(
Update: One very important issue missing from these debate is that, the defenders of status quo do not disagree that RMB could appreciate a bit, 3-10%, or even 15%. The key issue here is, should a monetary system be changed arbitrarily? Would this become a precedence of bureacratic intervention? Would you trust the bureaucrats in China?
Yielding to trade pressure to appreciate, e.g. the 2.1% last July, is, IMO, an arbitrary change.
This is why I agree with Cheung,
Yam and McKinnon, that a system that provides no leeway to the bureacrats is the best system. A commodity peg is one. The old system from 1994-2005 is another. The new basket peg since 7/2005, I don't know, yet.)
元高でしょう？ Stephen Cheung discussed RMB policy and Plaza Accord in
AD: The Horrible Lesson of Japan (see original in Chinese cached below).
Cheung first reviewed two essays:
- Ronald McKinnon's Apr 20 WSJ Op-ed (cached below): "But the higher yen led to no obvious reduction in Japan's trade surplus as a share of its slumping GDP. The fall in domestic imports from the sluggish economy offset the reduced growth in Japan's exports from the higher yen.....So, in an ideal world, on what basis should Presidents Hu and Bush agree to reduce the trade imbalance between the two countries? China needs to increase private consumption in order to reduce its saving glut -- and its new five-year plan, which in its newly marketized economy can only be indicative, points in this direction. But the U.S. needs to drastically rein in the federal budget deficit in order to reduce the national saving deficiency. If China keeps its side of the agreement but the U.S. does not, then China's reduced trade surplus, i.e., less lending to the U.S., will mean higher interest rates here and abroad. But, whether or not such a broad agreement is implemented, Secretary Snow's narrower job of interpreting Section 3004 is straightforward: China is not a currency manipulator and the yuan/dollar rate is best left more or less where it is."
- Deepak Lal's account of Plaza Syndrome
- Roubini thought it is unlikely that a RMB Revaluation Cause A Japanese-Style Deflation in China. This is what McKinnon said, "But if it is continually forced to appreciate the renminbi because bad economic theory suggests that a higher renminbi will eventually reduce its trade and saving surplus, the possibility of a Japanese-style deflationary slump cannot be ruled out." No contradiction. There is such possibility, and it is more likely is the insatiable pressure continues
- Roubini pointed out that Japan's economy expands for "close to 2 decades since 1971", but he forgot that Plaza Accord was signed on 1985, which is almost 2 decades after the period he quoted
Cheung then continues the comparison
- China's situation today is similar to where Japan was in mid-1970s, in terms of GDP/cap development and its historical trajectory
- But China still lags Japan-1975 in 3 areas: education/technology; legal/political/economic/financial system; and number of low cost competitors
- However, China also has its advantages: the momentum and determination to reform
- There are 2 ways to adjust the exchange rate: (a) active appreciation of the RMB; (b) passively, let USD/others depreciate by themselves. The difference is the relative exchange rate of China vs other developing countries and the risk of deflation in China. i.e. the real difference is about China's competitive advantage with Vietnam/Bangladesh, not China vs USA (27.5% or even 100% change in exchange rate would not shift the US trade deficit)
- All said, the current "basket peg" is ambiguous and dangerous, which will be further exacerbated if yielding to US pressure. China should seriously consider shifting into a more 'stable' currency regime, which cannot be 'manipulated' by foreign pressure of arbitrary decision by bureacrats. e.g. the "commodity basket".
