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The undervaluation of the renminbi : EU point of view

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  • #91
    Originally posted by DanS
    DAVOUT: It appears to me that China's system is meant to be pay-as-you-go. Perhaps they wish to avoid a persistent overall trade deficit.
    I share this analysis; they could not afford a persistent trade deficit. The Chinese authorities presently in office and driving this astonishing conversion to capitalism are not only risking their job, but (considering China records) their skins. So, we can understand that they are cautious. But the security margin provided by their positive trade account should not be exaggerated : it was only 80$ by Chinese in 2002, and is forecasted to be reduced to 40$ in 2003, whereas the US trade deficit by American will be 2000$.

    No other country in the world could experience such a deficit; it was only made possible by the role of ultimate currency reserve held by the $. If the $ has to share this role with the € in the coming years, that will reduce the ease to finance deficits.

    TCO was asking a question about what Europeans are thinking; in fact, they are worrying that the US should urgently take steps in order to have their imbalances corrected before the Euro reach its full strenght.
    Statistical anomaly.
    The only thing necessary for the triumph of evil is for good men to do nothing.

    Comment

    • #92
      it was only 80$ by Chinese in 2002, and is forecasted to be reduced to 40$ in 2003, whereas the US trade deficit by American will be 2000$.
      Do you mean $ per capita?
      Last edited by DanS; December 9, 2003, 16:03.
      I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

      Comment

      • #93
        Originally posted by DAVOUT
        TCO was asking a question about what Europeans are thinking; in fact, they are worrying that the US should urgently take steps in order to have their imbalances corrected before the Euro reach its full strenght.
        Do you mean correcting the trade deficit and/or stopping the fall of the dollar?

        Europe could have a problem with capital flight when the dollar stablizes. Is that what Europeans worry about?
        I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
        - Justice Brett Kavanaugh

        Comment

        • #94
          Originally posted by DanS


          Do you mean $ per capita?
          Yes.
          Statistical anomaly.
          The only thing necessary for the triumph of evil is for good men to do nothing.

          Comment

          • #95
            Originally posted by Kidicious


            Do you mean correcting the trade deficit and/or stopping the fall of the dollar?

            Europe could have a problem with capital flight when the dollar stablizes. Is that what Europeans worry about?
            I mean the trade deficit and the budget deficit.

            We have just experienced, between the launch of the Euro and the beginning of 2002, a totally unexpected fall of the Euro against the $ (nobody had anticipated neither the fall nor its magnitude); it has not caused major troubles, I believe for two reasons : the foreign trade was balanced, and Europe appears now as a big peacefull Switzerland. The worry come from the building up of public and privates reserves moving from the dollar to the Euro, this move being considered as a way to spread the risk; presently, it would be dangerous that this move deprives the US of financing. This is why we hope that the US will help themselves in correcting the imbalances.
            Statistical anomaly.
            The only thing necessary for the triumph of evil is for good men to do nothing.

            Comment

            • #96
              Originally posted by DAVOUT
              The worry come from the building up of public and privates reserves moving from the dollar to the Euro, this move being considered as a way to spread the risk; presently, it would be dangerous that this move deprives the US of financing. This is why we hope that the US will help themselves in correcting the imbalances.
              There has been no shortage in finances in the US while the dollar has continued to fall, even though people have already moved to the Euro from the dollar. The fall in the dollar has been fairly steady and there hasn't been any panic. That's not to say that people haven't traded dollars for Euros. I'm not worried about the US in the short run as long as nations like China and Japan invest here, and I don't see that changing any time soon. I'm a little worried about Europe when the dollar stops falling. Then all the people who moved to the Euro to avoid the cost of a falling dollar will trade Euros for dollars.
              I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
              - Justice Brett Kavanaugh

              Comment

              • #97
                I just read that 9.1 billion $ worth of yuan has been repatriated to China in anticipation of a repeg of the currency.
                I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
                - Justice Brett Kavanaugh

                Comment

                • #98
                  Leaving aside China for a moment, I guess I take a more prosaic view toward the value of the dollar. Just as long as there is not a crisis in the dollar, I have no problem with the value of the dollar declining in an orderly fashion, as is happening. That's the way the economic imbalances are corrected and I think it's quite difficult to say that there is any more danger this time around than any other. If American consumption growth is less in the next couple of years than hoped, it wouldn't be a tragedy for the US. US consumption maybe grew too much, so we have to pay some of it back. No big deal. Better to pay later than earlier, but you still have to pay it eventually.

                  If Japan wants to continue funding this consumption at rock bottom rates, then they are more than welcome to shovel their taxpayers' money at the American consumer, as far as I'm concerned. If Japan gets tired of doing that, since China's demand is replacing US demand (which they won't, because China's imports are denominated in dollars as well), or the tide against the dollar is too high, then I expect our major trading partners to share much of the pain of receding demand growth for a couple of years.

                  Now that the economy is out of recession (thanks, in part to this demand growth mind you), I think the US is well positioned to correct the imbalances. I don't think we should try to micromanage our currency or imbalances. I know that economists might want to get worked up over it, and it's an imperative that politicians act like they are concerned as well, but I guess it's there job to get worked up over it. But as for me, I think the market will take care of it.
                  Last edited by DanS; December 10, 2003, 13:42.
                  I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

                  Comment

                  • #99
                    An interesting wrinkle in the value of the dollar is that since China's reserves (some $400 billion) are denominated in dollars, they will have taken a bath on the reserves as the value of the dollar declines. Going forward, when they want to import stuff from other countries, they will also have to pay more for the goods and services.
                    I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

                    Comment

                    • #100
                      presently, it would be dangerous that this move deprives the US of financing
                      Why would it be dangerous? This stuff doesn't often happen overnight, after all. Also, does the Euro area have an asset of the size, liquidity, and quality of the US treasury market?

