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Bernanke's response

Kushinator

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Federal Reserve Chairman Ben S. Bernanke defended his monetary stimulus to fellow central bankers, saying it will aid the world economy, and made some of his strongest criticism of China’s weak-currency policy...................


"The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in a speech in Frankfurt today. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home", he said.

Bernanke Steps Up Stimulus Defense, Turns Tables on China - Bloomberg

Ben Bernanke said:
Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals..........

On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years. As a society, we should find that unacceptable.

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It's refreshing to see someone stand up to China. His point goes back to something i referenced less than a month ago: the persistent Chinese current account. Inflation concerns in the worlds second largest economy are magnified because the RYB is currently pegged to a US dollar being stimulated.
 

Albert Di Salvo

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Let us avoid lying to ourselves. No one in the US Govt. is going to stand up to Chinese mercantilism. America's options are limited. That's what happens when the party is over and the hangover begins.
 

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Bernanke Steps Up Stimulus Defense, Turns Tables on China - Bloomberg


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It's refreshing to see someone stand up to China. His point goes back to something i referenced less than a month ago: the persistent Chinese current account. Inflation concerns in the worlds second largest economy are magnified because the RYB is currently pegged to a US dollar being stimulated.


but wouldn't upward revaluation of the yuan diminish the value of the foreign (US) debt held by china

the inflation of the chinese economy is something which would seem to drive the asset holders to look for a safer haven, such as US dollars

i would appreciate your take
 

Lord Tammerlain

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China does not have an undervalued currency. The idea that a country with a fixed currency exchange that has been stable for years is rather idiotic.

What China has compared to the US is a cost advantage, that cost advantage is not due to the currency, but the amount of labour China has and lax regulation. We have been hearing about China's undervalued currency for years now, back in 2005 we heard that it was undervalued by 40%, today we hear that it is undervalued by 40% This is despite China having quite fairly high inflation rates over that time period. If China revalued its currency, what would happen? A large number of layoffs among Chinese factories increasing the labour pool, which will decrease the costs for labour. You will not see an increase in US exports to China ( generally because the items that the Chinese would like to buy from the US, the US wont sell to China. The only items that the US could see an increase in in sales to China are agricultural, chemical, and medical. Even then only for those items that China does not yet produce domestically. You will not see cars, clothing, electronics being exported to China.

Lets take a look at a few other countries that have massive current account surplus's specifically Japan and Germany. Japan was accused of having and undervalued currency in the mid 80s, by the 90s the Yen more then doubled in value compared the the USD, yet Japan still has a massive trade surplus with the US (note that a large chunk of China's trade surplus is from final assembly of components made in Japan). If the issue was with the Japanese currency being undervalued, the trade surplus would have gone away. It has not. Now take a look at Germany, it has a large trade surplus, has had one when the Euro was weak, and had one when the euro has been strong.

So what would happen to China if it raised its currency in value compared to the USD. China's economy would slowdown inflation will drop, and in about 2 years once the Chinese economy has adjusted China would get another large trade surplus with the US. If China does not revalue the currency, China will continue to see higher rates of inflation, driving costs up in China from labour rates, to all other factors of production. Either way, China will have a high trade surplus in the US. Only when the costs of production in China (real costs, not the short term effects of currency revaluation) rise to a point where production in the US makes more economic sense. All a currency revaluation would do is buy about 2 years of China being uncompetitive.


The other option is that the US in general starts to save money and stops spending so much on goods and services. That would also rebalance the current account issue
 

Lord Tammerlain

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but wouldn't upward revaluation of the yuan diminish the value of the foreign (US) debt held by china

the inflation of the chinese economy is something which would seem to drive the asset holders to look for a safer haven, such as US dollars

i would appreciate your take

Yes an upwards revaluation of the RMB would cause rather large loss's in China's holding of the USD, which is why China, Japan, SK, Germany were upset with the US and the US attempts to drive the USD down, the asian countries hold trillions of USD, Germany because of the beggar thy neighbor policy that this represents.

