Amy Tsui, “China Will Begin Sooner Rather Than Later Gradual Currency Adjustment, Bergsten Says”

China Will Begin Sooner Rather Than Later Gradual Currency Adjustment, Bergsten Says

Daily Report for Executives

11/24/2009

Amy Tsui
The Chinese leadership has genuinely bought into rebalancing its economy toward a domestic-led growth economy and will sooner, rather than later, allow a gradual 6 to 7 percent appreciation of the Chinese currency, C. Fred Bergsten, director of the Peterson Institute for International Economics, said Nov. 20.
“I’m convinced, maybe I’m naive, but I’m convinced, that the Chinese leadership, and more broadly Chinese society, has accepted the fundamental wisdom of rebalancing their growth pattern in favor of domestic demand and particularly consumer-led growth rather than relying on export-led growth,” Bergsten said at a meeting at the George Washington University’s Elliot School of International Affairs.
He said he would prefer a quicker transition, more along the lines of 10 percent appreciation over two years, but said that 6-7 percent appreciation over three years should serve to rebalance the U.S.-Chinese trade deficit in about three years.
China was “definitely in the wrong” for having a drastically undervalued currency, Bergsten said. “Massive intervention to keep your currency undervalued and run huge trade surpluses when you’re the world’s most competitive country and most rapidly growing trading country is just wrong policy and violates the fundamental norms” of both the International Monetary Fund and World Trade Organization systems, he said.

Some Progress on Currency
Even before the current financial crisis, Bergsten said, China had already begun to recognize some of the downsides of export-led growth with poor job creation, overly energy intensive industry, pollution, and problems with trading partners.
He said the Chinese would begin the appreciation of their currency to address pending inflation and to begin making the necessary structural changes to move toward a consumer-led growth economy. Prior to the financial crisis, China had made some progress on the undervaluation of its currency, and the trade imbalances between the United States and China are down from their peak three or four years ago, Bergsten said.

Undervalued by 40 Percent
He said as of today, by Peterson Institute calculations, the Chinese currency was now undervalued by 20 percent on a trade-weighted basis, and about 40 percent against the dollar.
“The one big global misalignment is the undervaluation of the RMB and the six to eight Asian currencies that are essentially pegged to the RMB,” Bergsten said.
The dollar is at equilibrium levels against the euro and the Canadian dollar, according to Bergsten. “There’s no generalized dollar overvaluation anymore, even though the U.S. is still running a current account deficit of maybe 3 percent of GDP,” he said.
Bergsten did not absolve the United States of responsibility for the financial crisis, saying that it needed to boost its savings rate. He said the United States needed to be heard from in addressing its own problems in the relationship.

G-2 Concept Seen to Develop
Bergsten characterized the macroeconomic relationship between the United States and China as being one of the least successful aspects in the beginning development of a so-called “G-2 relationship.” Bergsten introduced the concept of a relationship between the United States and China as the only two national superpowers in the world some five years ago.
In response to statements by U.S. and Chinese officials during President Obama’s visit to China last week that there was no G-2 relationship between the United States and China, Bergsten said that it was politically expedient for both sides to deny any such relationship. He said he, too, would deny a relationship given the political sensitivities of other countries to the idea that the United States and China could form an alliance that would dictate the terms of international agreements such as the climate change discussions taking place in Copenhagen.
Bergsten said U.S. and Chinese sniping over trade could simply be good cover for a G-2 relationship and that he believed the G-2 concept was being implemented in practice.
The area of climate change shows that a G-2 could provide a better outcome for international agreements as a whole, with the United States working well with China on such issues. It would help global and international system work better, supplementing and not supplanting the existing structures, Bergsten said.

Harold Meyerson, “A marriage made in China”

A marriage made in China, Washington Post

Harold Meyerson

Wednesday, November 18, 2009

President Obama’s trip to China has occasioned a spate of articles documenting the increasingly unhappy yet apparently indissoluble marriage between the American and Chinese economies. As The Post’s Keith Richburg wrote on Monday, those economies “have become inextricably intertwined, locked in a kind of co-dependency that neither side thinks is particularly healthy.”