Do not miss the insights from Morgan Stanley's
Stephen Roach:
- This is not the first time that Washington has tried to browbeat a major US trading partner into submission by using the blunt instrument of currency appreciation as the “remedy” for a trade imbalance. Repeatedly during the 1980s, when the US was in the midst of its first external crisis -- a current account deficit that peaked at a then-unheard of 3.4% share of GDP -- Washington pounded on Japan to let the yen rise. After all, the bilateral deficit with Japan was the biggest piece of the then-gaping US multilateral trade deficit. The theory was if Japan repriced its “unfair” competitive advantage, all would be well for an unbalanced world. Unfortunately, the Japanese heeded this advice, and the yen/dollar cross rate soared from 254 in early 1985 to an intraday peak of 79 in the spring of 1995. Sadly, Japan’s “endaka” (strong yen) was a major factor behind its subsequent undoing -- fueling the mother of all asset bubbles in equities and property that ended with a sickening collapse into a protracted post-bubble deflation. Politics never cease to amaze me, but I am incredulous that a mere 20 years later, America is offering the Chinese the same bad advice that took Japan down a road of unmitigated macro disaster. Fortunately, saner minds have prevailed in Beijing. (Read the rest yourself)
and "
Japan’s malaise was made in United States": Deepak Lal (2003)- ...Thus, while liberalization of Japan’s capital market in the early 1980s tied Japanese and US interest-rate movements, Japanese interest rates were discounted by the expected rate of currency appreciation. As long as US interest rates were high, Japanese interest rates remained fairly positive, allowing the BOJ to moderate the effects of the yen’s appreciation by easing domestic monetary policy.
But this ended after 1985, as the so-called “Plaza Accord”...Massive yen appreciation led to a Japanese recession in 1985-86, and the BOJ lowered interest rates to near zero. Even with the tradable sector suffering due to the strong yen, capital-market liberalization meant that the capitalized value of future income streams, particularly from land, soared, as the interest rate at which they were discounted fell.
- This was the start of the great Japanese asset-price bubble. As the yen’s strength undermined foreign demand for Japanese output, rising asset values turned domestic demand into the engine of the economy, and Japan rapidly grew out of the recession.
- But all bubbles burst. By the end of the decade, the BOJ was worried by a massive appreciation in land and stock prices. Before long, monetary tightening accompanied renewed trade friction with the US, prompting more yen appreciation and another recession.
Related:Thank you, Prez Hu (Hat tip:
New Economist)
Political pressure on the renminbi exchange rate: Joseph Yam (HKMA)
--------------------------------------------------------------------------------
Caches:
Currency Manipulator?Ronald I. McKinnon. Wall Street Journal. Apr 20, 2006. pg. A.14
China's president, Hu Jintao, on his first visit to the U.S., may well puzzle over his host's government's sometimes obscure and legalistic approach to international economic issues. Section 3004 of Public Law 100-418 requires that the secretary of the Treasury assess whether countries such as China that have global current account surpluses or large bilateral trade surpluses with the U.S. are manipulating their exchange rates to prevent effective balance of payments adjustment or to gain an unfair competitive advantage in international trade.
The question of whether the beleaguered treasury secretary, John Snow, is willing to classify China as a "currency manipulator," with unspecified economic sanctions to follow if he does, is the current serious flashpoint in China-U.S. relations. Unfortunately, U.S. lawmakers and many, if not most, economists fail to understand that China's motivation for pegging its exchange has been to secure internal monetary stability and not to achieve an undue mercantile advantage in world export markets. The law as written mistakenly presumes that current account surpluses are per se evidence of currency manipulation by the foreign countries in question.
Without a doubt, China's trade surpluses are large and possibly getting larger. From 2000 to 2004, China has had the world's largest bilateral trade surplus with the U.S. But since then, the collective trade surpluses of the oil-exporting countries have become larger than China's surplus. The key difference, however, is that China is a major exporter of manufactured goods that sometimes compete with U.S. manufactures, whereas imports of oil and natural gas are viewed as vital inputs for American industry. This difference explains the current concern in the Congress with possible "unfair" competition from China but not from oil exporters despite their proportionately larger surpluses. Still. China's current bilateral trade surplus with the U.S. is about one-quarter of America's huge and growing trade deficit, which is about 7% of U.S. GDP so far in 2006.
Section 3004 fails to recognize that persistent trade surpluses in China and trade deficits in the U.S. reflect very high saving in China and unusually low saving the U.S., an imbalance that no exchange rate change can correct. China's saving is even higher than its own extraordinarily high domestic investment of 40% of GDP, whereas saving in the U.S. is very low relative to a more normal level of domestic investment of 16% to 17% of GDP. The result is that China (like many other countries in Asia) naturally runs an overall current account surplus while the U.S. runs a current account deficit.
