Wednesday, September 3, 2014
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The Return of the Renminbi Rant

NEW HAVEN – China’s currency, the renminbi, has been weakening in recent months, resurrecting familiar charges of manipulation, competitive devaluation, and beggar-thy-neighbor mercantilism. In mid-April, the US Treasury expressed “particularly serious concerns” over this development, underscoring what has long been one of the most contentious economic-policy issues between the United States and China.

This is a timeworn debate – politically inspired and grounded in bad economics – that does a serious disservice to both sides by diverting attention from far more important issues affecting the US-China economic relationship. Taken to its extreme, America’s accusations risk pushing the world’s two largest economies down the slippery slope of trade frictions, protectionism, or something even worse.

First, the facts: Since hitting its high watermark on January 14, 2014, the renminbi has depreciated by 3.4% relative to the US dollar through April 25. This follows a cumulative appreciation of 37% since July 21, 2005, when China dropped its dollar peg and shifted its currency regime to a so-called “managed float.” Relative to where it started nearly nine years ago, the renminbi is still up 32.5%.

Over the same period, there has been a dramatic adjustment of China’s international balance-of-payments position. The current-account surplus – the most telling symptom of an undervalued currency – has narrowed from a record 10.1% of GDP in 2007 to just 2.1% in 2013. The International Monetary Fund’s latest forecast suggests that the surplus will hold at around 2% of GDP in 2014.

Seen against this background, US officials’ handwringing over the recent modest reversal in the renminbi’s exchange rate appears absurd. With China’s external position much closer to balance, there is good reason to argue that the renminbi, having appreciated by nearly one-third since mid-2005, is now within a reasonable proximity of “fair value.” The IMF conceded as much in its latest in-depth review of the Chinese economy, which calls the renminbi “moderately undervalued” by 5-10%. This stands in contrast to its earlier assessments of “substantial” undervaluation.

America’s fixation on the renminbi is a classic case of political denial. With US workers remaining under intense pressure in terms of both job security and real wages, politicians have understandably been put on the spot. In response, they have fixated on the Chinese component of a long-gaping trade deficit, charging that currency manipulation is the culprit to the long festering woes of the American middle class.

This argument is politically expedient – but wrong. The US trade deficit is a multilateral imbalance with many countries – 102 in all – not a bilateral problem with China. It arises not from the alleged manipulation of the renminbi, but from the simple fact that America does not save.

Lacking in domestic savings and wanting to grow, the US must import surplus savings from abroad, and run massive current-account deficits to attract the foreign capital. And that leads to America’s multilateral trade imbalance. Yes, trade with China is the largest component of this imbalance, but that largely reflects the complexity of multinational supply chains and the benefits of offshore efficiency solutions.

That brings us to the uncomfortable truth about America’s politically inspired China bashing: It will backfire. If America fails to solve its saving problem – a reasonable scenario in light of fiscal gridlock and persistently subpar personal saving – the current-account deficit will persist. That means that any reductions in China’s share of America’s external imbalance would simply be shifted to other foreign producers. Significantly, this alternative sourcing will most likely have a higher cost base than Chinese production, thereby imposing the functional equivalent of a tax hike on already-beleaguered middle-class Americans.

As China rebalances toward a growth model that draws greater support from domestic demand, Washington should stop ranting about the renminbi and start focusing on the opportunities that this bonanza will create. That means emphasizing US companies’ access to China’s domestic goods and services markets. Pushing for a bilateral investment treaty that relaxes caps on foreign ownership in both countries would be an important step in that direction.

Similarly, the US needs to give China credit for having taken meaningful steps on the road to further currency reform. The mid-March widening of the daily renminbi-dollar trading bands to plus or minus 2% (from the earlier 1% band) is an important step in relaxing control over the so-called managed float. That, coupled with the 3% depreciation in the past few months, should send a strong signal to speculators that one-way renminbi bets are hazardous – a signal that could help dampen inflows of hot money, which have complicated liquidity management and fueled asset-market volatility in China.

There are two views of the future of the US-China economic relationship: one that sees only risk, and another that sees opportunity. Fixating on the renminbi falls into the former category: It misses the rebalancing and reforms already under way in China and deflects America’s focus from addressing its most serious long-term macroeconomic problem – a lack of saving.

By contrast, viewing China as an opportunity underscores the need for America to undertake its own rebalancing – rebuilding US competitiveness and pushing for a meaningful share of China’s coming boom in domestic demand. Unfortunately, the revival in US saving that this will require is being drowned out by the renminbi rant.