The ugly goings-on within this marriage are plain for all to see. The U.S. trade deficit with China was roughly $60 billion in 1998, the year before we reached the accord granting China permanent normalized trade relations. Over the following decade, it ballooned to $268 billion, and tens of thousands of U.S. factories closed down. The trade deficit is the major reason China is awash in dollars — about 800 billion of them — and has become our largest creditor. And it is the major reason why boosting consumption in the United States, in an attempt to reverse the recession, has the peculiar effect of boosting production and employment in China just as much as if not more than happens at home.

Most reports that mention this defining economic imbalance treat it as a given — a fact as immutable as the cycles of the moon. In fact, after U.S. Trade Representative Charlene Barshevsky reached an agreement with her Chinese counterpart 10 years ago this week on normalizing trade relations, an intense debate took place in Congress and in the nation. U.S. business leaders, members of the Clinton administration, a majority of congressional Republicans and a minority of congressional Democrats all argued that the deal was a win for the American people.

Cautioning Congress not to reject the pact, Carly Fiorina, then chief executive of Hewlett-Packard, warned, “A vote against trade with China is a vote against U.S. business, employees, citizens and the people of China.” Advocates’ central contention was that the deal would eventually lead to a political liberalization of China — which it hasn’t — and would enable the United States to so increase exports to China that our Chinese trade imbalance would end — precisely the opposite of the effect that normalizing trade relations has actually had.

“The most fundamental thing we get out of this deal is an enormous increase in our access to the Chinese economy,” Kenneth Lieberthal, who was senior director for Asia on the National Security Council, said in 1999. Asked on PBS’s “News Hour” how the pact would affect the trade imbalance, Lieberthal predicted, “Over time, clearly it will shrink with this agreement.”

But even as some American companies contended that the agreement would increase their exports to China, many were planning instead to increase their production in China, where wages were low and the government was eager to help them set up shop. “This deal is about investment, not exports,” Joseph Quinlan, an economist with Morgan Stanley, said in May 2000. He was, of course, right: A flood of investment followed the agreement. As of 2007, roughly 60 percent of Chinese exports came from foreign firms operating there. And just as U.S. manufacturers have found China to be an exceptionally low-cost place to make things, U.S. retailers, with Wal-Mart in the lead, have found it to be an exceptionally low-cost place to buy the products they put on their shelves.

The China that has emerged since trade relations were normalized has become not just an economic giant but the planet’s leading protectionist power. By artificially depressing its currency and making its exports cheaper, China is compelling other nations to erect trade barriers. In essence, as economist Michael Pettis has observed, China’s currency policy is this depression’s equivalent of the Smoot-Hawley tariff.

Some foresaw the problems that would be unleashed. By nearly a two-to-one margin, House Democrats refused to ratify the agreement when it came to a vote in May 2000, but enough Democrats aligned with Republicans to ensure passage. (In the Senate, both parties favored it overwhelmingly.) Along with union leaders, many House Democrats predicted that the pact would cost American jobs and deepen, rather than lessen, our trade deficit. That they were right while mainstream economists and representatives of economic elites were wrong has not increased their credibility among mainstream economists and economic elites.

So as we try to rebalance our relationship with China, let’s not entertain any illusions that our growing dependence on that nation was the result of an unalterable tectonic shift in global power.Our economic elites wanted the higher profits that came with cheaper Chinese labor. They prevailed, and today we are floundering to clean up their mess.

Patti Waldmeir, “EU call for stronger renminbi rebuffed”

European officials failed yesterday to persuade Beijing to begin strengthening its currency, despite “frank” talks between top officials ahead of today’s EU-China summit in the eastern Chinese city of Nanjing.

Scarcely a fortnight after Barack Obama, the US president, called on his Asian tour for an appreciation of the renminbi, European officials made similarly little progress towards their goal of easing pressure on European exporters from the weak Chinese currency.