The high inflation in China is due to the high economic growth that China has, along with its fixed exchange rate. The issue to consider is the real rates of return for investors. If interest rates in china are around 15%, and inflation is at 10%, then you are getting a real rate of return of 5 %. If interest rates are 3% and the inflation rate is 2% you are getting only 1% real returns. The interest rate differentation is why alot of money is flowing into countries like Brazil, China and India for instance.
 

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China does not have an undervalued currency. The idea that a country with a fixed currency exchange that has been stable for years is rather idiotic.

What China has compared to the US is a cost advantage, that cost advantage is not due to the currency, but the amount of labour China has and lax regulation. We have been hearing about China's undervalued currency for years now, back in 2005 we heard that it was undervalued by 40%, today we hear that it is undervalued by 40% This is despite China having quite fairly high inflation rates over that time period. If China revalued its currency, what would happen? A large number of layoffs among Chinese factories increasing the labour pool, which will decrease the costs for labour. You will not see an increase in US exports to China ( generally because the items that the Chinese would like to buy from the US, the US wont sell to China. The only items that the US could see an increase in in sales to China are agricultural, chemical, and medical. Even then only for those items that China does not yet produce domestically. You will not see cars, clothing, electronics being exported to China.

Lets take a look at a few other countries that have massive current account surplus's specifically Japan and Germany. Japan was accused of having and undervalued currency in the mid 80s, by the 90s the Yen more then doubled in value compared the the USD, yet Japan still has a massive trade surplus with the US (note that a large chunk of China's trade surplus is from final assembly of components made in Japan). If the issue was with the Japanese currency being undervalued, the trade surplus would have gone away. It has not. Now take a look at Germany, it has a large trade surplus, has had one when the Euro was weak, and had one when the euro has been strong.

So what would happen to China if it raised its currency in value compared to the USD. China's economy would slowdown inflation will drop, and in about 2 years once the Chinese economy has adjusted China would get another large trade surplus with the US. If China does not revalue the currency, China will continue to see higher rates of inflation, driving costs up in China from labour rates, to all other factors of production. Either way, China will have a high trade surplus in the US. Only when the costs of production in China (real costs, not the short term effects of currency revaluation) rise to a point where production in the US makes more economic sense. All a currency revaluation would do is buy about 2 years of China being uncompetitive.


The other option is that the US in general starts to save money and stops spending so much on goods and services. That would also rebalance the current account issue

Another option is that other Asian nations become more cost competitive than China. Production then moves from China to Vietnam, China hurt the U.S. still does not get the jobs back.
 

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Lord Tammerlain said:
Yes an upwards revaluation of the RMB would cause rather large loss's in China's holding of the USD, which is why China, Japan, SK, Germany were upset with the US and the US attempts to drive the USD down, the asian countries hold trillions of USD, Germany because of the beggar thy neighbor policy that this represents.

Yes, but perhaps not as much as one might think. A large portion of those gazillions of USD are actually held in the form of US Treasury securities (883.5 billion as of Sep 2010), the majority of those relatively short-term, thus giving China the option of simply holding to maturity to avoid a mark-to-market loss. Of course, who knows what the exchange-rate loss (or gain) might be at maturity in one, two, or up to about five years (if they were to leave their holdings un-hedged in the currency forward market)?
 

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Yes, but perhaps not as much as one might think. A large portion of those gazillions of USD are actually held in the form of US Treasury securities (883.5 billion as of Sep 2010), the majority of those relatively short-term, thus giving China the option of simply holding to maturity to avoid a mark-to-market loss. Of course, who knows what the exchange-rate loss (or gain) might be at maturity in one, two, or up to about five years (if they were to leave their holdings un-hedged in the currency forward market)?

The problem would be who besides the Fed will fill the void of those hundreds of billions invested. Sure people will but at higher rates. So at least in the short term the foreigners are stuck. The Chinese will revalue their currency by about 5% per year and take that hit. A reason for the need of QE2 is that the Chinese have materially stopped buying U.S. debt.
 

