Rober Pozen, “Bashing Beijing Will Not Help Our Trade Deficit”

Bashing Beijing Will Not Help Our Trade Deficit, Wall Street Journal
August 20, 2010
Rober Pozen

Pressured by the U.S. and other countries, China announced in June that it would adopt a “flexible” exchange rate for the yuan. Yet to date there has been minimal appreciation against the dollar, so the pressure is back. Responding to reports on China’s rising trade surplus in July, Sen. Charles Schumer (D., N.Y.) said last week: “These numbers show just how little motive China has to end its currency manipulation.”

Many American politicians want the yuan to appreciate relative to the dollar in order to reduce the U.S. trade deficit—by making Chinese exports more expensive, and encouraging Chinese consumers to buy more imports. However, the value of the yuan is not the main driver of the U.S. trade deficit. The wages and social safety net of Chinese workers are more important.

Labor is the most significant component of most goods exported from China to the U.S. If wages go up in China, then the prices of its exports will rise—absent a proportional increase in labor productivity. Wages are direct costs of producing Chinese exports, which cannot be easily avoided by currency hedging.

The higher prices of exports from China should reduce the incentive of U.S. consumers to buy low-end goods from China like toys and clothing. While higher prices for Chinese exports will also increase the prices of consumer goods in the U.S., a little price inflation would be a welcome antidote to the dangers of potential deflation in the U.S.

And if wages rise in China, its workers would have more money to spend. Admittedly, Chinese workers are big savers, not spenders, because of the weak social safety net there. Ironically, in the People’s Republic of China, most Chinese workers must rely mainly on their own resources to pay for health care and retirement. Nevertheless, higher wages have been closely correlated with higher private consumption in China, according to the World Bank.

Between 1993 and 1995, for example, wages rose to 54% of GDP from 50% as private consumption rose to 49% from 47% of GDP. Conversely, between 1999 and 2006, wages declined to 40% from 52% of GDP as private consumption dropped to 37% from 47% of GDP.

Over the last two months, the average minimum wage in China has increased by an average of 20% in at least 18 provinces, including Beijing and Shenzhen. These increases in minimum wages reflect the smoldering labor disputes at many Chinese plants. For instance, striking workers at the Honda plants in southern China recently accepted wage increases of 24% to end their strikes. As higher wages are reflected in higher prices of Chinese-made goods, fewer of these goods will be purchased by consumers in America and Europe.

By contrast, the value of the yuan is not closely correlated with the size of the U.S. trade deficit with China. Although the relative value of the yuan to the dollar rose by 20% between 2005 and 2008, the U.S. trade deficit with China climbed to a record $268 billion in 2008, from $202 billion in 2005. There are several reasons for this disconnect between currency values and trade deficits.

First, many exports from China to the U.S. are only assembled in China; as with Apple’s iPod, most of the components are made elsewhere. Since the Chinese input constitutes no more than 10% of such exports, even a 20% appreciation in the yuan would at most increase the prices of these exports by 2%.

Second, the appreciation of the yuan relative to the U.S. dollar may cause China to lose low-end exports to countries like Bangladesh and Vietnam—thus leading to job losses and lower imports by Chinese workers. However, such a shift in low-end exports from China to other countries will not reduce the overall volume of exports to the U.S., just the country of origin.

Third, the volume of U.S. exports to China is primarily influenced by competition with countries such as Germany and Japan on high-end capital goods like supercomputers and jet engines. The critical determinant in this high-end competition is not so much the value of the yuan, but more the value of the dollar relative to the euro and yen.

In short, American politicians should not push so hard for yuan appreciation—which has, by provoking resistance in China, been counterproductive. Instead, they should support higher wages and a stronger safety net for Chinese workers. These measures would not only help reduce the U.S. trade deficit but also would be consistent with recent efforts of China’s officials to improve the living standard of its workers.

