James Lewis

Why Krugman Is Wrong About the Yuan

Yes Dixon,

Purchasing power of US consumers is taking a hit as credit is being withdrawn. However it US consumer purchasing power was at such highs this had to happen. After all a few years ago, people with very low monthly income had the ability to buy exceptionally expensive properties with no downpayment. In China if you have no money, you can eat with no problem but you can not buy things like high end computer goods, cars and certainly/certainly not property. You have people earning 1000USD/Month buying 600 000USD houses. Bloody rediculous.

This being said the USA will trade its way out of trouble, but by the time it does so. China would have cemented its power as number two.

Why Krugman Is Wrong About the Yuan

I like your work Shaun, I have great optimism like yourself for the consumer economy in China. I agree with a lot of your work.

I have to say however I do not agree with what you have stated in this article. The USD is not weak on any long-term relative basis, purachins power basis. If you look at long term currency charts you will see it is exactly in the middle of its range. Not expensive, not cheap. Not high, not low.

You also go to say that the market is taking the USD lower due to its structural imbalance. High trade deficits, budget deficits etc. This by your own definition means you understand that fundamentalyl the USD is stronger than it should be. The truth is the USD is overvalued because Asian countries are running large trade surpluses and buying the USD, this is artifical demand because the Asian currencies are weakening their currencies by buying the USD. This is the source of the problem as a lot of Asian currencies are not based on market pricing mechanism. We all know that the USD is maniuplated by the FED through polciy from time-time. But this is different from direct peg and guided price levels.

The point here that has been missed is that Obama is ok with the RMB-USD exchange rate. As long as it goes in the right direction. 4-5% revaluing per year is exactly what Obama wants. Anything more than that will create huge issues for US companies, inflation (important when you are creating new money through QE) and the funding mechanism for the US through selling Treasury Bonds. You have said this but missed that Obama is playing lip service to hide the fact that the Europeans are being forced to take the adjustment. The USD is falling against Euro, pegged to the Yuan means that Chinese goods in Euros are cheaper. And US goods are cheaper in Euros. The US and China share common goals in this respect, I would dare to say that both parties know this at the top level.

The US does have a lot to export to China but the exports are being blocked through protectionism. Import tariffs, lack of access to supply chains, no way in to distrubution networks, technology requirements that shut US companies out, subsidy loans, local laws that require joint ventures be set up (always bad for interntional partner). This is the true issue that Obama is focusiing on. The rmb is a red herring. It allows China to show it is not bowing down to US pressure, so Hu and Wen can keep face inside the Politburo and to the nation. It also gives them a little more room to allow some advantage to the US in China's rise.

Relations between the two countries are probably better than most people think. However there are very large risks, after all Hu and Wen do not hold all the power and there are a lot of right wing policitcans abd business leaders that want to see China hold all the cards in everyway. Hu knows that the best tactic is to concede some ground in negotiations, so's not to start a trade war with the US (its best customer). Being a surplus country starting trade wars with the main party who is a deficit country does not make sense. This has nothing to do with the China-US arguement, just pure economics.

The RMB is 15-20% undervalued due to the amount fo USD reserves it holds. The USD is overvalued, in part because one of its largest trading partners, China holds a peg.

Expect 5% revaluing on the Yuan per year for next three years.
Expect USD to go down a little lower, before making long term base. If this does not happen there will be serious trade wars and the US may retailate not by stamping duties of chinese imports but destroying the value of the dollar.

All very interesting

Three Myths About Business in China

I like you work Shaun, I am not sure how objective you are. Especially as you have pro-growth business. If you do not see opportunities, then you can not add value to your clients by offering your services.

However every chinese household in tier 1 cities has all the gadgets nd necessities that westerns have in the west as well as jewlery, cars. Most if not all eat out in restaurants, enjoy hobbies such as bowling and indulge by going out at night. If the Chinese manage to hold the price of property/stock market basically stable then we can expect consumption to continue increasing. It is too small currently and needs to increase if exports do not recover.

I am not sure we will see 50% of GDP being domestically generated through service industry in 5 years as asset price bubbles could inflate further or burst. Unless of course the economy is re-balanced. However a genuine 40%-45% is all that China needs if it is spread between enough people. Not juts the upper middle and upper class buying huge ticket items and asset speculation being counted in the figures.

Death Comes to Wal-Mart China

You have won me over Shaun, good article.

I do think that multinational companies have a hard time in China with management issues especially in places such as jiangxi. I would like to see multinational companies being more selective with employees as from what I can see in China. The employees working for big brands are all but destroying the brand in terms of areas as service, customer care.