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The problem would be who besides the Fed will fill the void of those hundreds of billions invested. Sure people will but at higher rates. So at least in the short term the foreigners are stuck. The Chinese will revalue their currency by about 5% per year and take that hit. A reason for the need of QE2 is that the Chinese have materially stopped buying U.S. debt.

Yes, the Chinese have slowed their purchases of US debt, but I'm not sure if I would characterize it as "material" at this point. In fact, Jun, Jul, Aug, and Sep were all increases in their holdings, up to 883.5 as compared to an average of 898 since Jun 2009.

They are not stuck if they hold until maturity. They simply roll their matuing obligations over at the extant rates. If their currency risk is hedged, they incur only the rollover rate risk: their income may go up or down. If their currency risk is not hedged, then, oh, well.
 

washunut

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Yes, the Chinese have slowed their purchases of US debt, but I'm not sure if I would characterize it as "material" at this point. In fact, Jun, Jul, Aug, and Sep were all increases in their holdings, up to 883.5 as compared to an average of 898 since Jun 2009.

They are not stuck if they hold until maturity. They simply roll their matuing obligations over at the extant rates. If their currency risk is hedged, they incur only the rollover rate risk: their income may go up or down. If their currency risk is not hedged, then, oh, well.

If I understand the numbers you used above their holding are actually down a bit, which is a change.

As to hedging , who would take the other side of the bet with a country that controls their currency peg.
 

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If I understand the numbers you used above their holding are actually down a bit, which is a change.

Note that I disagreed (modestly) with your description of the decline in Chinese holdings of US debt as 'material.' Yes, they are down but as of Sep, were only about 15 B below their average for about the last two years.

As to hedging , who would take the other side of the bet with a country that controls their currency peg.

The only market in the world that is more liquid and trades more notational amounts than the U.S. gov't securities market is the FX market. It would be no problem at all for China, through the central bank or other representative banks, to establish whatever level of currency hedges they wished. I don't know for sure, but I would be very, very surprised if they aren't sizable daily participants in the FX markets, both spot and forward; their currency exposures involved in their level of international trade virtually dictate it.
 

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Note that I disagreed (modestly) with your description of the decline in Chinese holdings of US debt as 'material.' Yes, they are down but as of Sep, were only about 15 B below their average for about the last two years.



The only market in the world that is more liquid and trades more notational amounts than the U.S. gov't securities market is the FX market. It would be no problem at all for China, through the central bank or other representative banks, to establish whatever level of currency hedges they wished. I don't know for sure, but I would be very, very surprised if they aren't sizable daily participants in the FX markets, both spot and forward; their currency exposures involved in their level of international trade virtually dictate it.

You may be right about the hedging. Either way, China had been a place where we financed our deficits. Now it seems that the Fed is stepping in. Just wonder how long that can last.
 

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Bernanke Steps Up Stimulus Defense, Turns Tables on China - Bloomberg



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It's refreshing to see someone stand up to China. His point goes back to something i referenced less than a month ago: the persistent Chinese current account. Inflation concerns in the worlds second largest economy are magnified because the RYB is currently pegged to a US dollar being stimulated.

Cry me a river. China's not inflating enough? Good for them. They're still doing fine. While Bernanke is pointing a finger at the Chinese he should recognize the three fingers pointing back at him.
 

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China does not have an undervalued currency. The idea that a country with a fixed currency exchange that has been stable for years is rather idiotic.

On the contrary, ignoring their increasing trade surplus and currency reserves is rather idiotic. On a fundamental basis, the RYB is undervalued due to its reserve holding of $2.65 trillion alone.

What China has compared to the US is a cost advantage, that cost advantage is not due to the currency, but the amount of labour China has and lax regulation. We have been hearing about China's undervalued currency for years now, back in 2005 we heard that it was undervalued by 40%, today we hear that it is undervalued by 40% This is despite China having quite fairly high inflation rates over that time period.

Either you are unaware of the numbers, or you are repeating a pro-Beijing talking point. Either way, the bold is incorrect. China has averaged around 3% inflation from 2000 till the present. China Inflation

If China revalued its currency, what would happen?