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  1. CommentedDaryl stevens

    So, besides merely currency, or wage arbitage, or a savings problem in the US, after all individual investors, pension plans and the similar could just keep their money in cash rather than invest, then a savings problem wouldn't exist would it, but it is the interest rate subsidy, it is the asset bloat, it is the money printed in China, it is the Non -tariff barriers to trade, the free loans, housing, training money, export subsidies, the free manufacturing facility build out, more than just the value of the currency, or another of my favorites, that US workers are not skilled, we have 14 year old's that create 6 cent medical tests, that displace multi-thousand dollar tests, we have 15 year old's who can build engines blind-folded, we have people who cycle trhoguh mutiple careers, taking the learning from each to bring innovation and efficiencies to new industries, Mr Roach and the like, your time of lies is over.

    Just like the NIC reports, the rise of the self-empowered human is upon us, micro and niche manufacturing, custom manufacturing, material science advances and the similar.

    Move on into retirement r roach, your selfish age is over.

  2. CommentedDaryl stevens

    Project Syndicate and Mr. Roach:

    I think it is time that you retire Mr. Roach's commentary, it is illucid, incorrect, overly representative of his personal interests as a member of those who make small percentages of big capital movements, and is finished. It is obvious that Mr Roach's commentary is shaded and incorrect. While correct that the issue of the RMB is more a point for 2003 and 2005 than today, where Chinese NPl's are so large, it's asset bloat so grave and its reliance on investment, re-greening of loans (papering-over) so extensive, that the RMB might fall rather than rise. This is because the Chinese economy is so skewed.

    But just to fact, the RMB has strengthened 33% since 2005, 9 years ago, and it is still @66% weaker than it was 11 years before that, so what is your point.

    Mr green, and others of his ilk would have argued when the Administration in 1998 had thought to pay off the Federal debt from surpluses that evaporated with Mr Bush's tax cuts in 2001 and 2003, coupled to his 800 billion dollar European pharmaceutical subsidy plan, otherwise known as Medicare Part D, which retires next year, and was paid for in the latter half of the 10 year period, during the GFC, he would have argued, that Global Capital (Global not US, mind you), that Global capital would have no place to run when a crisis hit, if the US paid off its deficit. Then around the mid-2000's, Mr Green would have argued that the FED had lost control of its ability to set interest rates, as he and Feldstein encouraged emerging nations to debase their currencies, buy US Federal Debt, and use the US assets, the US Federal Government Debt to "insure against Financial volatility". Thank God Bernanke and Geithner had the balls to prove his ilk's lies, moronically and selfishly inferior (Such a shame that the Tea Party and other Conspiratorial Theorists are so wrong on matters related to the FED, playing right into the Koch brothers hands). So, during the 2000's, a one-shot, shot the load, will not re-occur period of time, with Financial Globalization set off by Republicans in the late 1990's (not Clinton; Graham-leach-Blighely, 3 republicans), which saw European Banks lend trillions across borders, problems now, saw Emerging Sovereigns buy debt, saw the global public good that the US allows, not an exorbitant privelage, but an exorbitant burden, explode, where the US allows its currency to be used in trade, where countries used to be encourage to ahve 3 months of trade cover, now some Int Institutions calling for 6, some emerging nations have years of import cover, as they insure against financial volatility, cycling their Capital, printed in their own currencies on the back of inflated assets, buying US debt, that then cycles large amounts of money into the US economy, cycling interest rates lower and leading to risky investments, thus the 2000's housing bubble. And here we have Mr Roach, blathering about US savings rates, when a a man of his financial stautre should realize that all accounts balance at the atmosphere, that is the world is a closed system at the global level. if some countries print money and bloat assets, they can buy assets (govt Debt) in open economies, and then that has repercussions, not the child-mindlessly, simple-minded, the US DOESN"T SAVE ENOUGH. Who do you think you are talking to Mr Roach. Your lies are over. So is china anyway, which is why their currency is likely to reverse, due to their own impractical investment cycling, such will be difficult, as the party has increased and the younger newer members will not have the ability to graft like party elders, such will create dissension and grave internal political turmoil over the next two decades, as China has hit the wall of its development model. The only thing that has kept it going, is the poor Analysis of those like Mr Roach, and the completely fictitious nature of their economic data.

    Mr Roach, trade frictions are old hat and story, East Asia must change, should have startedd before 2008 and will inevitably be forced to as circumstances change, and nothing can alter that trajectory. They need to raise the wage share of their economies, focus more on services, and build out the trimmings of modern societies, it is not 1975, virtually the entire world is engaged in more open trade, the Statist structure, while there being a role for the State in the market, is finished. these countries have emerged, now need to preference less than interests of the elites, and move to the masses, which inevitably will provide firmer foundations for the elites themselves, it is income and wealth all the way down.

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