                      But the security margin provided by their positive trade account should not be exaggerated
                      Now that China is importing a lot of raw materials, such as oil, I wonder how a pay-as-you-go system could hold up, even when the trade account is negative for a short time. It seems a no-brainer that it would be worthwhile for China to be able to finance a trade debt of some size.
                      I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

                      Comment

                      • #101
                        Originally posted by DanS
                        If American consumption growth is less in the next couple of years than hoped, it wouldn't be a tragedy for the US. US consumption maybe grew too much, so we have to pay some of it back. No big deal. Better to pay later than earlier, but you still have to pay it eventually.
                        Consumption certainly did not grow too much. In fact, it didn't grow enough. How do you expect to reach full capacity and full employment without growth in consumption? It's investment that grew too much. Consumers won't be able to pay off their debt until we start utilizing our full capacity. Bush administration should have been aware of this when they designed the tax cuts. Only proper fiscal policy can help us here.
                        Last edited by Kidlicious; December 10, 2003, 18:02.
                        I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
                        - Justice Brett Kavanaugh

                        Comment

                        • #102
                          Originally posted by DanS
                          An interesting wrinkle in the value of the dollar is that since China's reserves (some $400 billion) are denominated in dollars, they will have taken a bath on the reserves as the value of the dollar declines. Going forward, when they want to import stuff from other countries, they will also have to pay more for the goods and services.
                          This is the case for all the Central Banks of the whole planet which for some reason have the unfortunate habit to maintain 50% or more of their reserves in US$.

                          Some of them which sold most of their gold reserves three or four years ago must feel sorry now. But Central Bank reserves are usually very long term holdings, and such variations of the dollar (and worse ones) have already been experienced; they just have to sleep, the $ will recover one day or the other ...

                          The effect on their imports is a direct consequence of the peg, and it could induce them to hasten their evolution toward a more flexible currency. But nothing is sure in this respect, because they have already faced the $ almost as low as it is to-day.
                          Statistical anomaly.
                          The only thing necessary for the triumph of evil is for good men to do nothing.

                          Comment

                          • #103
                            But Central Bank reserves are usually very long term holdings, and such variations of the dollar (and worse ones) have already been experienced; they just have to sleep, the $ will recover one day or the other ...
                            Yes, this is true. But China is different in that its reserves also have to directly cover fluctuations in their trade accounts. Don't we expect their reserve to be drawn down in the next couple of years? This leads me to consider China's dollar reserves as more short-term.

                            The effect on their imports is a direct consequence of the peg, and it could induce them to hasten their evolution toward a more flexible currency. But nothing is sure in this respect, because they have already faced the $ almost as low as it is to-day.
                            Yes, the situation would seem to dictate that, from China's perspective. This is the way Greenspan looks at it and you could say that the Bush administration is only a couple of months or years ahead in its rhetoric. And yes, China recently have faced the $ as low as it is today. But its situation is much different now. Trade with the US skyrocketed during the late 90s.
                            I came upon a barroom full of bad Salon pictures in which men with hats on the backs of their heads were wolfing food from a counter. It was the institution of the "free lunch" I had struck. You paid for a drink and got as much as you wanted to eat. For something less than a rupee a day a man can feed himself sumptuously in San Francisco, even though he be a bankrupt. Remember this if ever you are stranded in these parts. ~ Rudyard Kipling, 1891

                            Comment

                            • #104
                              It seems that you both agree that a more flexible currency would allow China to afford trade debt. Why is that?
                              I drank beer. I like beer. I still like beer. ... Do you like beer Senator?
                              - Justice Brett Kavanaugh

                              Comment

                              • #105
                                Originally posted by DanS


                                But China is different in that its reserves also have to directly cover fluctuations in their trade accounts. Don't we expect their reserve to be drawn down in the next couple of years? This leads me to consider China's dollar reserves as more short-term.
                                I would not say that China is different, because the main purpose of the reserves of all Central Banks is to make sure that the nation is able to repay its foreign debts, whatever they are, and under any circumstance. This is why the size of reserves is often expressed in number of monthly imports. In China case, the reserves are currently amounting to more that 9 months of imports which means that it would take 9 months without any exports and with the same amount of imports (which is practically impossible) for China to reach bankruptcy. But what is definitely possible, not to say probable, is temporary deficit; it would be easily covered, but needs nevertheless to be corrected.

                                And it is at this point that more flexibility, Kidicious, would be usefull. It would make possible a smooth fall of the yuan, untill it reachs a level where 1) the reduced price of Chinese goods triggers an increase of the exports, or stop the fall, and 2) the increased price of foreign goods triggers a reduction of the imports, or stop their growth.

                                As nobody knows precisely where the equilibrium point is, flexibility is a better solution than the brutal fix rate devaluations.
                                Statistical anomaly.
                                The only thing necessary for the triumph of evil is for good men to do nothing.

                                Comment

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