The RYB would revalue if they allow it to float. The market would set the relative value, as opposed to the current manipulation taking place in Beijing.

A large number of layoffs among Chinese factories increasing the labour pool, which will decrease the costs for labour. You will not see an increase in US exports to China ( generally because the items that the Chinese would like to buy from the US, the US wont sell to China. The only items that the US could see an increase in in sales to China are agricultural, chemical, and medical. Even then only for those items that China does not yet produce domestically. You will not see cars, clothing, electronics being exported to China.

China's labor cost comparative advantage is not in dispute. A devalued yuan (RYB) decreases the purchasing power of the Chinese worker, investor, saver. It has long been established that China has become a leading importer of luxury goods produced in Europe and the Americas (entertainment, wine, liquor, tobacco, vehicles, yachts, airliners, delicacies, etc...)

Lets take a look at a few other countries that have massive current account surplus's specifically Japan and Germany. Japan was accused of having and undervalued currency in the mid 80s, by the 90s the Yen more then doubled in value compared the the USD, yet Japan still has a massive trade surplus with the US (note that a large chunk of China's trade surplus is from final assembly of components made in Japan). If the issue was with the Japanese currency being undervalued, the trade surplus would have gone away.

Maybe you are not understanding the basis of a floating exchange rate (dirty or not). The large trade surpluses have caused the relative value of the Yen to increase quite dramatically; hence is a natural reaction to persistent current account surpluses.

It has not. Now take a look at Germany, it has a large trade surplus, has had one when the Euro was weak, and had one when the euro has been strong.

Again, this (currency strengthening) is a result of the balance of trade.

So what would happen to China if it raised its currency in value compared to the USD. China's economy would slowdown inflation will drop, and in about 2 years once the Chinese economy has adjusted China would get another large trade surplus with the US. If China does not revalue the currency, China will continue to see higher rates of inflation, driving costs up in China from labour rates, to all other factors of production. Either way, China will have a high trade surplus in the US. Only when the costs of production in China (real costs, not the short term effects of currency revaluation) rise to a point where production in the US makes more economic sense. All a currency revaluation would do is buy about 2 years of China being uncompetitive.

Incorrect on multiple levels. The first being that the Chinese would be harmed by allowing their populace greater relative purchasing power. The income, substitution, and price effects generated from such a policy are vital in developing internal growth prospects. Secondly, low skill labor production will not shift back into the U.S, rather it will flow into less productive (less cost) economies such as Vietnam, Malaysia, etc..., allowing the Chinese consumer to realize productivity gains similar to that in the developed world.

The other option is that the US in general starts to save money and stops spending so much on goods and services. That would also rebalance the current account issue

What has this done so far? China's CA balance is increasing at a high level even as the US consumer deleverages (increased savings rate). Something tells me China would devalue their currency even more if the US savings rate were to continue to increase, as it would be in their best interest given their economic objective (massive current account surpluses).

China CA balance

income and savings report
 

Kushinator

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but wouldn't upward revaluation of the yuan diminish the value of the foreign (US) debt held by china

the inflation of the chinese economy is something which would seem to drive the asset holders to look for a safer haven, such as US dollars

i would appreciate your take

The value of dollar denominated assets in terms of RYB will fall if the yuan were to float. However, the value in dollars vs other relative currencies would remain constant. At the same time, all US goods and services (even assets) would become cheaper for Chinese consumers/investors. This is especially critical if you consider the petro trade, which is conducted in dollars.

A critical component to the balance of trade discussion is a countries foreign currency reserves. By China holding $890 billion in dollar denominated assets, there is a glut in capital that has not been liquidized in terms of RYB. As China's currency reserves fall, so will the values of their assets in terms of RYB via the pricing mechanism, e.g. selling dollars and buying yuan.
 