Mr. Pozen is chairman emeritus of MFS Investment Management and a senior lecturer at Harvard Business School.

http://online.wsj.com/article/SB10001424052748704023404575429843465266202.html

“Exporters Optimistic Over Move on Currency,” New York Times

Exporters Optimistic Over Move on Currency, New York Times
By Steven Greenhouse and Stephanie Clifford
Published: June 21, 2010

Embracing China’s decision to let its currency move more freely, American businesses said on Monday that the move would make it easier to compete against Chinese companies and would help reduce the United States trade deficit.

They cautioned, though, that the rise in the currency, the renminbi, is expected to be gradual, even if many American economists say it is 20 to 40 percent undervalued.

SGI, a California company that makes servers and data storage equipment, looks forward to extra business.

“It’s a real opportunity for SGI and other American companies to expand sales to China,” said Mark Barrenechea, the chief executive. “Although this will increase some costs for American businesses that source in China, it also means that Chinese businesses can more readily afford American exports.”

Trade experts said the winners would be American companies like General Electric and Caterpillar that export to China, while companies like Wal-Mart and Target that rely on China as a low-cost export platform may be squeezed by rising costs.

In fact, costs have already been rising this year because of demands for higher wages among Chinese workers, who are balking at the coastal jobs once coveted as a way out of rural poverty.

Even though Caterpillar has tractor-making factories in China to serve the local market, the company was quick to praise the country’s decision, struck just days ahead of a crucial Group of 20 meeting of nations. That is because along with what it produces there, Caterpillar sells China some of its most sophisticated, and therefore expensive, American-made equipment, including giant bulldozers, large mining trucks and gas turbines.

“Presumably, a stronger currency will increase their buying power, and if their economy remains strong, that will inevitably lead to more exports,” said Jim Dugan, a Caterpillar spokesman.

As China’s goods become more expensive, goods produced in the West will become relatively more attractive, not just in China but around the world.

Fred P. Hochberg, chairman of the Export-Import Bank of the United States, said it was hard to predict how much China’s currency increase could bolster American exports. “It depends on how they implement it, what rate of speed and how much it is really market-driven,” he said.

American companies and global companies that count on China to produce goods at a low cost, however, may be hurt by the currency’s rise just as they have been suffering from rising labor costs. John Frisbie, president of the United States-China Business Council, cited companies with low-end products, like apparel, shoes and toys, as among those most affected.

Wages have risen recently in China to help workers keep up with inflation and in response to labor unrest, most notably strikes at several Honda plants and 11 worker suicides at Foxconn Technology’s mammoth electronics factory in Shenzhen.

Mitch Free, chairman of MFG.com, a company based in Atlanta that helps secure manufacturing for Black & Decker, Whirlpool and Motorola, said Chinese manufacturing prices had risen by 8 percent in the last year, largely because of labor costs. He expects the trend to continue.

“They’re proactively giving some wage increases,” Mr. Free said. “We’re seeing people sending messages to the buyers, through the system, saying that they’re revising a price or can only hold a price for a short time because they’re anticipating wage increases.”

How much American exports increase depends in part on how much China allows its currency to rise. C. Fred Bergsten, director of the Peterson Institute for International Economics, predicted that if the renminbi rose by 20 percent over the next two or three years, and if adjacent countries like Taiwan and Malaysia similarly let their currencies rise, the United States would lop $100 billion to $150 billion a year from its current account deficit and create up to one million American jobs.

“Most of that change would be in exports, not just exports to China, but to Bangladesh, Vietnam and even Mexico,” Mr. Bergsten said.

Mr. Frisbie was more skeptical about the impact on the trade deficit. Neither a stronger renminbi nor higher wages would have much effect on major companies like G.E. or Boeing that have made large investments in China to sell to local consumers, he said.

For companies that make products in China for sale elsewhere, however, there will be an incentive to reconsider where their factories are.

“They’re the ones who are strategizing to consider other locations,” Mr. Frisbie said. “They’re the companies that will be impacted most. They’re looking at other places with low labor costs, like Vietnam.”