Three of Europe’s most senior economic policymakers met Wen Jiabao, China’s premier, Zhou Xiaochuan, central bank governor, and other senior officials for a mini-summit on the renminbi.

After the meeting, Jean-Claude Juncker, Luxembourg’s prime minister, who chairs eurozone finance minister meetings, said of China’s plans to strengthen its currency: “I can’t say I am more optimistic than I was before I came here.”

José Manuel Barroso, European Commission president who met Mr Wen for a private dinner last night, said afterwards: “The Chinese reiterated their position on the matter . . .

“They are telling us exactly what they told President Obama – exactly the same.”

State television reported that Mr Wen had restated Beijing’s long-standing position that the renminbi’s exchange rate should be kept at a reasonable, balanced level.

Today’s EU-China summit is expected to focus on climate change, coming only days before United Nations-sponsored meetings in Copenhagen.

Last week, China unveiled a proposal to curb the carbon intensity of its economy after Washington also announced a carbon-cutting target.

Mr Barroso said the EU welcomed the Chinese offer, adding that the US and Chinese initiatives “seem to have created some momentum” for the Copenhagen talks.

Jean-Claude Trichet, the European Central Bank president, said Chinese officials had reiterated their intention to implement currency reforms launched in July 2005, when Beijing ended a peg to the dollar and said it would let the renminbi float in a managed band with reference to a basket of currencies.

But he stressed that Europe should not “overinterpret” the importance of that statement.

The officials stressed the problems caused by the weak renminbi for European exporters.

The EU’s exports to China, the world’s fastest-growing leading economy, fell 5.3 per cent in the first half of the year as the euro’s appreciation made goods from the region less competitive.

The euro has gained 15 per cent against the Chinese currency in the past year, fuelling complaints that the renminbi’s unofficial peg to the weakening US dollar is creating an unfair advantage for China’s exporters.

Eurozone officials argued that a gradual, orderly rise in the renminbi was in the interests of both China and the world economy.

However, Mr Juncker said Beijing’s officials had argued that it was hard to convince the Chinese public to support an immediate appreciation of the currency.

Beijing insists China needs a stable exchange rate against the dollar to assist its economic recovery which, it says, has benefited the world.

http://www.ft.com/cms/s/0/e9aa81ce-dd4e-11de-ad60-00144feabdc0.html

Andrew Batson, China’s State Firms Cling to Their Cash

BEIJING — Getting China to spend rather than save turns out to be harder than it sounds.

The nation collectively socks away over half its income, an extraordinarily high rate. By comparison, the average for developed countries is about 21%. Putting more of China’s money to work would provide a big boost to the global economy, especially with U.S. consumer spending now constrained by high unemployment and debts.

China’s high savings show up all over the place: They’re piling up not just in household bank accounts, but also in company vaults. Those corporate savings — basically, profits that haven’t been invested or returned to shareholders — have boomed. On central bank estimates, they rose to 23% of national income in 2007 from 12% a decade earlier. Household savings have stayed at around 20% of income during the same period.

The financial strains that push Chinese households to save can be addressed by expanded health care and lower education costs. But high corporate savings are a trickier problem. Much of that money comes from China’s resurgent state enterprises, now hugely profitable and dominant in key industries.

Taking money away from those powerful state firms and shifting it to consumers would be good economics, many observers think — and seemingly in line with the socialist principles of China’s government. But such changes are politically difficult: They threaten the interests of enormous corporations and perhaps even the ideas driving China’s hybrid command-market economy.

“On the surface, it’s a technical question. But in reality, it’s a very political question,” said Liu Jipeng, a professor at the China University of Political Science and Law. China’s large state sector helped it bounce back more quickly from the financial crisis than Western countries, he argues, so the government should be strengthening state firms, not sucking them dry.