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On the contrary, ignoring their increasing trade surplus and currency reserves is rather idiotic. On a fundamental basis, the RYB is undervalued due to its reserve holding of $2.65 trillion alone.
I never said the US should ignore the US trade deficit or the fact that money is leaving the US. That China has a large trade surplus and large currency reserves is no more troubling then Japans, Taiwans, or Germany's large trade surplus. The fact that China has 2.65 trillion in reserves is not purely a function of a low RMB, but also a function of high savings in China. People in China save a significant amount of their income.
Either you are unaware of the numbers, or you are repeating a pro-Beijing talking point. Either way, the bold is incorrect. China has averaged around 3% inflation from 2000 till the present. China Inflation



The RYB would revalue if they allow it to float. The market would set the relative value, as opposed to the current manipulation taking place in Beijing.


China's labor cost comparative advantage is not in dispute. A devalued yuan (RYB) decreases the purchasing power of the Chinese worker, investor, saver. It has long been established that China has become a leading importer of luxury goods produced in Europe and the Americas (entertainment, wine, liquor, tobacco, vehicles, yachts, airliners, delicacies, etc...)



Maybe you are not understanding the basis of a floating exchange rate (dirty or not). The large trade surpluses have caused the relative value of the Yen to increase quite dramatically; hence is a natural reaction to persistent current account surpluses.

The Plaza accord was the stimulus for the Yen to increase originally, the US government complained about the trade surplus Japan had with the US, just as it is complaining now. It pushed for a Japan to readjust rather then have the US adjust its economy to become more competitive (it could have and should have pushed for more open Japanese markets as well). I understand the point of a floating exchange rate, and view it as being fine should countries choose to allow it. If they dont they have to follow the monetary policy of the country they have tied their currency too. Over the short term a country can use it to over or undervalue their currencies to gain a short term advantage regarding trade. Over the long term the economy adjusts to the true economic competitiveness of the country. Japan and Germany still have large trade surplus's despite having "strong" currencies, ones that have risen in value dramatically over time. The same would occur with China, a dramatic rise in the RMB will just result in quite a few layoffs among China's factories, (causing a decrease in wages leading to increased competitiveness again). US exports will not increase to China, the trade deficit will improve for a couple of years untill China went through the economic adjustment required to meet the higher costs of production. Then it will go revert to past trends. Overall except for food, airplanes, industrial tooling, computer tech and military tech the US does not produce things China will want at the prices the Chinese can afford.
Again, this (currency strengthening) is a result of the balance of trade.

If that is the case why do those economies still have large trade surplus`s
Incorrect on multiple levels. The first being that the Chinese would be harmed by allowing their populace greater relative purchasing power. The income, substitution, and price effects generated from such a policy are vital in developing internal growth prospects. Secondly, low skill labor production will not shift back into the U.S, rather it will flow into less productive (less cost) economies such as Vietnam, Malaysia, etc..., allowing the Chinese consumer to realize productivity gains similar to that in the developed world.
The Chinese involved in industries that are export focuses will certainly be harmed by a higher RMB. Marginally profitable factories will shut down, increasing unemployement, and as such a decrease in the standard of living, and lower overall purchasing power. Despite China`s strong growth over the last few decades they still have a large population that is under or unemployed, certainly the poor still outnumber the growing middle class in China. As for Chinese productivity, it is increasing as well at a dramatic rate, many of it factories are making the investments to increase its productivity, and making the investments in R&D to further Chinas ability to move up the value chain. China is a massive country that still has a wide disparity in income levels between those in the coastal provinces (Pearl River Delta etc) and those further inland like Chongching. The coastal area`s are approaching western levels of development, while the further inland you go the poorer the provinces. The Chinese economy has to account for all of that. A high RMB might be ok for the coastal areas but dramatically hurt the inner provinces. As it stands the marginal factories that have been located in the coastal areas are moving further inland to find cheaper labour and lower costs

What has this done so far? China's CA balance is increasing at a high level even as the US consumer deleverages (increased savings rate). Something tells me China would devalue their currency even more if the US savings rate were to continue to increase, as it would be in their best interest given their economic objective (massive current account surpluses).