Other Asian countries could well let their currencies rise along with the renminbi, reducing the potential benefit of transferring operations out of China.

Still, some companies may decide to continue diversifying their suppliers, said Hana Ben-Shabat, who oversees A. T. Kearney’s global-retail index.

“Companies will spread their bets among different countries instead of being so attached to getting a large proportion of their goods out of China,” she said.

She said she did not expect a wave of moves to lower-wage countries because labor costs make up only 15 to 20 percent of apparel costs. “Cost of labor in Bangladesh is way lower than China,” she said, but given other costs like shipping, “the same garment could cost much more out of Bangladesh than in China.”

At one big company, Li & Fung, which does work for Wal-Mart and Liz Claiborne, among others, the president, Bruce Rockowitz, said China was still attractive. “This is not the end of China, but it’s the end of lower prices,” he said.

Clyde Prestowitz, president of the American Strategy Institute and author of “The Betrayal of American Prosperity,” said he expected no rush out of China by American companies.

“In fact, I see important guys going in, like Intel and Applied Materials,” both semiconductor manufacturers, he said. “Foreign companies are obviously concerned, but I haven’t seen anybody except Google talk seriously about getting out. It’s a big market that’s going to get bigger.”

David Barboza contributed reporting.

Shen Hong & Aaron Back, “China Balances Tone on Currency, Trade”

China Balances Tone on Currency, Trade, Wall Street Journal
By Shen Hong and Aaron Back
April 14, 2010

BEIJING—Chinese President Hu Jintao indicated to U.S. President Barack Obama that Beijing remains committed to gradually changing its currency policy and helping to increase imports from the U.S., according to a report Tuesday by the state-run Xinhua news agency.

Mr. Hu also signaled Beijing’s displeasure at demands from Washington and elsewhere that China let its currency’s value rise—telling Mr. Obama that any changes to China’s exchange-rate policies would be based on the country’s own economic needs.

But Mr. Hu’s reassurance, at a face-to-face meeting with the U.S. president in Washington on Monday, indicated an effort at conciliation and cooperation on an issue that has been a source of tension between the two nations.

In recent weeks, the Obama administration has been trying to give China time to move on its own on the currency, engaging in behind-the-scenes negotiations with Chinese leaders but refraining from tough talk.

Warming relations and a surprise visit by U.S. Treasury Secretary Timothy Geithner to Beijing last week had set off a wave of speculation that China could be preparing to change its currency policy sooner rather than later.

Mr. Hu, China’s president and the top official of its ruling Communist Party, told Mr. Obama that while China is looking to revamp the way it sets the value of the yuan, it “won’t push forward the reform under external pressure,” according to a Xinhua report.

Mr. Hu’s signal of determination that China wouldn’t bow to pressure and the comments in Beijing on Tuesday will likely reinforce the general belief among analysts that while a sudden, large jump in the value of the yuan against the U.S. dollar is unlikely, China is probably willing to allow its currency to gradually climb upwards in the coming months.

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“Obama calms China renminbi dispute,” Financial Times

Obama calms China renminbi dispute, Financial Times

By Daniel Dombey and Alan Beattie in Washington and Geoff Dyer in Beijing

Published: April 13 2010 19:07 | Last updated: April 14 2010 04:59

Barack Obama sought to defuse the US-China confrontation over the renminbi on Tuesday by ack­now­ledging Chinese sensitivities about the US ­campaign for currency appreciation.

Speaking at the end of the nuclear security summit he hosted in Washington, the US president depicted the relationship with China as increasingly productive – a sign of his administration’s growing confidence that Beijing is moving the way the US wants on the renminbi and sanctions on Iran. The two issues are among Mr Obama’s international priorities.

“China rightly sees the issue of currency as a sovereign issue,” he said when asked about his meeting on Monday with Hu Jintao, China’s president. “They are resistant to international pressure when it comes to them making decisions about their currency policy and monetary policy.”

