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Following Ed’s lead on Krugman’s analysis of the Chinese revaluation of
the yuan yesterday here are a couple of other perspectives. While the editorials, especially the Wall
Street Journal opine that this will help the US and incidentally strengthen
Bush policies and douse some of the anti China fire on Capital Hill, others
like Krugman and Bradsher issue warning labels. Note more details and name in
this by Bradsher. NYT Editorial China Revalues the Yuan http://www.nytimes.com/2005/07/22/opinion/22fri2.html Washington Post Editorial China’s Currency Move http://www.washingtonpost.com/wp-dyn/content/article/2005/07/21/AR2005072102091.html Note econ blog on this subject at this WSJ link http://online.wsj.com/public/article/0,,SB112195421057192103-yo0CE9r3Qlx2bpKV7GXZBEXa5Q0_20060722,00.html?mod=public_home_us FYF Daily Free
WSJ http://online.wsj.com/public/us China's Opaque Currency Policy For
nearly eight years, Beijing's leaders trusted in Alan Greenspan, assuming that
where the dollar went, China could safely follow. Now China's rulers are
putting their trust in a much less well-known central banker: Zhou Xiaochuan,
the governor of the People's Bank of China, who must manage the more
discretionary policy put in place yesterday. Starting with the Asian financial crisis in
1997 and continuing through the rapid economic expansion since then, China has
allowed the yuan to vary less than one-hundredth of a percent from its peg of
8.277 to the dollar. That impressive stability helped prompt business
executives and entrepreneurs from around the world to invest $60 billion a year
in new factories and other operations in China. These investors were confident
that they knew what those businesses and their exports would be worth in
dollars. The People's Bank of China raised the value of the yuan by 2
percent on yesterday, to 8.11 to the dollar. But more important, the bank said
that each evening, it
would set a new trading range for the yuan to move within on the next trading
day. To add to the uncertainty, each day's new range may not necessarily be
expressed in terms of dollars, the bank warned. It did not provide examples,
but the euro would be the most likely alternative. To determine the new peg, the central bank will look at how
a basket of foreign currencies moved the day
before. But the central bank did not reveal which currencies it will track or
their relative weightings within the basket. This policy gives enormous discretion
to China's leaders to push the yuan up or down as they choose. The
only limit that the central bank put on its moves was a promise yesterday that
the center of each day's trading range would not move more than 0.3 percent in
either direction from the center of the previous day's range. But with 20 or so
trading days in a month, that means China could in theory push its currency up
by 6 percent a month - or push it down by the same amount. Senior officials in China said in interviews last month that
they were seriously considering the adoption of a so-called secret basket of
currencies, an approach already followed by Singapore in setting the value of
the Singapore dollar. But the officials also acknowledged that the secrecy of
this approach carried a serious risk: it leaves China vulnerable to accusations
from the United States and other countries that it is manipulating its currency
so as to gain an advantage in trade. The United States Treasury came close in May to labeling
China as a currency manipulator and demanded that China allow its currency to
appreciate before the next official review in October; countries categorized as
manipulators can be subject to trade sanctions. Economists disagreed yesterday about how much change China
would allow over the next few months in the value of its currency. Nicholas R. Lardy, a China expert at the Institute for
International Economics in Washington, said that Chinese central bankers had
had the legal discretion for years to let the yuan move in a wider range
against the dollar, and had chosen not to exercise it. But Liang Hong, an economist in the Hong Kong office of Goldman
Sachs, predicted that China would allow the yuan to rise gradually against the
dollar. She compared the new policy to China's currency policy in late 1994,
when Beijing first pegged the yuan to the dollar and then allowed it to crawl
upward by a small fraction of 1 percent each trading day. This resulted in a
total increase of 3 percent in 1994 and smaller increases thereafter. For American consumers, China's new policy is unlikely to
have much effect unless it is followed by much bigger currency moves in the
months to come. Chinese exporters making everything from clothing to computers
incur much of their costs in dollars, importing essentials like fuel, factory
machinery and computer chips. This will mean that the overall costs of good manufactured
by Chinese producers will rise by considerably less than 2 percent, limiting
their need to raise prices to American retailers. Moreover, China is strongest
in the production of cheap goods like toys and T-shirts for which the wholesale
price paid to the factory in China may be only a quarter of the price charged
by a store in the United States. The stores charge much higher prices because
they pay rents and wages at American levels. "Prices in our stores are not changing any time