China CA balance

income and savings report

The RMB has increase invalue somewhat over the last while, and yet it still increases its trade surplus, meaning the Chinese have increased its competitiveness whiles its competitors have not. The US should seek to increase its domestic competitivenss, something it should have done years ago mind you. It wants to do it the easy (currency manipulation) rather then structural adjustments which would be far more long lasting. An increase in the value of the RMB would only be a temporary fix, as the Chinese economy, would (as it is a dynamic economy) adjust to the higher RMB (higher unemployement causing lower wages, and an overall lowering cost of production) at which point it will again be more competitive then the US leading to a large trade surplus. Just as Japan and Germany have large trade surplus`s despite strong currencies ( the Euro was worth 0.80 USD only a few years ago, it is not 1.33 USD. The USD was worth 250 yen or there abouts in the 80s and now is around 1 USD to 83 yen. The change in the value of the currencies has not made a dramatic adjustment to their high trade surplus`s. It is a function of the structural competitiveness of the economy and the overall saving`s rates
 
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I never said the US should ignore the US trade deficit or the fact that money is leaving the US. That China has a large trade surplus and large currency reserves is no more troubling then Japans, Taiwans, or Germany's large trade surplus. The fact that China has 2.65 trillion in reserves is not purely a function of a low RMB, but also a function of high savings in China. People in China save a significant amount of their income.

Maybe i should have been more specific, but China holds $2.65 trillion in what are called foreign currency reserves, which is a result of retaining currency from many years of trade surpluses. The savings rate has little if anything to do with these reserves.

The Plaza accord was the stimulus for the Yen to increase originally, the US government complained about the trade surplus Japan had with the US, just as it is complaining now. It pushed for a Japan to readjust rather then have the US adjust its economy to become more competitive (it could have and should have pushed for more open Japanese markets as well).

Since the appreciation of the Yen vs. Dollar (1990-2009), the U.S. current account deficit with Japan, as a percentage of GDP, has fallen from 0.7% of GDP to 0.3% of GDP.

Source:

Source 2:

Simple research will eliminate these type of errors.

Over the short term a country can use it to over or undervalue their currencies to gain a short term advantage regarding trade. Over the long term the economy adjusts to the true economic competitiveness of the country.

The bold is dependent on gains in real wages, which are a function of worker productivity. Diminishing the value of the RYB does not allow the Chinese worker to realize gains in productivity necessary for the economy to adjust.

[Japan and Germany still have large trade surplus's despite having "strong" currencies, ones that have risen in value dramatically over time.

Japan and Germany have seen their trade surpluses as a % of GDP fall as their currencies have appreciated vs. the $. Germany's trade surplus for example has fallen from close to 0.4% of U.S. GDP (2005) to 0.19% of U.S. GDP (2009). During this period (2005-2009), the EUR has appreciated over 30%.

Source:

Source2:

Source3:

The same would occur with China, a dramatic rise in the RMB will just result in quite a few layoffs among China's factories, (causing a decrease in wages leading to increased competitiveness again). US exports will not increase to China, the trade deficit will improve for a couple of years untill China went through the economic adjustment required to meet the higher costs of production.

Biased assumptions do not coincide with the numbers. For example, U.S. exports as a % of GDP have increased from 0.16% in 1998 to 0.447% in 2007 (an increase of 179%) even as China has watched its exports to the U.S. as a % of U.S. GDP increase from 0.647% in 1998 to 1.83% in 2007 (an increase of 183%). Similar gains as China maintains a pegged currency: coincidence?

Source:

source2:

Then it will go revert to past trends. Overall except for food, airplanes, industrial tooling, computer tech and military tech the US does not produce things China will want at the prices the Chinese can afford.

What does a stronger RYB do to the purchasing power of Chinese consumers?

If that is the case why do those economies still have large trade surplus`s

This statement does not support your argument as it contradicts the numerical evidence. Trade deficits as a % of U.S. GDP decline as foreign currencies appreciate. The entire basis behind valuation gains (increasing productivity) is undermined by your argument; as the Chinese become more productive, their currency should appreciate in value.

