sharpe_mind

China's Devastating Earthquake: Bad For Monetary Policy, Too

Not only does it complicate things, but from the bureacratic point of view it's likely to make the policy stance even more accomodative, and less likely to act.

China: Caught in a Monetary Trap

Mr. Pettis, this is a rather small point, but it seems to me that you could have the SWF invest in China- it would have to be for a project that uses primarily imported parts or labor though- such as buying oil (of which there is already speculation), stocking up Boeing airplanes or outsourcing the construction of a nuclear power plant to GE, etc.

In effect this would be like increasing China's consumption metrics, by the state instead of the private sector.

Why China's Exporters Are Complaining Loudly

One other thing to mention about the recent noise made by China's exporters- it has all been from the very low end (textiles and toy producers) and all been in the Guangdong area. Considering that Shenzhen, just north of Hong Kong, was the very first Special Economic Zone (SEZ), and has been tremendously successful, it makes perfect sense that it should be the first one where wages rise to the point where the very low end is priced out (as higher value exports open up and take over). My suspicion is that part of the recent fervour has been Shenzhen's proximity to the Hong Kong press (which means the press has easy access to those complaining as well as a wide forum for airing their complaints), as well as the fact that many of the early established lower value added factories in Shenzhen are owned by Hong Kongers.

I'm in complete agreement with Mr. Pettis- the interior is picking up the lower end exports as the coast/south moves up the value chain. For example, China is starting to come up in heavier industry and capital goods, such as shipbuilding and autos, and the tertiary industry is growing strongly. Even so, exporter complaints may be beside the point and exactly what is needed. At this level of inflation, there _needs_ to be pain somewhere to bring inflation lower. If anything China has wanted to have its cake and eat it too. The very best thing for China would be pain concentrated in the export sector, as opposed to pain spread throughout the entire economy.

Why China's Exporters Are Complaining Loudly

bill stenner- the Euro is so overvalued precisely because the RMB is so undervalued. China is forced to buy so many dollars because it keeps RMB undervalued, but it doesn't want to hold all its currency reserves in USD, so it buys enormous quantities of EUR every day. The reason EUR has been able to raise to what by any valuation indicator are ridiculous levels is because it is the best alternative to the USD for the reserves of Asian and Middle Eastern central banks. In fact the same goes for pretty much every flexible currency that doesn't face massive intervention, including GBP, CAD, AUD....the one exception being JPY, which nonetheless has been rising signficantly lately.

continuum, trade balances aren't the only factor one can use to explain a currency's value. Numerous other factors are important, including relative interest rates and structural savings/investment vs consumption levels. But the bottom line is that if the PBOC stopped buying USD tomorrow, CNY would rise tremendously. It would take a serious appreciation before China's private sector started sending its money abroad, as the lackluster reception of QDII and the small outward FDI show. Besides you probably need that very large appreciation to occur in the first place before corporate China would feel like sending money aboard was even worth fighting the CNY's continual appreciation.

paultaut- I agree 100%. Just look at the stock price of WMT, which accounts for an astounding 30% of foreign purchases in China and 10% of all US imports from China: ipezone.blogspot.com/2...

China's PMI Numbers Are Too Strong

openminded, I completely disagree. Though I can see where you picked up this argument- there have been those in China which have used the same argument to push for slower appreciation. Yet this is a complete misreading of the economic facts (as an aside, I believe it is either Wen Jiabao or Zhou Xiaochuan who has hinted at discounting this argument as China needs to "accurately read from historical lessons", or something to this effect). Firstly, the yen appreciated tremendously in the 1970s, and yet Japan continued to have some of the strongest growth in the world in the 70s and 80s. USD had two episodes of strong appreciation in the first half of the 80s and second half of the 90s, neither of which led to prolonged economic slump. And even if we focus specifically on the period in question, starting with the Plaza Accords in 1985, the Deutchemark appreciated significantly along with the yen, but Germany avoided the decade long slump of Japan. Even its slower growth in the 90s is much more attributable to the costs of integrating East Germany.

No, the currency is ancillary to Japan's problems in the 90s. They stem from too lax monetary policy in the late 80s, and then a series of blunders in the 90s including too tight monetary policy (as evidence by the continued strong appreciation of the yen after the Louvre accord). In addition, Japan began suffering as their exports were cut into by the rising Asian tigers, and behind them China.

In the case of China, there really is no other China to threaten Chinese exports. No other places have the one-stop shop quality and the infrastructure. Vietnam and Cambodia are far too small, India has far too much red tape, poor infrastructure, and is much more union-friendly, and Africa continues to be a basket case. Latin America and Russia are far too expensive. The era of disinflationary prices of imports from the developing world is over.