, Prime Minister Wen Jiabao rejected American complaints as “a kind of trade protectionism” and made clear that he had no plan to do anything differently.
Since 2003, China’s central bank has been purchasing huge amounts of dollars to keep the value of its currency, the renminbi, artificially low against the dollar. China backed away somewhat in 2005, allowing its currency to appreciate slowly from 8.25 renminbi to the dollar to about 6.83 renminbi by 2008. As the global recession hit, China slammed on the brakes in order to protect its exports. The renminbi has remained at about 6.83 since then, and the pain has been felt in countries as far apart as Mexico and India.
Beijing’s intervention is a textbook example of the beggar-thy-neighbor competitive devaluation forbidden by the International Monetary Fund’s charter.
The challenge now is how to persuade China to at least moderate its strategy without unleashing something even more destructive. As the decibel level has risen in Washington, Chinese officials have implicitly warned that they could retaliate by dumping Treasury bills from their central bank’s $2.4 trillion cache.
This would be risky for both countries. The move would weaken the dollar and lessen the value of China’s holdings. The United States might weather a sell-off or even benefit from the drop in the dollar’s value, but any precipitous move could further disrupt the skittish financial markets. And Beijing has other potential weapons, like tariffs and quotas. There is no guarantee of rationality in these showdowns. The fallout from a trade war would be felt around the world.
It makes a lot more sense to address the problem in a multilateral setting, where China couldn’t portray itself as a weak, righteous fighter holding out against arbitrary American power. Retaliation, or even the threat, would carry more legitimacy if it were part of a multilateral agreement and done on a world stage.
One way would be to press the I.M.F. to officially pronounce on whether China is breaking the rules and manipulating its exchange rate. That is part of the fund’s job, though it has preferred not to pick the fight. China would find it far harder to reject an I.M.F. determination than any American criticism. It could open the door for other aggrieved trading nations to eventually seek legal redress at the World Trade Organization.
Even before that, it would help if some other countries — certainly those in the European Union, but perhaps aspiring players including India and South Korea — started publicly making the case that the cheap renminbi is hurting them, too.
The world’s battered economy is certainly in no shape to keep absorbing China’s exports, subsidized through a cheap currency policy. The more countries that say this, the more likely Beijing will consider changing course — and the less likely this disagreement will escalate into a fight that no one can win.
Editorial New York Times
March 17, 2010
The drumbeat of complaints in Washington about China’s manipulation of its currency — and the deafening silence pretty much everywhere else — might lead one to think that this is just an American problem. It isn’t.
China’s decision to base its economic growth on exporting deliberately undervalued goods is threatening economies around the world. It is fueling huge trade deficits in the United States and Europe. Even worse, it is crowding out exports from other developing countries, threatening their hopes of recovery.
After treading lightly on the subject of China, President Obama vowed last month to “get much tougher” about China’s cheap currency. On Monday, 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner, demanding that the Obama administration designate China as a currency manipulator in a report due to Congress next month. On Tuesday, a bipartisan group of senators introduced a bill aimed to force the administration’s hand. This would ease the way to imposing retaliatory trade barriers against Chinese goods.
So far, China has been defiant. On Sunday, after the close of the annual National People’s Congress, Prime Minister Wen Jiabao rejected American complaints as “a kind of trade protectionism” and made clear that he had no plan to do anything differently.
Since 2003, China’s central bank has been purchasing huge amounts of dollars to keep the value of its currency, the renminbi, artificially low against the dollar. China backed away somewhat in 2005, allowing its currency to appreciate slowly from 8.25 renminbi to the dollar to about 6.83 renminbi by 2008. As the global recession hit, China slammed on the brakes in order to protect its exports. The renminbi has remained at about 6.83 since then, and the pain has been felt in countries as far apart as Mexico and India.
Beijing’s intervention is a textbook example of the beggar-thy-neighbor competitive devaluation forbidden by the International Monetary Fund’s charter.