This large current account deficit -- more in goods than in services -- reflects borrowing from the rest of the world to cover its saving deficiency. Without this saving transfer allowing the U.S. to spend more on goods and services than it produces, the U.S. would suffer a credit crunch. Interest rates would increase so that investment -- both industrial and residential -- would fall. If this cessation of net foreign lending to the U.S. happened suddenly causing the current account deficit to fall quickly, and if there was no correction in America's saving deficiency, the U.S. economy would be forced into a sharp cyclical downturn similar to the "credit crunch" of 1991-92. On the other hand, if reduction in net foreign lending was gradual and spread over many years, the cost would be that America's longer term economic growth would slow as domestic investment and the current account deficit fell in tandem as a proportion of GDP.
Two main points must be recognized. First, an exchange rate change cannot correct America's current account and saving-investment imbalance. Second, if the saving rate in the U.S. were to increase gradually through time, then its current account deficit would gradually diminish -- without requiring any substantial change in nominal dollar exchange rates with major trading partners including China.
Increased U.S. saving must come from two sources: the federal government and the household sector. (U.S. corporate saving from retained profits remains robust.) Strenuous efforts must be made reduce the U.S. federal fiscal deficit, which at 3% to 4% of GDP, is a terrific drain on national saving. Tax revenues have fallen to an unduly low level by international standards. Dealing with deficient, perhaps negative, household saving is conceptually a much trickier problem. But some program of "forced" saving, from a national pension plan above and beyond Social Security contributions, should be considered. Singapore's Provident Fund could be a good model.
However, suppose the U.S. current account deficit is misdiagnosed as an exchange rate problem as with Section 3004. More than 20 years ago, when Japan had the largest bilateral trade surplus with the U.S., the U.S. government exerted continual pressure on Japan to appreciate the yen. Indeed, the yen went all the way from 360 to the dollar in 1971 to peak out at just 80 to the dollar in April 1995. This induced a bubble in Japanese stock and land prices in the late 1980s, which collapsed in 1991. A deflationary slump and a zero interest liquidity trap followed resulting in Japan's "lost decade" of the '90s. But the higher yen led to no obvious reduction in Japan's trade surplus as a share of its slumping GDP. The fall in domestic imports from the sluggish economy offset the reduced growth in Japan's exports from the higher yen.
Could the same thing happen to China? From 1994 through to July 21, 2005, China had fixed its exchange rate at 8.28 yuan per dollar by focusing its national monetary policy on maintaining that rate. The idea was to use the dollar exchange rate to anchor China's price level at a time when great financial transformation made domestic monetary indicators difficult to interpret. And this policy was successful in ironing out China's previous "roller coaster ride" in domestic price inflation and growth rates. Its high inflation of the mid 1990s came down and converged to that in the U.S. -- as the principle of relative purchasing power parity would suggest.
Now China has come under great pressure -- mainly from the U.S. -- to appreciate the renminbi. Since July 21, 2005, the renminbi has appreciated slowly -- only about 3.5% so far. But Section 3004 is an important part of continuing American political pressure on China for further appreciation. In 2006, China's year-over-year CPI inflation has fallen to just 1%, whereas America's is over 3%. Clearly, any substantial further appreciation will push China into a situation where its CPI begins to fall. To be sure, China's real economy remains robust. But if it is continually forced to appreciate the renminbi because bad economic theory suggests that a higher renminbi will eventually reduce its trade and saving surplus, the possibility of a Japanese-style deflationary slump cannot be ruled out.
