It looks like the Third Sino-US Strategic Economic Dialogue isn’t turning out to be much fun, although I think it is good for both sides to put their problems squarely on the table.Chen Deming, China’s Vice Minister of Commerce, formerly Vice Chairman of the NDRC and expected to become Minister of Commerce in March, is by all accounts opposed to rapid RMB appreciation.In his comments he argued that rather than focusing on excessive weakness in the RMB the US should be trying to do more about excessive weakness in the US dollar. At one point he said, according the South China Morning Post, "What I am worrying about now is the weakening dollar and its potential impact on global growth. The dollar is the major currency for trade, and its continuous depreciation will push up prices of oil and gold and reduce the wealth of dollar-holding nations. So I want to see a strong dollar.”
This is a little disingenuous, I think. The dollar is not weak across the board. It is weak only against the euro and those currencies (and commodities) whose prices are allowed to float, and in those cases it is weak most probably because Japan, China, and other parts of the world especially in Asia intervene heavily to keep their currencies weak against the dollar. As a consequence, the floating currencies have to take the full brunt of the adjustment needed to reduce the US trade deficit.If there were less intervention to keep the dollar strong against local Asian currencies, I think we would quickly see a reversal of dollar weakness against the euro and other floating currencies.I am not sure if Chen Deming doesn’t understand that or if his comments are simply meant to be part of the bickering, but it seems to me that when PBoC governor Zhou Xiaochuan talks about the weak dollar, he seems more careful and perhaps more aware of the role of the RMB in dollar “weakness”.
Chen also argued – rather tiredly, by now – that the US trade deficit with China benefits the US because it allows US consumers to purchase cheap goods. The fact that I mostly agree with him – I think the current US-China trade relationship is better for the US than for China, although mostly because it is bad for China – doesn’t keep me from finding this argument a little annoying.If he really believes this, what would happen if the US delegation were simply to thank China for its generosity and then demand that China raise the value of the RMB substantially so that the US could repay China by selling China very cheap goods? I am sure that he and most Chinese would reject the equivalent US generosity with horror.
Hank Paulson continued arguing for a more flexible exchange rate policy. I am not sure what he means by this but I don’t think “flexibility” is in the best interests of China for the time being.On the contrary, I think China should continue to keep its currency pegged, but at a much higher rate so that it can regain some control over its jet-fueled domestic monetary policy.Given how weak and undeveloped the country’s financial system is, China needs much longer before the country can absorb too much flexibility in the exchange rate, and to allow the currency to float freely any time in the near future would be extremely painful for the economy.Better to revalue and peg.
For all the bickering, the US needs to resist calls for protectionism at home, and I am pretty embarrassed by some of the comments from the presidential candidates – I hope these are mostly for public consumption and do not represent real policy positions. I know there is disagreement on this front – for example my friend Brad Setser takes a much less benign view than I do about the domestic employment effects of the US trade deficit – but I don’t think the current trade imbalance is harmful for the US and it may even be necessary in the medium term as Europe, Japan, Russia and, most worryingly, China, are forced to pay for the very ugly demographic adjustments they will need to make in the coming decades.
For China the value of the RMB is part of a very complex set of policy changes that can have serious economic (and political) repercussions, and there is clearly a great deal of worry in Beijing.I think they are making a big mistake on the RMB issue, largely because gradualism has become a new ideology in China and it will take a real disaster to break with it, but the problems the Chinese are wrestling with are substantial.The US really needs to be more patient.
By the way, as I have said many times, China is increasingly likely to face a very uncomfortable adjustment to its domestic monetary policy (or lack thereof), and if this were to happen after a forced appreciation of the RMB, it is an almost dead certainty that the US will be blamed and that there will be a revival of very ugly nationalism in China. A little forbearance from the US and less silliness from domestic politicos would not be a bad thing.China’s RMB policy is definitely very harmful – but mostly for China.For the US it really does mean that Americans get cheap stuff, much of which isn’t, or shouldn’t be, made in the US, from doubly underpaid Chinese.
I am sure that there are billions of dollars of goods that China wants to buy but US won't sell, such as high tech stuff, which US has comparative advantage. Too bad that there is no opportunity that let China appreciate US generosity.
By fatbrick - 12/12/2007 10:01 PM
Prof. Pettis,
Is there any kind of systematized aggregation for Chinese "gray market" interest rates?
The weak US dollar is a direct result of trying to fight a major war while cutting taxes.
Paulson's big agenda is have China open its capital account so that all of that Chinese wealth that is being generated can flow through Wall Street. A maxi-reval and then a peg wouldn't help him get what he wants, but the QDII program with or without a reval does.
Also protectionism bothers me less than it does most people. The fact is that the US and Chinese economies are so interlinked that general protectionist barriers are simply not politically feasible, and this is why people who are against protectionism are rather quiet. It also helps that protectionism is not a "China-focused" issue. With the one exception of textiles, if the US puts trade sanctions on China, all that means is that the factories will end up in Mexico.
Protectionism at this point merely buys off small noisy groups of people, and if tariffs on textiles keeps people in North Carolina from thinking about China, then that's a good deal.
I'm actually worried more about the United States than China. At least in China, I get the sense that people are seriously thinking and debating the issues. I don't get that sense about the United States. The two people that really scare me are Lou Dobbs and Tom Tancredo.
They have a coherent "blame China, immigrants, and multi-national corporations" ideology and if something really bad happens to the US economy, then you'll also see some rather ugly nationalism here too. The thing about them is that I can see why people find his rhetoric and ideas attractive, and he really has this unique combination of ideas that I think will be increasingly important in the political debate in the United States especially if the economy goes bad. I'm not worried about the 2008 presidental elections. It's 2012 and 2016 that worry me.