The Chinese involved in industries that are export focuses will certainly be harmed by a higher RMB. Marginally profitable factories will shut down, increasing unemployement, and as such a decrease in the standard of living, and lower overall purchasing power. Despite China`s strong growth over the last few decades they still have a large population that is under or unemployed, certainly the poor still outnumber the growing middle class in China.

As exports diminish, the internal economy (specifically the service sector) will become more and more capable of picking up the slack as a result of increased purchasing power.

As for Chinese productivity, it is increasing as well at a dramatic rate, many of it factories are making the investments to increase its productivity, and making the investments in R&D to further Chinas ability to move up the value chain.

If they had a free floating currency, it would appreciate as the economy witnesses gains in productivity. Further gains in productivity have a positive affect on foreign direct investment as greater buying power opens their consumer market. Companies will be licking their chops in anticipation of gaining access to a market with a middle class that i larger than the entire U.S. population.

China is a massive country that still has a wide disparity in income levels between those in the coastal provinces (Pearl River Delta etc) and those further inland like Chongching. The coastal area`s are approaching western levels of development, while the further inland you go the poorer the provinces. The Chinese economy has to account for all of that. A high RMB might be ok for the coastal areas but dramatically hurt the inner provinces. As it stands the marginal factories that have been located in the coastal areas are moving further inland to find cheaper labour and lower costs.

While this is certainly the case, it does not justify currency manipulation (which is harmful or the citizens located in the more developed coastal regions).

The RMB has increase invalue somewhat over the last while, and yet it still increases its trade surplus, meaning the Chinese have increased its competitiveness whiles its competitors have not.

What do the numbers say?

The US should seek to increase its domestic competitivenss, something it should have done years ago mind you. It wants to do it the easy (currency manipulation) rather then structural adjustments which would be far more long lasting.

This is too much! You are making the claim that the U.S. should first focus on increasing domestic competitiveness when their largest trade partner has engaged in currency manipulation for more than two decades, and then you have the audacity to label the U.S. a currency manipulator in the process. A more productive China naturally results in a weaker RYB on the basis of fundamentals alone. I have little doubt that China is becoming more productive/competitive. What i am arguing is that their currency should reflect these gains.

An increase in the value of the RMB would only be a temporary fix, as the Chinese economy, would (as it is a dynamic economy) adjust to the higher RMB (higher unemployement causing lower wages, and an overall lowering cost of production) at which point it will again be more competitive then the US leading to a large trade surplus. Just as Japan and Germany have large trade surplus`s despite strong currencies ( the Euro was worth 0.80 USD only a few years ago, it is not 1.33 USD. The USD was worth 250 yen or there abouts in the 80s and now is around 1 USD to 83 yen. The change in the value of the currencies has not made a dramatic adjustment to their high trade surplus`s. It is a function of the structural competitiveness of the economy and the overall saving`s rates

Research the balance of trade accounts before you make baseless statements that contradict the data.

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Kushinator

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Cry me a river. China's not inflating enough? Good for them. They're still doing fine. While Bernanke is pointing a finger at the Chinese he should recognize the three fingers pointing back at him.

Maybe you were responding to someone else,as this does not address any of my comments. Where do you get that a stronger Chinese currency(my argument) leads to inflation?
 

Lord Tammerlain

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Maybe i should have been more specific, but China holds $2.65 trillion in what are called foreign currency reserves, which is a result of retaining currency from many years of trade surpluses. The savings rate has little if anything to do with these reserves.



Since the appreciation of the Yen vs. Dollar (1990-2009), the U.S. current account deficit with Japan, as a percentage of GDP, has fallen from 0.7% of GDP to 0.3% of GDP.

Source:

Source 2:

Simple research will eliminate these type of errors.



The bold is dependent on gains in real wages, which are a function of worker productivity. Diminishing the value of the RYB does not allow the Chinese worker to realize gains in productivity necessary for the economy to adjust.