The challenge now is how to persuade China to at least moderate its strategy without unleashing something even more destructive. As the decibel level has risen in Washington, Chinese officials have implicitly warned that they could retaliate by dumping Treasury bills from their central bank’s $2.4 trillion cache.
This would be risky for both countries. The move would weaken the dollar and lessen the value of China’s holdings. The United States might weather a sell-off or even benefit from the drop in the dollar’s value, but any precipitous move could further disrupt the skittish financial markets. And Beijing has other potential weapons, like tariffs and quotas. There is no guarantee of rationality in these showdowns. The fallout from a trade war would be felt around the world.
It makes a lot more sense to address the problem in a multilateral setting, where China couldn’t portray itself as a weak, righteous fighter holding out against arbitrary American power. Retaliation, or even the threat, would carry more legitimacy if it were part of a multilateral agreement and done on a world stage.
One way would be to press the I.M.F. to officially pronounce on whether China is breaking the rules and manipulating its exchange rate. That is part of the fund’s job, though it has preferred not to pick the fight. China would find it far harder to reject an I.M.F. determination than any American criticism. It could open the door for other aggrieved trading nations to eventually seek legal redress at the World Trade Organization.
Even before that, it would help if some other countries — certainly those in the European Union, but perhaps aspiring players including India and South Korea — started publicly making the case that the cheap renminbi is hurting them, too.
The world’s battered economy is certainly in no shape to keep absorbing China’s exports, subsidized through a cheap currency policy. The more countries that say this, the more likely Beijing will consider changing course — and the less likely this disagreement will escalate into a fight that no one can win.
Monday, March 15, 2010
341) China's trade and exchange policies - New York Times
China Uses Rules on Global Trade to Its Advantage
By KEITH BRADSHER
The New York Times, March 14, 2010
HONG KONG — With China’s exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is skillfully using inconsistencies in international trade rules to spur its own economy at the expense of others, including the United States.
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”
To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.
In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.
China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.
“Many of us would like to see the W.T.O.-style commitments — with people’s feet being held to the fire — at other international agencies, like the I.M.F.,” said Jagdish Bhagwati, a Columbia University economist.
Western countries hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the renminbi artificially low.
An undervalued currency keeps a country’s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.
Last September, President Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China’s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China’s attitudes about its economic policies.
If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce “a more market-oriented exchange rate.” China’s defiant response keeps the administration in a difficult position.
China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt. But the Treasury also faces an April 15 deadline for whether or not to list China as a country that manipulates the value of its currency.
If China is listed, that could embolden members of Congress who are already discussing whether to seek restrictions on Chinese exports to the United States. China would certainly criticize such retaliation as protectionism, leading to a broader deterioration in already strained bilateral relations.
China is starting to describe its currency interventions as stimulus. But unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China.
Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the W.T.O. and the I.M.F., to reduce the risk of another Great Depression.
Unlike its predecessor, which had weak arbitration panels whose rulings could be easily blocked by the losing country, the trade organization has had powerful tribunals since 1995. These tribunals can clear the way for the imposition of sanctions running into the billions of dollars.
Filing a case against another country is the heaviest artillery available to countries in trade disputes. But it also is expensive. Preparing a case and pushing it through a tribunal can easily require millions of dollars in legal expenses, and low-income countries seldom file them.
China joined the W.T.O. in 2001 and in its first seven years filed only three cases. But it has stepped up its pace recently, and has filed four of the 15 cases in the last year: two against the United States, on poultry and tires, and two against the European Union, on steel fasteners and poultry.
The monetary fund has not acquired similar powers to the trade organization.
I.M.F. policies call for it to disclose documents and information on a timely basis, with the deletion only of market-moving information. But under the rules a member country may decide to withhold a report, an organization official said.
China allowed the release of its reports until the monetary fund’s executive board decided in June 2007 that reports should pay more attention to currency policies. China has quietly blocked release of reports on its policies ever since, without providing its specific reasons to the I.M.F.