So, in an ideal world, on what basis should Presidents Hu and Bush agree to reduce the trade imbalance between the two countries? China needs to increase private consumption in order to reduce its saving glut -- and its new five-year plan, which in its newly marketized economy can only be indicative, points in this direction. But the U.S. needs to drastically rein in the federal budget deficit in order to reduce the national saving deficiency. If China keeps its side of the agreement but the U.S. does not, then China's reduced trade surplus, i.e., less lending to the U.S., will mean higher interest rates here and abroad. But, whether or not such a broad agreement is implemented, Secretary Snow's narrower job of interpreting Section 3004 is straightforward: China is not a currency manipulator and the yuan/dollar rate is best left more or less where it is.
Mr. McKinnon is professor of economics at Stanford
--------
還 斂 集 ： 日 本 的 可 怕 故 事阿 康 傳 來 兩 篇 文 章 。 一 篇 是 史 坦 福 大 學 經 濟 學 教 授 Ronald McKinnon 四 月 二 十 日 發 表 的 ， 內 容 是 中 國 沒 有 「 操 縱 」 人 民 幣 的 國 際 幣 值 。 他 指 出 逼 使 人 民 幣 升 值 不 會 改 進 美 國 的 外 貿 赤 字 ， 也 支 持 人 民 幣 兌 換 美 元 的 匯 率 不 變 。 看 來 是 刻 意 地 安 排 在 胡 錦 濤 訪 美 時 發 表 於 《 華 爾 街 日 報 》 ， 幫 中 國 一 個 忙 ， 炎 黃 子 孫 要 感 謝 這 位 教 授 。
為 中 國 好 ， McKinnon 反 對 人 民 幣 升 值 有 一 些 日 子 了 ， 這 次 再 澄 清 論 點 。 他 對 日 本 的 經 濟 發 展 有 深 入 的 研 究 ， 指 出 日 本 當 年 發 展 得 頭 頭 是 道 ， 卻 給 美 國 頻 頻 施 壓 ， 把 日 圓 幣 值 趕 上 去 ， 害 得 日 本 經 濟 兵 敗 山 倒 。 是 可 怕 的 故 事 ， 也 屬 無 聊 ： 害 死 了 日 本 ， 美 國 卻 沒 有 得 到 好 處 。 此 君 的 分 析 角 度 與 我 的 不 同 ： 他 用 四 十 多 年 前 我 讀 過 的 absorption approach ， 加 上 變 化 ， 令 人 大 開 眼 界 。
另 一 篇 是 洛 杉 磯 加 大 的 Deepak Lal 教 授 寫 的 ， 二 ○ ○ 三 年 二 月 發 表 。 Lal 是 印 度 人 ， 年 多 前 訪 神 州 ， 我 跟 他 暢 論 天 下 大 勢 ， 解 釋 中 國 的 發 展 情 況 。 在 比 我 年 輕 一 輩 的 經 濟 學 者 中 ， Lal 是 難 得 一 見 地 懂 世 事 ， 對 經 濟 理 論 基 礎 的 掌 握 有 分 寸 ， 會 面 後 我 在 文 章 中 讚 過 他 。
Lal 的 文 章 ， 論 日 本 ， 也 評 論 McKinnon 與 Kenici Ohno 合 著 的 一 本 題 為 《 Dollar and Yen 》 的 書 ， 讚 。 加 上 自 己 的 ， Lal 論 日 本 數 十 年 來 的 經 濟 盛 衰 ， 日 圓 被 迫 升 值 而 弄 得 財 政 近 於 破 產 （ virtually insolvent ） 的 故 事 ， 比 McKinnon 說 的 更 可 怕 。