After a wave of closures in the late 1990s, the government has enthroned a smaller number of strong state firms at the commanding heights of China’s economy. There are now three oil companies, three phone companies, two electricity distributors — all majority owned by the state. The profits of state firms were rising more than 30% a year before the crisis, and their strength is increasingly visible. They’ve been building lavish new headquarters in Beijing, and on average pay their employees 82% more than private firms.

Chinese officials flubbed their first attempt to extract some savings from these cash-rich state enterprises. A requirement for state firms to pay a new dividend to the government has had little impact since its launch in 2008, bringing in revenue of just 0.2% of gross domestic product. And most of the money was used to aid state companies themselves, not support consumers.

“State-owned enterprise managers are a very powerful group in the policy debate. So the State Council [or cabinet] has moved very cautiously in implementing this reform,” said Zhang Chunlin, private-sector development specialist in the World Bank’s Beijing office.

Scholars and government officials are debating changing this dividend policy. Many argue that the current payout of 5% to 10% of profits should be increased. And there’s also a push for putting the money into the general government budget, where it could support social programs rather than fill a slush fund for state enterprises.

Many outside the country also see a shift in this dividend policy as key to making China a more consumption-driven economy. The U.S. Treasury and the International Monetary Fund have both urged China to take more money out of the pockets of state firms and use it to support household incomes.

Even supporters are not optimistic that these changes will come quickly. An overhaul to the dividend policy could threaten the agency that now administers it — the State-owned Assets Supervision and Administration Commission, or SASAC — and cause resistance in the bureaucracy.

“Scholars have put forward a lot of suggestions, but I think there is zero possibility of changing the dividend policy this year. And next year also,” said Wen Zongyu, a researcher at the Ministry of Finance’s think tank. A gradual approach is more likely to win support, he said, with changes phased in at the end of the dividend policy’s initial three-year trial period.

Perhaps not by coincidence, 2011 would also be close to the end of the current administration’s term — so the tough calls could be pushed off even further.

http://online.wsj.com/article/SB125953211574968639.html

Cheng Guangjin, “RMB rate fine-tuning is possible”

RMB rate fine-tuning is possible
By Cheng Guangjin (China Daily)
Updated: 2009-11-25 07:51

The vice-foreign minister said the RMB rate’s flexibility may widen, echoing the nation’s central bank a month ago.

The announcement by Vice-Foreign Minister Zhang Zhijun comes after the People’s Bank of China, which has the power to oversee the yuan and financial institutions, said it was in the process of reforming the exchange rate system.

China is also starting to receive more international pressure to let its currency appreciate. The nation adopted the policy of loosely pegging the RMB to the US dollar since the financial recession began.

“China will increase the flexibility of the RMB exchange rate at a controllable level in the future,” Zhang said, “based on the market demand and with reference to a basket of currencies.”

But he said, China will further work on the exchange rate policy on its own initiative and in a constructive and controllable manner.

Foreign exchange rates are expected to be the focus of the 12th China-European Union Summit scheduled next week in Nanjing, capital of Jiangsu province. The affluent Jiangsu province accounted for 18 percent of the total China-EU trade volume last year.

Three EU policymakers are due to hold talks in Nanjing a day before the summit with Premier Wen Jiabao and central bank officials, the Ministry of Finance as well as with the National Development and Reform Commission on Nov 29.

The trio are European Central Bank President Jean-Claude Trichet; Luxembourg Prime Minister Jean-Claude Juncker; and Joaquin Almunia, the EU’s commissioner for economic and monetary affairs.

The summit, initiated in 1998, will be co-chaired by Wen, European Commission President Jos Manuel Barroso and Swedish Prime Minister Fredrik Reinfeldt, whose country currently holds the rotating EU presidency.

Newly elected EU president Herman Van Rompuy and foreign policy head Catherine Ashton are not coming to the summit as they prepare for their new roles.

At the summit, China hopes to forge a common stance with Europe against protectionism, said Sun Yongfu, director of the Department of European Affairs with the Ministry of Commerce.

“We welcome more products from foreign countries to China and also from the EU,” Sun said.

China and the EU will also discuss ways to tackle climate change at the summit, Zhang said.

