Michael Pettis

China: Can the RMB Be More Undervalued Today than It Was Last Year?

Sober Realist, in that light I do agree with your comments. For exmaple one of the problems we are seeing here of is that without a better system of enforcing concerns of ordinary households onto the government some of the necessary reforms, including for example liberalizing the banking system so that households aren't so heavily taxed via low deposit rates, are unlikely to happen as long as there are powerful consituencies that benefit from the existing sysytem.

As for your question, much of John Lee's information is (or was) publicly available. The data on the number of incidents of "mass unrest" for example, although probably understated, used to be released by one of the ministries annually until 2005, when the release was discontinued for reasons never explained.

China: Can the RMB Be More Undervalued Today than It Was Last Year?

Sober realist, of course I agree that China is not a democracy, and not even close, but when you argue that this is why China favors domestic producers over foreign, then I have to disagree. The US did the same thing in the early 1930s. I think there is much to criticize, but for the criticism to be effective it should also be fair.

China: Can the RMB Be More Undervalued Today than It Was Last Year?

Sober realist, although there are certainly grounds for criticism, I think your last statement is unfair. What China is doing today is not so different from what the US did in 1930-31. Like in most countries, domestic politcal considerations in China trump international obligations until the foreign response forces otherwise.

China: Can the RMB Be More Undervalued Today than It Was Last Year?

What drives the value of a currency is the balance of payments flows, so that China, with its massive trade surplus and very large capital account surplus should see its currency revalue, and would if the PBoC didn't counteract those flows by massive purchases of foreign assets. The only reason "strong" economies tend to see appreciating currencies (and they often don't) is that perceptions of strength often encourage investment inflows. In this case, China still has a massive balance of payments surplus, even if the economy is slowing (and by the way a slowing economy would still give it above average growth).

Why Do Chinese Save?

Cesar, of course people save for insurance purposes, and especially the poor, but that does not explain why some poor people save more than other equally poor people. If it were just insurance there would be a lot of countries that save more than China, whereas no large country, and perhaps no small country either, saves as much of its income as does China. There must be also be other reasons.

The Coming of a U.S. Savings Culture?

Tern, it is not clear that inflation necessarily discourages savings. During the last great period of US inflation, in the 1970s, US household savings exceeded their normal range of 6-10% of GDP to rise as high as 13% (I am quoting the numbers from memory, so please check before you use them elsewhere, but the magnitudes are more or less correct).

Unexpected inflation benefits borrowers, but expected inflation actually discourages borrowing in part because of high real rates and in part because high nominal interest rates have the impact of accelerating real payments on the debt, making cashflow more difficult to manage.

Is Governor Zhou a Closet Bernanke-ite?

Thanks Ma-lin, but I am not sure I agree with your historical observation – a fairly widespread one, it seems – that China has always run trade surpluses. I haven’t looked at Roman era trade and don’t have any feel for it, but the Ming and Qing trade, in which China largely exported silk, tea and porcelain and imported silver, at least until the early 19th century when opium replaced silver, has often been mistakenly compared to modern trade surpluses which are balanced by reserve accumulation, with silver taking the place of reserve accumulation. But besides being anachronistic – China of course did not have a central bank and did not try to accumulate reserves – this version of history may misrepresent Chinese needs at the time.

In the mid-Ming period China experienced a collapse of its money system. This resulted in and was exacerbated by silver hoarding, which became worse after Japan, China’s major source, cut off silver exports in response to declining silver stocks in Japan. Fortunately for China the Spanish colonization of the Americas resulted in massive silver discoveries in the 16th Century and was the main cause of burgeoning trade between China and Europe. China desperately needed silver to re-monetize its monetary system, for which it exported silk, tea, porcelain, and other goods, and European wanted those goods and were willing to exchange it for the suddenly plentiful silver.

In fact historians estimate that one-third of all American silver ended up in China. If China was simply passively accumulating silver as the clearing of its trade surplus, this would have been almost impossible – why would China give up so much real production for passively accumulating silver, and why did the monetary system strengthen rather than collapse? By the way the Qianglong’s “famous reply” probably had to do more with domestic court politics and factional infighting (between “openers” versus “closers”, a long Chinese tradition) than with any real description of trade needs.

By the end of the 18th century, with the drying up of silver from the Americas, the silver drain started to become a serious problem for Europeans, which is when the British hit on the idea of “balancing” trade by exporting Indian opium to China. In fact, contrary to what one would have expected if China merely passively accumulated silver, there is quite a lot of evidence that the Chinese emperor turned against opium imports not because of the deleterious effect on the Chinese people but rather because China’s growing economy and monetary system needed silver, and with the importation of opium the Chinese monetary system began experiencing the consequences of a too-tight monetary conditions.