A person who has seen copies of the most recent report last summer said that the monetary fund staff concluded the renminbi was “substantially undervalued.”
The monetary fund regards a currency as substantially undervalued if it is more than 20 percent below its fair market value.
More than four-fifths of the I.M.F.’s members allow publication of the agency’s annual staff reports on their economies. Countries blocking release are mostly tightly controlled places like Myanmar, Sudan, Turkmenistan and Saudi Arabia, although Brazil has also not released its reports.
China’s central bank did not respond to calls and messages seeking comment.
The main indicator of a country’s intervention in currency markets is its level of foreign reserves. China halted the gradual appreciation of the renminbi against the dollar in July 2008; from June 30, 2008, through Dec. 31 of last year, China’s foreign exchange reserves rose by $590 billion. A small part of the increase reflected interest on bonds, the appreciation of stocks and currency fluctuations.
By KEITH BRADSHER
The New York Times, March 14, 2010
HONG KONG — With China’s exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is skillfully using inconsistencies in international trade rules to spur its own economy at the expense of others, including the United States.
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”
To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.
In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.
China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.
“Many of us would like to see the W.T.O.-style commitments — with people’s feet being held to the fire — at other international agencies, like the I.M.F.,” said Jagdish Bhagwati, a Columbia University economist.
Western countries hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the renminbi artificially low.
An undervalued currency keeps a country’s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.
Last September, President Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China’s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China’s attitudes about its economic policies.
If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce “a more market-oriented exchange rate.” China’s defiant response keeps the administration in a difficult position.
China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt. But the Treasury also faces an April 15 deadline for whether or not to list China as a country that manipulates the value of its currency.
If China is listed, that could embolden members of Congress who are already discussing whether to seek restrictions on Chinese exports to the United States. China would certainly criticize such retaliation as protectionism, leading to a broader deterioration in already strained bilateral relations.
China is starting to describe its currency interventions as stimulus. But unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China.
Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the W.T.O. and the I.M.F., to reduce the risk of another Great Depression.
Unlike its predecessor, which had weak arbitration panels whose rulings could be easily blocked by the losing country, the trade organization has had powerful tribunals since 1995. These tribunals can clear the way for the imposition of sanctions running into the billions of dollars.
Filing a case against another country is the heaviest artillery available to countries in trade disputes. But it also is expensive. Preparing a case and pushing it through a tribunal can easily require millions of dollars in legal expenses, and low-income countries seldom file them.
China joined the W.T.O. in 2001 and in its first seven years filed only three cases. But it has stepped up its pace recently, and has filed four of the 15 cases in the last year: two against the United States, on poultry and tires, and two against the European Union, on steel fasteners and poultry.
The monetary fund has not acquired similar powers to the trade organization.
I.M.F. policies call for it to disclose documents and information on a timely basis, with the deletion only of market-moving information. But under the rules a member country may decide to withhold a report, an organization official said.
China allowed the release of its reports until the monetary fund’s executive board decided in June 2007 that reports should pay more attention to currency policies. China has quietly blocked release of reports on its policies ever since, without providing its specific reasons to the I.M.F.
A person who has seen copies of the most recent report last summer said that the monetary fund staff concluded the renminbi was “substantially undervalued.”
The monetary fund regards a currency as substantially undervalued if it is more than 20 percent below its fair market value.
More than four-fifths of the I.M.F.’s members allow publication of the agency’s annual staff reports on their economies. Countries blocking release are mostly tightly controlled places like Myanmar, Sudan, Turkmenistan and Saudi Arabia, although Brazil has also not released its reports.
China’s central bank did not respond to calls and messages seeking comment.
The main indicator of a country’s intervention in currency markets is its level of foreign reserves. China halted the gradual appreciation of the renminbi against the dollar in July 2008; from June 30, 2008, through Dec. 31 of last year, China’s foreign exchange reserves rose by $590 billion. A small part of the increase reflected interest on bonds, the appreciation of stocks and currency fluctuations.
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