soon," Amy Wyatt, a Wal-Mart spokeswoman, said. Rival exporters in Asia, mostly countries with low-wage work
forces like China's, are expecting the yuan's rise to bring them little relief
from the relentless expansion of Chinese companies in world markets. "They
will not increase their prices unless it really shoots up farther," said
Annisul Huq, a textile magnate in Bangladesh. Executives from more than a dozen Chinese companies said in
interviews over the last four months that they expected very little impact on
their exports if the yuan rose less than 5 percent, and only a modest effect if
it rose by 5 to 10 percent. A big question mark hanging over China's currency policy
shift is not commercial but financial, economists said. If investors decide that China's secret
currency policy will result in a stronger yuan, then they are likely to pour
even more money into China -
a step that could feed inflation in China and make many Chinese long for the
days when China still paid more heed to Mr. Greenspan than Mr. Zhou. China Unpegs Itself By Paul Krugman,
NYT, Friday, July 22, 2005 Thursday's statement from the People's Bank of China,
announcing that the yuan is no longer pegged to the dollar, was terse and
uninformative - you might say inscrutable. There's a good chance that this is
simply a piece of theater designed to buy a few months' respite from
protectionist pressures in the U.S. Congress. Nonetheless, it could be the start of a process that will
turn the world economy upside down - or, more accurately, right side up. That
is, the free ride China has been giving America, in which the world's richest
economy has been getting cheap loans from a country that is dynamic but still
quite poor, may be coming to an end. It's all about which way the capital is flowing. Capital usually flows from mature,
developed economies to less-developed economies on their way up. For example, a
lot of America's growth in the 19th century was financed by investors from
Britain, which was already industrialized. A decade ago, before the world financial crisis of
1997-1998, capital movements seemed to fit the historic pattern, as funds
flowed from Japan and Western nations to "emerging markets" in Asia
and Latin America. But these days things are running in reverse: capital is
flowing out of emerging markets, especially China, and into the United States. This uphill flow isn't the result of private-sector
decisions; it's the result of official policy. To keep China's currency from
rising, the Chinese government has been buying up huge quantities of dollars
and investing the proceeds in U.S. bonds. One way to grasp how weird this policy is would be to think
about what a comparable policy would look like in the United States, scaled up
to match the size of our economy. It's as if last year the U.S. government
invested $1 trillion of taxpayers' money in low-interest Japanese bonds, and
this year looks set to invest an additional $1.5 trillion the same way. Some economists think there is a deep rationale for this
seemingly perverse policy. I think it's something the Chinese government
stumbled into as it tried to protect itself from the 1997-1998 crisis, and it
is reluctant to change because the Chinese economy has been doing well. That
is, China's leaders don't want to mess with success. But pressures against China's dollar purchases are building.
By keeping the yuan down, China is feeding a trade surplus that is creating a
growing political backlash in America and Europe. And China, which is still a
poor country, is devoting a lot of resources to the accumulation of a basically
useless pile of dollars instead of to higher living standards. The question is what happens to us if the Chinese finally
decide to stop acting so strangely. An end to China's dollar-buying spree would lead to a sharp
rise in the value of the yuan. It would probably also lead to a sharp fall in
the value of the dollar relative to other major currencies, like the yen and
the euro, which the Chinese haven't been buying on the same scale. This would
help U.S. manufacturers by raising their competitors' costs. But if the Chinese stopped buying all those U.S. bonds,
interest rates would rise. This would be bad news for housing - maybe very bad
news, if the interest rate rise burst the bubble. In the long run, the economic effects of an end to China's
dollar buying would even out. America would have more industrial workers and
fewer real estate agents, more jobs in Michigan and fewer in Florida, leaving
the overall level of employment pretty much unaffected. But as John Maynard
Keynes pointed out, in the long run we are all dead. In the short run, some people would win, but others would
lose. And I suspect that the losers would greatly outnumber the winners. And what about the strategic effects? Right now America is a
superpower living on credit - something I don't think has happened since Philip
II ruled Spain. What will happen to our stature if and when China takes away
our credit card? This story is still in its early days. On the first day of
the new policy, the yuan rose only 2 percent, not enough to make any noticeable
difference. But one of these days Chinese dollar purchases will trail off, and
we'll find ourselves living in interesting times. http://www.nytimes.com/2005/07/22/opinion/22krugman.html?hp |
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