I think we have to be careful about these kinds of arguments because we assume things are immutable that are not. Until the early 1990s everyone talked about how Asian trade surpluses were the consequence of culture and not monetary and trade policy, but in then until 1997 Asian trae accounts went wildly into deficit until the 1997 crisis scared policymakers into engineering trade-surplus policies. I think policies and economic conditions do matter to the trade account, at least as much as culture does.

As for your import duty proposals, this might have had the effect you say, but it probably would have violated the WTO and would have set a terrible precedent for a country that is eager to encourage free trade.

China's Graduates

JWG, ha ha actually I meant late 1970s

Talk of New Reserve Currency Will Probably Lead Nowhere

HaavBline, while everyone rails about the weakness of the dollar it has actually strengthened over the past six months. In fact we have seen the weird spectacle of Chinese worrying about future weakness in the dollar (which hurts their reserves) while complaining about current strength (which hurts exports). I don’t know what the dollar will do in the next ten years, but it isn’t obvious to me that it will decline against any other major currency.

TERN, a more important question is whether other countries would want to hold a significant portion of their reserves in RMB. Twenty years ago anyone with “brains” knew that Japan would be the world’s largest economy, and the yen the dominant reserve currency, by the end of the century. As a famous wag once said, predictions are difficult, especially about the future.

Talk of New Reserve Currency Will Probably Lead Nowhere

Aalan, China has been in a demographic sweet spot since the mid-1970s, when the one child policy caused a collapse in the number of young and, as a consequence, the dependency ratio improved dramatically (i.e. working population grew at more than twice the rate of overall population). So while China’s population has recently peaked out (and may even be shrinking) the working population nonetheless continues to grow.

This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.

Talk of New Reserve Currency Will Probably Lead Nowhere

Aalan, China has been in a demographic sweet spot since the mid-1970s, when the one child policy caused a collapse in the number of young and, as a consequence, the dependency ratio improved dramatically (i.e. working population grew at more than twice the rate of overall population). So while China’s population has recently peaked out (and may even be shrinking) the working population nonetheless continues to grow.

This process reverses itself, however, over the next five years, during which time we should see a sharp deterioration in the working population as the baby boom pre-1975 and the baby “bust” thereafter brings China the most rapidly aging population in history. They are sort of stuck because over the next 30-40 years a relaxation of the one-child policy will cause a much sharper deterioration in the dependency ratio for about 20-25 years before the positive impact finally kicks in. As for immigration, China is a net exporter of immigrants.

Premier Wen: China Is Ready to Significantly Expand Stimulus

HaavBline, the problem with that argument is that it assumes that manipulating the currency is the only form of trade policy. In fact although other countries have devalued (sometimes, as in the case of Vietnam, because of inflation, so that there has been no real depreciation), there are many ways to boost net exports artificially, including by national purchase requirments for state sector or state controlled buyers, low interest rates, suppressed wage increases, forced credit expansion, etc.

If you want to see whether or not China has been more agressive in its trade policy, you would probably want to check to see if China's exports have fallen less than those of other Asian countries (it has declined by much less) or whether its trade surplus has declined as quickly as other Asian countries (in fact its trade surplus has surged while others' have declined).

Other Asian countries are claiming that China has been very aggressive about forcing increasing amounts of overcapacity onto the world, thus causing them to bear more than 100% of the adjustment, and so they would not be sympathetic to the argument that China needs to devalue in order to protect it from predatory currency behavior among its competitors. That is why trade relations between China on one side and India, Indonesia and Malaysia on the other have gotten so bad. I suspect those bad feelings will spread.

Chinese Real Estate Is in the Headlines Again

A lot of these comments and questions are discussed, including by Jack, on my original site.

The U.S. Government: Frozen in the Headlights

Thanks for the comments. Yes, Dalmasian, it is often difficult to figure out the real numbers behind official numbers, but the National Bureau of Statistics seems really to be trying to get the numbers right and has made heroic efforts to do so, even though for lots of different reasons (including the speed of China's transformation) it is not always easy. Most of us who watch China closely try to combine official numbers with alternative statistics, gossip and anecdotal evidence. We don't always get it right.

Contrasting China Now to the U.S. in 1929

lbsterling, no. I mean that with total external liabilities of under $450 billion and reserve of over $2 trillion (if counted correctly) there is little chance that a run on the RMB can become self-fulfilling.

The hand, I think China has less monetary independnce than may of us suppose given its current currency regime. I don't want to suggest that there is nothing it can do, but my instinct is that their lack of control on the way up will be mirrored on the way down.

Amouna, for reasons I have discussed in other pieces the fear of whether or not China would support US fiscal expansion are groundless. It is hard to know if China can or should float the currency. After having waited too long they now face significant risks either way.