China as Scapegoat, Again

Here's an excellent example of 'spin' deflecting what really should be the story of the moment - how other Asian economies have been given a free ride off the dollar's strength in the face of a global meltdown.

Instead, the focus on the article is how China continually pegs its currency against the dollar.

What I find interesting is that had China instead *devalued* their currency upwards of 20% like South Korea, Thailand, or Malaysia (justifiable given their own meltdown in exports), Congress would have gone bonkers. Unfortunately, instead of the focus on currency manipulation by other countries, or China spending its own reserves to stimulate its economy amid a weakening Asia, the focus is placed on China's dollar peg. Can anyone spell 'scapegoat'?

A comment posted on the article says it all:

This article is a model of incoherence. What are the Koreans complaining about? The chart in the article shows that the won continues to trade at a 20% depreciated level versus the renminbi. The won looks even weaker relative to regional manufacturing rivals like Japan and Taiwan. If anything, it should be the Chinese complaining about the Koreans. Perhaps South Korea can explain why it has bought $50 billion USD in the past 3 months to thwart gains in the won. Strange behavior for a country with the largest current account surplus it has had in a decade, and a surging export sector. Does the Korean language have an idiom for "the pot calling the kettle black"?

Comments

[Alphameister:]

Very enlightening article. Thank you.

Oct 26 12:01 PM

[goldbug101:]

Trashing USD is all the rage.

Right up until the next financial calamity that is.

Then we

Oct 26 12:48 PM

[mna:]

Thanks for the analysis and the chart. I agree, this is why you have to be real careful of media bias. The media's influence is subtle, but powerful. Before you know it, your objectivity suffers and you're no longer neutral. Neutral and fact-based analysis, I think, is the key to successful investing.

It's a China bashing party right now, because China phobia headlines sell. But to be objective, sometimes you have to take a step back and think from the other point of view.

Oct 26 03:25 PM

[Graham and ...:]

China is certainly not the culprit here.'

It's just a "scapegoat" for say, South Korea.

Oct 26 04:44 PM

[Ben Gee:]

China, unlike Japan, will NOT let the US influence its decission on economic matters. The US can cry all it want to, China will go on doing what has to be done, for itself as well as the developing world.

Oct 26 05:45 PM

[John Lounsbury:]

Ricard - - -

Nice analysis. One of the many things about which I need some perspective. Thanks.

Oct 26 05:48 PM

[Options Tra...:]

More of this kind of articles should hit the press.

Oct 27 01:20 AM

[Ricard:]

Thanks all for the positive feedback.

It amazes me at times how political the economic discourse between China and the US can get.

Oct 27 11:25 PM

[BrotherMaynard:]

first of all, a $2tr+ reserve build across any period of time shorter than a millenium should always ring a collective alarm bell. the aggregate demand that has been displaced by this black hole is scores larger than the other countries mentioned. when those other countries build reserves as large as china has, on both relative and absolute basis, then they should get chastised. but china is by no means a scapegoat with $2tr+. it takes a very deliberate effort to rack up that number and a very indifferent trading partner.

Oct 28 05:46 PM

[Ricard:]

Good comment.

I must disagree that the reserve is a black hole. It is saving, pure and simple, something we lack. Just because we burn our money rather than sock it away under the mattress does not mean that we are 'en-lightened,' pardon the pun.

I do agree that the methodology of how they acquired the saving was not based on a win/win scenario, and that other trading partners should be cautious of such a buildup at their expense. Whether or not it was preventable (win/win vs win/loss) is debatable - their expansion is reminiscent of America's ascension at the turn of the last century at Europe's expense.

Considering that the reserve is akin to 'potential energy,' to borrow from kinematics, it may yet become something extraordinary, if properly applied. That is the argument for the 21st century belonging to Asia.


On Oct 28 05:46 PM BrotherMaynard wrote:

> first of all, a $2tr+ reserve build across any period of time shorter
> than a millenium should always ring a collective alarm bell. the
> aggregate demand that has been displaced by this black hole is scores
> larger than the other countries mentioned. when those other countries
> build reserves as large as china has, on both relative and absolute
> basis, then they should get chastised. but china is by no means
> a scapegoat with $2tr+. it takes a very deliberate effort to rack
> up that number and a very indifferent trading partner.