Japan and Germany have seen their trade surpluses as a % of GDP fall as their currencies have appreciated vs. the $. Germany's trade surplus for example has fallen from close to 0.4% of U.S. GDP (2005) to 0.19% of U.S. GDP (2009). During this period (2005-2009), the EUR has appreciated over 30%.

Source:

Source2:

Source3:



Biased assumptions do not coincide with the numbers. For example, U.S. exports as a % of GDP have increased from 0.16% in 1998 to 0.447% in 2007 (an increase of 179%) even as China has watched its exports to the U.S. as a % of U.S. GDP increase from 0.647% in 1998 to 1.83% in 2007 (an increase of 183%). Similar gains as China maintains a pegged currency: coincidence?

Source:

source2:



What does a stronger RYB do to the purchasing power of Chinese consumers?



This statement does not support your argument as it contradicts the numerical evidence. Trade deficits as a % of U.S. GDP decline as foreign currencies appreciate. The entire basis behind valuation gains (increasing productivity) is undermined by your argument; as the Chinese become more productive, their currency should appreciate in value.



As exports diminish, the internal economy (specifically the service sector) will become more and more capable of picking up the slack as a result of increased purchasing power.



If they had a free floating currency, it would appreciate as the economy witnesses gains in productivity. Further gains in productivity have a positive affect on foreign direct investment as greater buying power opens their consumer market. Companies will be licking their chops in anticipation of gaining access to a market with a middle class that i larger than the entire U.S. population.



While this is certainly the case, it does not justify currency manipulation (which is harmful or the citizens located in the more developed coastal regions).



What do the numbers say?



This is too much! You are making the claim that the U.S. should first focus on increasing domestic competitiveness when their largest trade partner has engaged in currency manipulation for more than two decades, and then you have the audacity to label the U.S. a currency manipulator in the process. A more productive China naturally results in a weaker RYB on the basis of fundamentals alone. I have little doubt that China is becoming more productive/competitive. What i am arguing is that their currency should reflect these gains.



Research the balance of trade accounts before you make baseless statements that contradict the data.

BOT Data

I had typed out two long responses but got timed out so both times so I will use a few short points

Rising wages in China will have the same effect on living standards as would a rise in the RMB
Overall trade surplus's are more usefull when determining a countries competitiveness rather then trade with specific countries. In which case in absolute dollars Germany has a larger trade surplus, then China. As a % of GDP Switzerland, the Netherlands, Taiwan all have larger trade surplus's then China


China is not lacking in FDI, and has not been so for at least 10 years. Foreign companies are licking their chops at getting in the Chinese market, from all sectors from food, autos, consumer goods, retail. aerospace, all want in on the Chinese market and are pushing hard to get a part of it. The fixed RMB does not seem to have much of a depressing effect on that at all

The coastal regions are seeing standards of living and wages increase at dramatic rates, a rise in the RMB would just decrease the rate of wage increases. Overtime it would have zero effect on their standard of living as the increase in wages would make up for the static RMB value

Various US governments have been complaining about other countries trade surplus's since the Nixon admin with Germany, the Reagan admin with Japan, the Bush/Obama with China (Obama admin with many others). Given that Germany is not manipulating its currency, that the the yen has nearly tripled in value since 1985 and the RMB has remained rather static in value but all still have large trade surplus's with the US, something other then currency valuation is the primary cause of the problem with the US having significant trade deficits for decades.

Final point

A fixed RMB will not provide China with long term advantage over the US regarding trade. The trade surplus would cause the chinese economy to grow, increasing cost pressures from wages and other general costs. Chinese wages have been increasing over time rather strongly. This has the same effect as an increase in the value of the RMB to the USD. As chinese wages increase so will its domestic economy, and its trade surplus will decrease as domestic consumption increases. An increae in the RMB is not needed to accomplish this

If China all of a sudden cut the value of the RMB to the USD then I would agree with you in that China is manipulating its currency. As currency manipulation will only work for a few short years, not over the long term. The economy would adjust to the value of the currency by either having wages drop or wages increase. Currency readjustments are not a long term fix to any trade imbalance, only an increase in competitiveness is (provided equally open markets)
 
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