“The upcoming China-EU summit is very important leading up to the Copenhagen conference,” he said.

This will be the second China-EU Summit and the third meeting between leaders from both sides this year.

The last China-EU Summit was held in Prague in May, postponed from last December by China after French President Nicolas Sarkozy met with the Dalai Lama.

“The EU is practical in economic ties with China but ideal-oriented in human rights and values,” said Zhao Junjie, an expert in European studies with the Chinese Academy of Social Sciences.

http://www.chinadaily.com.cn/bizchina/2009-11/25/content_9042260.htm

Jamil Anderlini, “Big Property Bubble Forming in China, Warns Leading Developer”

Big Property Bubble Forming in China, Warns Leading Developer, Financial Times

By Jamil Anderlini in Beijing

Published: November 19 2009 02:00 | Last updated: November 19 2009 02:00

A large bubble is forming in China’s property market as a result of Beijing’s credit-driven stimulus programme, one of the country’s most prominent real estate developers warned.

Zhang Xin, chief executive of Soho China, one of the country’s most successful privately-owned property developers, told the Financial Times the asset bubble was leading to rampant wasteful investment in the sector, undermining the country’s long-term growth prospects.

“Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real estate segment,” Ms Zhang said. “The rising prices are a direct result of so much money coming from the banks and the Chinese banks should be very worried.”

Ms Zhang’s assessment was echoed by Fan Gang, a member of the central bank’s monetary policy committee, who warned yesterday that real estate in cities such as Beijing, Shanghai and Shenzhen was expensive and there was a growing risk of asset price bubbles.

Urban property prices in 70 big and medium-sized Chinese cities rose 3.9 per cent in October from a year earlier, accelerating from September’s 2.8 per cent rise, according to government figures.

Price rises in top-tier markets such as Beijing and Shanghai have been much faster. Analysts say the rebound has largely been driven by an unprecedented government-led expansion of bank lending. It is also being driven by government policies, including tax breaks, low interest rates and smaller down-payment requirements.

Investment in real estate development, a key driver of economic growth, rose 18.9 per cent in the first 10 months of the year on a year earlier, a marked acceleration from 17.7 per cent growth in January-September.

Ms Zhang said the current speculation should be a serious warning for the industry and the general economy.

“In Manhattan, they have vacancy rates of 10-15 per cent and they feel like the sky is falling, but in Pudong [the central business district in Shanghai vacancy rates are as high as 50 per cent and they are still building new skyscrapers,” she said.

“If you look at GDP growth, then China looks like a new engine driving the global economy, but if you look at how growth is being created here by so much wasteful investment you wouldn’t be so optimistic.”

http://www.ft.com/cms/s/0/bcf0ced2-d4ab-11de-a935-00144feabdc0.html

“The Currency Quarrel,” The Washington Post

The Currency Quarrel, The Washington Post
China won’t change on command. America must retake control of its own financial destiny.

Tuesday, November 24, 2009

BY NOW it is a cliche that the United States has no more important bilateral relationship than that with China. Yet in the wake of President Obama’s sometimes awkward visit to Beijing, it is becoming clear that, in one crucial respect, Sino-American relations are dysfunctional: Though umbilically connected by trade and capital flows, the two countries are pursuing incompatible economic policies. Without a course correction, both will suffer, and so will the global economy.

China has achieved its economic miracle through exports — producing far more than its people consume. The United States — where consumers have driven 70 percent of the economy in recent years — is its biggest market. The United States, in fact, consumed more than it produced, but China enabled this by accumulating $2.3 trillion in reserves and plowing much of it back into U.S. government bonds.

When the global boom went bust, the United States cut interest rates to zero and began running a fiscal deficit of 10 percent of gross domestic product. This made the dollar vastly cheaper, but China, to protect its export industries, has responded by linking its currency to the plunging buck. Thus, U.S. exports are not growing as much as they would otherwise, and neither are those of other countries in Asia. China, meanwhile, evinces anxiety about its dollar-denominated assets, and U.S. leaders try to deal with having a distant, militarily powerful and authoritarian state as their banker.