But he added that a “more market-oriented currency approach” would be in China’s own interest and would help rebalance its economy away from exports towards domestic consumption and production, so as to avoid “bubbles from building up within the economy”.

Mr Hu has sought a similar delicate path of his own, asserting Beijing’s right to set exchange rate policy while avoiding open conflict with the US over one of the most sensitive issues in international diplomacy.

“China will firmly stick to a path of reforming the yuan’s exchange rate formation mechanism,” he told Mr Obama on Monday, according to China’s official Xinhua news agency. But the agency reported that he also insisted that a move by Beijing “won’t be advanced by any foreign pressure” and indicated he did not share the US view that revaluation would help rebalance the world economy.

“Renminbi appreciation would neither balance Sino-US trade nor solve the unemployment problem in the US,” Xinhua quoted him as saying.

China’s vice foreign minister sent the same message on Tuesday when he told reporters in Washington that China did not believe the world’s economic problems were tied to its exchange rates.

“It is not justified for outsiders to exert pressure (on the currency) and we will not take action under pressure,” Cui Tiankai said, according to Reuters.

Financial markets reacted by lowering somewhat expectations for liberalisation of the renminbi. Economists said a gradual rise beginning around the middle of the year was still the most likely outcome.

“It is only a matter of time before China moves but they like to do things in response to domestic economic conditions,” said Kevin Grice, international economist at consultancy Capital Economics.

US officials also highlight increased co-operation with Beijing on the Iran file, despite disputes this year over Taiwan, Tibet and Google.

“The amount of turbulence … was actually relatively modest when you look at the overall trajectory of US-China relations,” said Mr Obama, noting that China had “sent official representatives to negotiations in New York, to begin the process of drafting a sanctions resolution” on Iran at the United Nations.

In Beijing, the message was more nuanced. “Sanctions and pressure cannot fundamentally resolve the issues, and dialogue and negotiation are the best ways,” said Jiang Yu, a spokeswoman for the Chinese foreign ministry. But she also signalled that UN Security Council measures were now likely. “We believe the Security Council’s relevant actions should be conducive to easing the situation and conducive to promoting a fitting solution to the Iranian nuclear issue through dialogue and negotiations,” she said.

http://www.ft.com/cms/s/0/40ba438a-4723-11df-b253-00144feab49a.html

“China’s Hu rebuffs Obama on yuan,” Associated Press

China’s Hu rebuffs Obama on yuan
AP
Tue Apr 13, 10:17 am ET

BEIJING – Chinese President Hu Jintao rebuffed U.S. calls to re-value China’s currency, telling President Barack Obama that any tinkering with the yuan will be done by Beijing in accord with domestic interests.

Hu defended China’s policy of pegging the yuan to the dollar at a Monday meeting with Obama in Washington and said changes to the exchange rate would not come from U.S. pressure.

“Detailed measures for reform should be considered in the context of the world’s economic situation, its development and changes as well as China’s economic conditions. It won’t be advanced by any foreign pressure,” Hu said in remarks released by China’s Foreign Ministry on Tuesday. He said reform would come based on China’s “own economic and social development needs.”

China’s currency has emerged as prominent friction in a relationship already troubled by disputes over trade, U.S. arms sales to Taiwan and Obama’s meeting with Tibet’s exiled leader, the Dalai Lama.

With high unemployment persisting in the U.S., Congress has been pressuring the Obama administration to punish China for the yuan-dollar peg — a tactic which economists say keeps the currency undervalued and gives Chinese exports an unfair advantage.

Hu told Obama that a rise in the value of the yuan, also known as the renminbi, would not solve U.S. economic ills. “Renminbi appreciation would neither balance Sino-U.S.. trade nor solve the unemployment problem in the United States,” Hu said, according to the remarks.

He reiterated his government’s standing line that China did not intentionally seek a trade surplus with the with U.S. and would buy more goods if Washington relaxed controls on exports of high technology goods.