記 得 日 圓 被 迫 升 值 不 久 ， 我 於 一 九 八 七 發 表 《 日 本 大 勢 已 去 》 ， 不 幸 言 中 。 當 時 日 本 還 有 另 一 項 嚴 重 的 政 策 失 誤 ， 上 述 兩 位 教 授 沒 有 提 及 的 。 那 是 他 們 禁 止 農 產 品 進 口 ， 搞 起 高 地 價 。 一 個 蕃 茄 零 售 五 美 元 ， 土 地 種 出 黃 金 ， 上 帝 也 保 不 住 。 感 謝 上 帝 ， 今 天 中 國 沒 有 那 樣 傻 。
我 曾 經 提 及 ， 中 國 目 前 的 經 濟 活 力 彷 彿 七 十 年 代 初 期 的 日 本 ， 而 日 本 從 一 九 五 二 至 一 九 七 三 的 增 長 速 度 ， 與 中 國 八 、 九 十 年 代 可 以 相 提 並 論 。 日 本 當 時 有 三 個 比 中 國 優 勝 的 地 方 。 其 一 是 以 時 代 衡 量 ， 日 本 當 時 的 科 技 基 礎 遠 比 中 國 好 。 其 二 是 在 制 度 上 ， 日 本 不 需 要 像 中 國 那 樣 經 過 千 山 萬 水 的 大 改 革 。 其 三 是 日 本 當 年 不 需 要 面 對 數 之 不 盡 的 擁 有 大 量 廉 價 勞 力 的 競 爭 者 。 這 樣 ， 中 國 二 十 多 年 來 的 發 展 遠 比 日 本 昔 日 困 難 。 如 果 說 日 本 當 年 是 經 濟 奇 蹟 ， 中 國 今 天 是 奇 上 加 奇 。
更 神 奇 的 是 ， 撇 開 沙 石 ， 我 認 為 中 國 今 天 的 經 濟 體 制 比 日 本 當 年 優 勝 。 這 顯 然 是 因 為 中 國 的 改 革 有 動 力 ， 今 天 還 在 改 ， 以 後 會 不 會 改 壞 了 是 以 後 的 事 ， 但 今 天 看 ， 中 國 的 發 展 勢 頭 是 比 日 本 七 十 年 代 初 期 可 取 的 。 很 不 幸 ， 在 這 重 要 關 頭 ， 中 國 的 貨 幣 制 度 開 始 走 上 歪 路 ， 央 行 的 言 論 令 人 擔 心 ， 而 外 間 施 壓 人 民 幣 升 值 ， 一 方 面 是 強 逼 中 國 走 上 日 本 的 災 難 性 的 路 ， 另 一 方 面 會 促 使 央 行 放 棄 我 屢 次 高 舉 的 中 國 貨 幣 制 。
這 裡 有 兩 個 重 點 。 第 一 ， 原 則 上 ， 如 果 人 民 幣 只 對 所 有 先 進 之 邦 的 貨 幣 升 值 ， 中 國 容 易 接 受 。 這 是 說 ， 如 果 其 他 地 區 不 存 在 ， 人 民 幣 上 升 百 分 之 二 三 十 先 進 之 邦 還 要 買 中 國 貨 ， 中 國 的 收 入 會 增 加 。 問 題 是 今 天 的 人 民 幣 早 就 按 廉 價 勞 力 的 競 爭 地 區 調 整 ， 這 升 值 會 被 競 爭 地 區 在 背 後 一 刀 斬 過 來 。 第 二 ， 說 過 了 ， 誰 調 整 幣 值 誰 就 要 付 出 大 代 價 。 人 民 幣 升 值 中 國 會 有 通 縮 ， 外 幣 自 己 貶 值 （ 人 民 幣 因 而 升 值 ） 他 們 會 有 通 脹 。 從 北 京 的 立 場 看 ， 當 然 讓 外 幣 貶 值 為 上 。
解 決 上 述 兩 個 重 點 的 最 佳 辦 法 ， 是 人 民 幣 轉 用 一 籃 子 物 品 為 錨 ， 然 後 穩 守 。 這 樣 ， 先 進 之 邦 的 貨 幣 大 可 自 由 貶 值 ， 廉 價 勞 力 之 區 繼 續 與 中 國 平 手 競 爭 ， 而 朱 鎔 基 時 代 的 中 國 貨 幣 制 度 保 持 不 變 。
Does the graph above demonstrate coincidence or correlation between the 2 indices? do such correlation indicate causal relationship? (Source: Heavy Lifting; See also Kedrosky, and do not miss the discussion (also hat tip) in Big Picture)