Economically, the solution is obvious. China must increasingly grow by producing to meet domestic demand; the United States must live within its means. Both sides have made some headway. China has plans to build hundreds of new hospitals; pension reforms, which would reduce the need to save for old age, are also said to be on the way. In the United States, private savings have risen from minus 2.1 percent of GDP in the last quarter before the recession to 6.2 percent now. But more action is needed: Not only must the United States seriously address its long-term budget deficits; China must also allow its currency, the yuan, to rise. This view is confirmed by the two countries’ trading partners as well as the International Monetary Fund.

The problem is how to get there. In theory, the United States and China might pursue some 21st-century version of the 1985 Plaza Accord, the intergovernmental agreement that called for appreciation of the Japanese yen and the West German mark against the dollar. In practice, that’s not likely: Japan and West Germany were not only trading partners but also Cold War military allies of the United States. Communist China does not exactly fit that description. Moreover, the deal’s results were ultimately disappointing, and it was abandoned in 1987.

And so, the United States and China are at an impasse, with each demanding, in effect, that the other change first. For Washington, the best approach is to continue pointing out the costs and contradictions of China’s policy — while taking charge of its own destiny. Given the current fragility of the U.S. economy and the 10.2 percent unemployment rate, it would be unwise, both for the United States and China, to tighten monetary policy and slash the budget deficit immediately, as some Chinese commentators have demanded. But, by beginning work now on credible “exit strategies” for fiscal and monetary policy, the United States could undermine China’s beggar-thy-neighbor currency stance and ensure the long-term stability of the dollar.

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/23/AR2009112303039.html

Martin Wolf, “Grim truths Obama should have told Hu”

Geoff Dyer and Edward Luce, “Obama calls for stronger renminbi”

President Barack Obama yesterday urged China to strengthen its currency as tensions over exchange rates and trade broke through a carefully orchestrated show of co-operation between Washington and Beijing.

Mr Obama made his comments after a three-hour meeting in Beijing with President Hu Jintao, during which both leaders pledged to work together on pressing international issues.

However, the US president also joined in the growing

chorus of international voices calling on China to allow the renminbi to appreciate.

“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” he said at a joint appearance with Mr Hu. Such a move would “make an essential contribution to the global rebalancing effort”.

The reference to “past” statements could imply that China did not make any new commitments yesterday. Mr Hu did not mention the currency issue in his statement, although he did call on both governments to refrain from protectionism, a criticism of recent US measures on Chinese steel pipes and tyres.

Coming at a moment when Chinese prestige is growing and the US is facing enormous difficulties, Mr Obama’s trip has symbolised the advent of a more multi-polar world where US leadership has to co-exist with several rising powers, most notably China.

The two leaders both made prepared statements, adding to the impression that Mr Obama’s visit has been one of the most tightly scripted in recent years.

In their comments and a joint statement, the pair spelt out a programme for ever-growing co-operation, including stronger military ties, research initiatives on climate change and clean energy and “a dialogue on human space flight”.

On Iran , where the US has been pushing China to take a harder line against Tehran, Mr Obama used stronger language: “Iran has an opportunity to present and demonstrate its peaceful [nuclear] intentions but if it fails to take this opportunity, there will be consequences.” Mr Hu said it was important to resolve the issue through negotiations.

China’s currency has been effectively re-pegged to the US dollar since mid-2008. In recent weeks a number of international officials and governments have complained about the advantage this gives Chinese exporters.

Yu Yongding, a leading Chinese economist and former central bank adviser, said Europe and China “should play together and put pressure on the US to change its monetary policy”. China and much of the world was being held “hostage” by US policy, he said.

http://www.ft.com/cms/s/0/1dc505da-d3e3-11de-8caf-00144feabdc0.html

Documents from President Obama’s State Visit to China

Documents from President Obama’s State Visit to China, Office of the Press Secretary, The White House

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