White House national security aide Jeffrey Bader said Obama reiterated his view that there needs to be “a more market-oriented exchange rate.”

Despite Hu’s statements, many economists and financial analysts believe China will re-value the yuan in the second or third quarter this year. Options include a one-off revaluation or resuming a slow appreciation of the currency.

Beijing used a combination of the two — a one-off revaluation followed by a crawling appreciation — in 2005 when it ended a decade long yuan-dollar peg. But China reverted to the peg in mid-2008 worried about the impact on its exports as the economic crisis took off in the U.S.

The yuan was only one of several issues Obama and Hu discussed — Iran’s nuclear program chief among them. Bader described the meeting as “positive and constructive” and the presidents are “familiar and comfortable with each other.”

In recent weeks, Washington and Beijing have sought to relax tensions that crept into relations late last year after the arms sales and contentious negotiations on climate change. Particular attention has been paid to trying to make discussions of the yuan less heated. U.S. Treasury Secretary Timothy Geithner, on his way home from India, stopped in Beijing last week for a 75-minute discussion with Vice Premier Wang Qishan.

http://news.yahoo.com/s/ap/20100413/ap_on_bi_ge/as_china_us_currency

Yang Yao, “Renminbi adjustment will not cure trade imbalance”

Renminbi adjustment will not cure trade imbalance, Financial Times

By Yang Yao

Published: April 12 2010 03:00 | Last updated: April 12 2010 03:00

Mark Drajem and Sara Eisen, “Chinese Trade Barriers May Undercut Yuan Change, Locke Says”

Chinese Trade Barriers May Undercut Yuan Change, Locke Says, Business Week/Bloomberg
By Mark Drajem and Sara Eisen

April 9 (Bloomberg) — U.S. Commerce Secretary Gary Locke said China should allow the yuan to float, even though import barriers may undercut any boost for American exporters from a revaluation.

“Sometimes it’s like two steps forward and one step backwards, or two steps sideways” when dealing with China, Locke said in a Bloomberg Television interview. “They can revalue their currency, but if they still have market barriers or if they favor their domestic companies, then that revaluation of the currency will not make much of a difference.”

U.S. Treasury Secretary Timothy F. Geithner’s unscheduled meeting with Chinese Vice Premier Wang Qishan in Beijing yesterday fanned speculation the yuan’s 21-month-old peg to the dollar may be scrapped. Geithner last week postponed an April 15 deadline for a U.S. review of currency policies amid pressure from Congress to brand China a currency manipulator.

‘Imminent’ Move

“A move is imminent,” said, Ben Simpfendorfer, Hong Kong-based chief China economist at Royal Bank of Scotland Group Plc, said in an interview. “It’s more likely to be weeks rather than days.”

Geithner and Wang “exchanged views on U.S.-China economic relations, the global economic situation and issues relating to” a May meeting of officials from the two nations in Beijing, according to a Treasury Department statement.

China’s trade surplus with the U.S. last year rose to $226.8 billion, more than the combined deficit the U.S. had with its next nine biggest trading partners, according to Commerce Department data.

The Chinese currency “should be market based; it should be allowed to float,” Locke said from New York. “The Chinese foreign-exchange rate puts American companies at a disadvantage.”

Blaming The Peg

Senators including New York Democrat Charles Schumer and South Carolina Republican Lindsey Graham blame the currency peg for much of the imbalance. The peg keeps the currency undervalued, aiding Chinese exporters and discriminating against foreign competitors, according to economists such as C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington.

U.S. companies are also harmed by Chinese policies to restrict government purchases to software and clean-energy products developed in the country, rules curbing the growth of FedEx Corp. distribution, and by piracy of copyrighted movies and music, Locke said.

Tim Adams, a former U.S. Treasury Undersecretary, said China may allow gains by the yuan “fairly soon” to limit the focus on the currency at international summits in coming months.