Oct 28 11:07 PM

[BrotherMaynard:]

look, you're implying that there is some sort of "virtue" associated with saving and that consumption is a "vice."

The only vice in economics is disequilibrium and the only virtue is equilibrium. the more disequilibrium, the bigger the problem. chinese consumption as a % of GDP hit 30% with the recent gov't stimulus program...that is an all-time low for any country at any point in time. that is disequilibrium at an extreme...get your gaussian model out and assign a x-sigma to that event.

obviously, the US is at the opposite end of that balance. but to suggest that there is some sort of inherent benefit to infinite savings, falls in line with a socioeconomic heuristic that does little towards solving the current dilemma, and in fact, falls into the category of disinformation.

Oct 29 12:47 PM

[Ricard:]

1) According to the article, South Korea has twice the per-capita reserves than China, built in a similarly short amount of time.

2) Not sure where you're going with your arguments about equilibrium and bell curve analysis. I have not done a historical analysis of prior periods - I would be interested in seeing US consumption as a percentage of output at the turn of the last century compared to Europe at the same time. Do you have such analysis available?

3) I'm of the belief that 'we,' meaning the developed world, are subject to a severe case of reflexivity in which we all now believe in the maximization of consumption being a pure benefit. Supposedly this reaches a golden rule 'equilibrium' as far as economics is concerned...but let's face it, this is all theory. In the end, there's one point of equilibrium that most models leave out - zero supply and zero demand. It is possible we are headed in that direction.

Just because China's level of consumption may be several SDs off the rest of the world does not necessarily mean they are wrong. Something to think about there.

4) I never implied an inherent benefit to infinite savings. Everything is relative...some societies make do with less, some with more, and some with much more. I do believe that prioritizing consumption above other needs is neither healthy nor competitive behavior.


On Oct 29 12:47 PM BrotherMaynard wrote:

> look, you're implying that there is some sort of "virtue" associated
> with saving and that consumption is a "vice."
>
> The only vice in economics is disequilibrium and the only virtue
> is equilibrium. the more disequilibrium, the bigger the problem.
> chinese consumption as a % of GDP hit 30% with the recent gov't stimulus
> program...that is an all-time low for any country at any point in
> time. that is disequilibrium at an extreme...get your gaussian model
> out and assign a x-sigma to that event.
>
> obviously, the US is at the opposite end of that balance. but to
> suggest that there is some sort of inherent benefit to infinite savings,
> falls in line with a socioeconomic heuristic that does little towards
> solving the current dilemma, and in fact, falls into the category
> of disinformation.

Oct 29 05:32 PM

[BrotherMaynard:]

points well taken.

just to add:

feldstein in today's FT: www.ft.com/cms/s/0/fd4...

krugman in last weeks nyt: www.nytimes.com/2009/1...

Oct 30 01:10 AM

[Ricard:]

Thanks for the articles, both were interesting reads.

I posted a response that apparently didn't rub the SA editors the right way. I'll post here what I consider the most pertinent argument that blows the smoke and mirrors away from the dollar devaluation argument:

seekingalpha.com/autho...

Regarding the FT article, I take issue with this argument:

"The dollar must decline relative to other currencies to make US products more attractive to foreign buyers and to cause Americans to substitute US goods and services for imports. Without that incentive to increase exports and reduce imports, the rise in domestic spending will just lead to US economic weakness and rising unemployment. That is why the recent decline in the dollar relative to the euro, the yen and other currencies is a natural and desirable part of the process of reducing the US trade deficit and shrinking global imbalances."

If anything, the euro is the currency that currently needs to drop the most (and Japan's for the past 20 years), given the relative shape of their economies compared to ours in their relative time frames - luckily for us, we are an occupying power in Europe and Japan, and can force a dollar devaluation upon them. To think our military presence bears no influence on their economies is naive to say the least.

My point? No one is taking the high moral ground here. Blatantly selfish stances such as the one outlined in the FT article are hardly justifiable in the international arena, unless backed by force or some other form of persuasion. Are we willing to play this gambit?


On Oct 30 01:10 AM BrotherMaynard wrote:

> points well taken.
>
> just to add:
>
> feldstein in today's FT: www.ft.com/cms/s/0/fd4...
>
>
> krugman in last weeks nyt: www.nytimes.com/2009/1...;hp

Oct 30 07:15 PM