Twofish, Tom Tancredo has precisely zero power, and Lou Dobbs doesn't have much more.
The weak US dollar has virtually nothing to do with waging "major war while cutting taxes." Even after you account for supplemental spending, the US deficit as a percentage of GDP has been lower than the eurozone core. The real issue is that as American fiscal prospects have clouded, the Bush Admin. has enjoyed substantially lower interest payments as a percentage of GDP because foreign demand for US capital has soared. Most of that demand originated in Beijing, Riyadh and Abu Dhabi. Washington's profligacy (and lack of expected consequences) is a direct result of the 'savings glut' that has accumulated in the exporting powerhouses.
Paulson can't force China to do anything, everyone knows that. Westerners want China to revalue its currency because China's combination of exploding trade surpluses, exploding inflation, and a dramatically undervalued currency is *not sustainable.* The fact of the matter is that Chinese price indices, which are in part based upon government price caps, are less and less reflective of the escalating cost of living as Chinese turn to gray market means of capital, fuel and food.
Paulson's "big agenda" to get Chinese wealth to "flow through Wall Street" was accomplished before Paulson was running the Treasury Department, when Chinese investors bought Blackstone at the peak of the bubble and probably scarfed up a lot of garbage subprime mortgages.
The Chinese have learned too well from the 1997 crisis, and their $1.5trn USD is more than enough to crush any speculative "shark" who tries to attack China's currency peg. The only way the Chinese currency peg will be blown will be through currency speculation initiated by a capital pool of similar size (the Russians have shown themselves to be incredibly predictive in these matters) or through inflation-driven Chinese unrest.
Fatbrick, I have often heard it said that there would be a significant improvement in the trade relationship if China were allowed to buy the high-tech goods that the US won't sell it, but I think this is special pleading. I have never seen an accounting of all the stuff China would buy if it were allowed to, but excluding certain high-tech weapon systems I don't think it amounts to much more than a small fraction of the trade surplus.
EC, in the South there are apparently interest rate quotes in the newspapers, which suggests to me that these informal banks have some pretty powerful local supporters, but here in Beijing I don't know where I can get the information. I am asking around. One disagreement: China's huge reserves could help China fend off the "sharks" if speculative inflows were looking to force a depreciation, as in the Asian crisis of 1997, although I don't really buy the argument that speculators forced the collapse of the currencies -- most sellers of local currencies were local corporations with seriously mismatched balance sheets desperate to hedge their dollar debt. Large reserves are actually a disadvantage when the authorities are trying to hold the currency down, as they are in China.
I am actually a little less pessimistic than you are about the level of debate in the US, Twofish. The US suffers from the "disadvantage" that any fool can get up and say what's on his mind, so you hear a lot of nonsense from influential figures, but there is a very sophisticated discussion going on in DC and NY. Here in China you don’t hear as much idiocy from the provincial figures, but except for within a narrow circle, I think the level of debate is driven more by fear of a political miscalculation than by a real understanding of the issues, and a blinkered and at times ugly nationalism is as much a problem here as it is in the US -- except that it is not given much room for public expression. I do worry about protectionism and nationalist idiocy from both countries.
By Michael Pettis - 12/13/2007 5:44 PM
Cartman: Tom Tancredo has precisely zero power, and Lou Dobbs doesn't have much more.
They are on the semi-lunatic fringe, and I'd like to keep things that way. If the US economy blows up, then they'll start becoming mainstream. You need to keep an eye on the people on the fringe because they are the people with the new ideas. I remember in 2000, I had a discussion with someone who knew Paul Wolfowitz. His opinion was that Wolfowitz was a smart guy, but he had this bizarre and crazy obsession about invading Iraq, which of course was totally implausible.
Cartman: Even after you account for supplemental spending, the US deficit as a percentage of GDP has been lower than the eurozone core.
I don't see why that is relevant. If the eurozone core had lower deficits, the equilibrium values would be different, and the Euro would be stronger. The relevant comparision is between the US-2000 with the US-2007.
Cartman: Westerners want China to revalue its currency because China's combination of exploding trade surpluses, exploding inflation, and a dramatically undervalued currency is *not sustainable.*
Different people want China to revalue for different reasons. I doubt that a senator from North Carolina cares if the Chinese economy blows up or not, as long as it doesn't affect his voters or chances for election. (It will, but that's another issue.) What should someone in North Carolina care about China? Or Peru? Or Zimbabwe? Why care about currency as oppose to rural unrest, the Chinese environment, or the Shanghai real estate bubble.
Wall Street and labor unions rarely agree on anything, but they both economically benefit from a revaluation. The fact that it fixes the Chinese economy is of secondary concern to them. I should note that there is a *lot* less American pressure for a reval, now that they both got what they want from China, and all of the major bills intended to pressure China over currency are now stalled.
One rule of thumb is that if you have a politician from North Carolina tells me that they are doing something mainly for the benefit of Shanghai or a politican from Shanghai who tells me that they are doing something mainly for the benefit of North Carolina, I just don't believe them.
Michael Pettis is a professor at Peking University's Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is a member of the board of directors of ABC-CA Fund Management Co., a Sino-French joint venture based in Shanghai.
Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt.
Pettis is a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He is the author of several books, including The Volatility Machine: Emerging Economies and the Threat of Financial Collapse (Oxford University Press, 2001). He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University.
Subscribe to this Site
Comments (6) for "Weak RMB? No! Weak dollar!"
- 12/13/2007 6:06 AM
January, 2008