The Group of 20 finance ministers’ meeting on April 23 in Washington, the U.S.-China Strategic and Economic Dialogue in Beijing in May, and the G-20 summit in Toronto in June are “key events,” Adams said in an interview from Washington. “I don’t think the Chinese want to go into these key forums talking about the exchange rate.”

Stay Competitive

China’s companies should be able to remain competitive if the yuan rises, Dell Inc.’s China President Amit Midha said today.

“As long as it’s gradual, I think most industries would be able to adjust,” Midha, who is also vice-chair of the China Association of Enterprises with Foreign Investment, said in an interview. “It would be more difficult to adjust if the revaluation was sudden.”

People’s Bank of China adviser Xia Bin said yesterday a small one-time revaluation of the yuan may be better than a return to gradual appreciation because it would help deter speculators. Hong Kong Exchanges & Clearing Ltd. Chairman Ronald Arculli said yesterday that China would avoid a “big- bang” revaluation.

“Where the economic recovery of the global marketplace is still patchy, and not as solid as we would like to see, currency issues are very sensitive,” Arculli, 71, said. “The internationalization of the renminbi is a stated objective of the central government, but the timing of it, how we get there, and all that is what we call ‘work in progress’.”

Level Playing Field

U.S. companies meanwhile remain concerned at the lack of a “level playing field” for goods in China, Locke said.

China introduced rules last year that restrict government purchases to technology products developed in China, the leading complaint of U.S. trade groups representing companies such as Microsoft Corp. and Intel Corp.

Government contracting preferences are among policies, including tax rebates, export restraints and “Buy China” regulations, that limit trade and foreign investment, the U.S. Trade Representative’s office said in a December report to Congress.

Still, Locke said commercial relations between the two countries have benefited since China began to open up its markets and joined the World Trade Organization in 2001.

“We are so economically interdependent with one another,” he said. “The last thing we want to do is engage in a trade war.”

–With assistance by Judy Chen, Kevin Hamlin and Belinda Cao in Beijing. Editors: Steve Geimann, Paul Panckhurst.

Charles Blum, ” No Fooling”

Jim O’Neill, chief economist at Goldman Sachs,  put in his two cents’ worth to the currency debate in a April 1 Financial Times op ed entitled “Tough talk on China ignores economic reality.”  His argument seems to be:

• At 14-15 percent, China’s annual domestic demand growth is “too strong,” adding to inflationary pressures in China.
• China’s “strong imports”  are a positive force in the world economy.
• The RMB is not undervalued but rather “ very close to the price it should be.”
• “[G]iven the past weakness of the dollar and the strength of domestic demand in many big emerging countries, China included, the US has a chance of reaching its goal [of doubling exports over the next five years].”
• So, it’s counterproductive to press China to change its exchange rate regime.

Huh?   Is this some sort of April Fool’s piece?  Let’s try to think straight about each piece of O’Neill’s argument:

• As O”Neill  himself recognizes, revaluation of the renminbi is deflationary, not inflationary.  Inflation arises when the total supply is restricted.  A revaluation helps remedy that problem immediately and over time.  First, domestic prices would fall as the price of imports (energy, raw materials,  components, luxury goods) fell and the supply of imports rose.  Over the longer term, China’s domestic supply would be expanded, too, as some producers found the economics of producing goods for the domestic market more appealing than exporting.   So, the inflation argument helps to justify a revaluation.
• If China’s expected trade deficit for March were to turn out to be more than a one-month wonder, the argument for China’s growth being good for the global economy would be more credible.   However, a revaluation would help to open the Chinese economy to global competition on an on-going basis.   Here again, O’Neill’s argument seems to work in favor of a revaluation.
• How can O’Neill argue that the RMB is not undervalued?  China’s official reserves have reached stratospheric levels and are still rising.  IMF rules require a rebalancing when trade flows or the balance of payments are imbalanced.  That means a reversal of rising trends, not a slowing or a stabilization of them.
• How will past weakness of the dollar help future US exports when it was associated with the world’s largest trade deficit?   How will continued strength of the dollar against the renminbi help increase US exports?
• O’Neill seems implicitly to endorse the old chestnut that “China doesn’t respond to foreign pressure.”   The other side of that coin is “no pressure, no problem.”  Silence is just a form of assent.

The facts and the law are on the side of an immediate, substantial revaluation.  Economic logic indicates that a revaluation is in the overall interests of the not just the US, but China and the rest of the world as well.   That much should be apparent to all independent analysts by now.  It’s time to stop fooling around and act.

Charles Blum, Executive Director, Fair Currency Coalition

Jim O’Neill, “Tough talk on China ignores economic reality”

Tough talk on China ignores economic reality, Financial Times

By Jim O’Neill

Published: March 31 2010 22:59 | Last updated: March 31 2010 22:59

In the past few weeks, Washington has upped the rhetoric concerning China and its currency. Coming at a time when there are a number of other sensitive issues facing the US-China relationship, it is not obvious to some of us why Congress is so excitable about this issue. With the biannual decision of the US Treasury on whether to name China as a currency “manipulator” due on April 15, it is far from clear that all this noise is helpful to anyone.

Indeed, from a macro-economic perspective, the timing could not seem more inappropriate. About four weeks ago, President Barack Obama announced a plan to double exports over the next five years. This is ambitious, but given the past weakness of the dollar and the strength of domestic demand in many big emerging countries, China included, the US has a chance of reaching its goal. So why go down a path of tit-for-tat retaliation that would take things in the opposite direction?

There are three fundamental issues that US policymakers should focus on: domestic demand in China, China’s trade with the rest of the world, and exchange rates.

With respect to domestic demand in China, there is rather clear evidence that, if anything, it is currently too strong, and certainly not at a level to justify accusations that China is not doing its “bit” for the world economy. For about 13 years we have used our own proprietary gross domestic product indicator for China, the so-called Goldman Sachs China Activity index. At the moment, this is growing at an annual rate of more than 14 per cent. Indeed, and somewhat ironically, it is likely that if Washington and others could keep quiet, Chinese policymakers would probably be more eager to do things to ease the inflationary pressures arising from this growth, including introducing more flexibility to the exchange rate.

Looking at a number of indicators, whether they be anecdotal from domestic or global companies that do business in China, published data on consumption and investment, or, importantly, the trade data, all of this is clear. Speak to anyone involved at any level of the consumer business, whether it be Tesco, Walmart or Louis Vuitton, and their evidence backs up the data. Chinese consumption is probably growing at about 15 per cent, similar to a 2-3 per cent rate for the US consumer.

As far as China’s involvement with the rest of the world goes, the real story since the worst of the crisis is not China’s recovering exports but China’s strong imports. The forthcoming trade release – interestingly due a few days before the Treasury report – is likely to demonstrate enormous import growth again, absolutely and relative to exports. This is seen not just in Chinese data, but in those from many other important trading nations. Indeed, quite remarkably, Germany’s trade with China is showing such strong growth that by spring next year, on current trends, it might exceed that with France. China last year reported a current account surplus of 5.8 per cent of GDP, significantly lower than apparently assumed as the current level by many people in Washington. In 2010, it could be closer to 3 per cent – incidentally below the 4 per cent level deemed as “equilibrium” by the Peterson Institute for International Economics.

Which brings me to the exchange rate. I have spent a lot of my career working on exchange rate models and am familiar with all the pitfalls. We have developed ours over the years at Goldman Sachs, including for the renminbi. At the moment, rather oddly, our model suggests that the renminbi is very close to the price that it should be. This has not always been the case. The model used to suggest the currency was undervalued by about 20 per cent, but it has moved by that degree in the past five years. We are, of course, less sure about the accuracy of this model than is usual with currency models, given the huge changes going on with China’s growth dynamics and the world as a whole.

This brings us back to the irony of the question. Why are US policymakers pushing the protectionist buttons at the very time when there is growing evidence that events would otherwise play out in their favour? Moreover, it should and probably does seem obvious to those who matter in Beijing that keeping the renminbi rigidly pegged to the dollar has lost its post-crisis usefulness, something that the governor of the People’s Bank of China has himself recently noticed.

The writer is chief economist at Goldman Sachs

http://www.ft.com/cms/s/0/dc113472-3cfd-11df-bbcf-00144feabdc0.html

Corinna Petry, “Council disputes study tying yuan manipulation to US job losses”

Council disputes study tying yuan manipulation to US job losses, American Metal Market
By Corinna Petry Published: Mar 26 2010 6:11PM

CHICAGO — While acknowledging that Chinese central government policy trends have caused concern around the world and must be addressed, the U.S.-China Business Council has called into question the credibility of a study by the Economic Policy Institute (EPI) drawing a direct and damaging link between the nation’s alleged currency manipulation and the loss of 2.4 million U.S. jobs, especially manufacturing employment.

The EPI study showed the U.S. metals industry alone lost nearly 150,000 jobs between 2001 and 2008 due in no small measure to the Chinese government’s manipulation of its currency. U.S. Sens. Lindsey Graham (R., S.C.) and Charles Schumer (D., N.Y.) have publicly supported the EPI’s findings as it relates to legislation they brought forward in the past couple of weeks (AMM, March 25). Their bill would allow the U.S. Commerce Department to impose countervailable duties on Chinese imports if the
imports are unfairly priced due to currency manipulation.

“Their methodology is horribly flawed,” council president John Frisbie said Friday in an interview.”(EPI’s) fundamental assumption is that all (Chinese) imports would be made in the United States. That’s not even close to being right.” For example, the United States hasn’t produced television sets in decades, instead importing them first from Japan, then South Korea and now China. Those imports “do not represent goods that would be made in the U.S. The data is overstated, which undermines the study,” he said.

The council is made up of 220 U.S. companies, with roughly half split between manufacturing and service industries, Frisbie said.
“We’ve never found a credible methodology that ties trade to jobs. To balance the debate, what we use is U.S. exports to China. China is a significant export market for the U.S. now—the third largest behind Canada and Mexico—and will be as China continues to grow,” he said. “Even last year, which was a down year for trade, our exports to China were flat with 2008, or about $70 billion, while U.S. exports to the rest of world were down 19 percent. China is outperforming (other nations) as a destination for U.S. goods. Chinese currency has never (before) been cited as a barrier to access, so we should not believe Chinese currency should affect trade flows or the U.S. trade deficit.”

The United States should continue to use its tariff powers—”anti-dumping rules for example”—to deal with unfair trade, Frisbie said. “If there are increases in anti-dumping orders, then that is a way of addressing it. There are ways to go after (trade violations) that are legally based. This study is not done this way,” he added.

“There are growing concerns about policy trends in China that need to be addressed. One is the currency issue: We should let exchange rate value fairly, but that won’t impact imports much,” Frisbie said. “The second issue is the policies in China that limit access (for U.S. exporters) to China’s government procurement market.” Frisbie noted that during the 2005-08 period during which China did allow the yuan to appreciate 20 percent against the dollar, the U.S.-China trade deficit continued to grow. “So the link is not there,” he said.

Rather, the link is between U.S. manufacturing productivity and the loss of jobs in the sector. “The U.S. makes more with fewer people, primarily because of productivity and technology advances,” Frisbie said. “The answer is not to build walls around the U.S. to isolate ourselves from our growing export opportunities with China,” especially with United States still emerging from the economic downturn.

On the other hand, “good economics suggest that it is probably time for China to resume exchange rate movement, and my guess is that will likely happen if politics do not get in the way,” he said, adding that when China is found to be “flouting international trade rules, we should first seek direct dialogue to resolve the issue.”

AMM