April 13, 2013.
NORTH KOREA PROBLEMS & OTHERS
I am not very savvy or privy to what these North Koreans are up to - but we do know that they are dirt-poor, whilst their leaders continue to do their sabre-rattling, and threatening world peace.
From what I have read, South Korea, in my view, has been very accommodating to NK in the past and even to the present days - they have given millions of $ in food aids, industrial cooperation, e.g. the huge Kaesong Industrial Park in NK is built by the South Koreans, of course, to promote SK prodcuts - but there are some 50,000 North Korean workers working in this Park alone, at least earning some income for themselves! Every time the NKs perceived some "threats" they turn on the screws - and now the Park is shut down and the 50,000+ NKs are out of work - on their government orders!
North Korea continues to persist with its bomb and missiles threats - as this latest incident shows - and a disunited world stands by and watch, seemingly powerless to intervene effectively. In these respects, NK has broken strings of UN sanctions embargo over its armaments sales to rogue nations like Iran, and its continuing long-range missile tests - with hardly any concern or fear over retaliation by the international community.
In this respect, in my view, it is the same behavior exhibited by Iran and Cuba. Cuba is a closed Communist State under Castro for years, and now under his Brother Raul - but because of its close proximity to the U.S. continental shelf, it will not be able to "misbehave" that easily.
But Iran is a different matter - they too are on the verge of being a nuclear power - and their warmongering to destroy Israel is, in my view, all too real. Yes, Israel, we all know has long had nuclear capability - but, I stand corrected here - they can "behave" more correctly - presumably like the U.S., French and U.K., Russia and China too I reckon - who are also nuclear powers, in that they will not do "first strike" unless provoked with a nuclear strike by, say, Iran or North Korea.
Pyongyang should emulate Myanmar's (Burma's) unbelievable transition to some form of democracy and an open society - after its years of dictatorship and military rule. The international community did all kinds of economic and military sanctions, but - in rogue nations like Iran, North Korea, Myanmar - where dictators rule with iron fists - the general population is powerless to do anything substantial to change its nations' directions. Aung San Suyi, the iconic Iron Lady of Burma, was incarcerated for years in her fight for Burmese freedom - but, lo and behold! it then happened! One decent military dictator and his gang decided that it was time to open up, give up their nuclear ambitions (they tried to get North Korean technology here), give Aung San a chance - and we see it happening now. International sanctions worked here? I doubt it.
Actually, for years, North Korea has asked U.S. to sign a peace treaty to formally end the Korean War 1950-1953. From that date, till now, only an "Armistice" was signed to end the War, which meant that, technically, South Korea and U.S. were still at war with NK.
For instance, on 27 July 2011, NK again asked the U.S. to sign a peace treaty to formally end the Korean War. In an editorial marking the 58th Anniversary of an Armistice that ended the Korean War 1950-1953, the North Korea'a official news agency, Korean Central News Agency, insisted a peace treaty would go a long way towards resolving a deadlock over Pyongyang's pursuit of nuclear weapons.
On March 13, 2013, the former U.S. Ambassador to South Korea, Donald Gregg just returned from a trip to North Korea. He is of the view that North Korean genuinely wants a peace treaty. He further adds that what the North Koreans call "the old way" which was "give up your nuclear weapons and then we talk" is going to get nowhere with them.
The 6-Nations Talk Group (North Korea, South Korea, U.S. China, Japan and Russia) was initially set up to provide the North with security guarantees and economic assistance in return for its nuclear disarmament. The North says it is continually threatened by SK and U.S., especially with the presence of 28,500 U.S. troops on SK soil - a legacy of the Korean War, and thus its reliance on nuclear weapons. But it is prepared to resume this 6-Nations talks without any pre-conditions, its Foreign Minister was quoted then.
The Obama Administration again on 13/04/2013 look to China to rein in its unruly neighbor, and with only the counter-threat of overwhelming superiority in conventional weaponry (the NK has over a million soldiers, the SK has some 650,000) to offer the North Koreans, the U.S. has little choice but to rely on Beijing to de-escalate tensions in a peaceful manner.
U.S. Secretary of State John Kerry just held a series of meetings with Chinese leaders in his visit to Beijing before proceeding to Seoul - where he issued a warning to Pyongyang to cease and desist its 2,500-mile mid-range missiles testing/firings expected to proceed next week. These missiles can reach Japan and the U.S. Guam bases, and hence the flurry of early warnings to be prepared for such bombings.
China has been a long-time ally of NK since the Korean War, and provides the North with most of its fuel and much of its food aids.
It has been said that China's main interest in North Korea is not its de-nuclearization as the West keeps demanding, but its priority is to see to it that its neighbor and friend, the North Korean government does not fall - and this has been its strategy over the years. Whilst many South Koreans fear the cost of unification (same same as the West Germans did those days of East German unification) with their brothers to the north, China opposes that even more stridently. China's fears are that a reunited Korea with its U.S-backing, will spell more trouble for is nation - notwithstanding its exasperation at the Kim dynasty's uncanny ability to wag China's dog. China remains deeply wary of any American military built-up in its backyard, as the U.S. continues to do so, with its now-shifting emphasis and strategy to contain China in its expansion paths.
China is suspicious that the containment efforts towards North Korea will be part of the long-term U.S. strategy to expand its influence in the region, and ring in fast-growing China with countries closer to Washington. Already, its navy chiefs recently announced that they will be more active in the Asian naval arenas.
Your call for a peace treaty with North Korea is the way to go - if the U.S. is serious in its efforts for world peace, since, as I said, such calls were made many many times before by North Korea itself - although China, as stated above, will not allow North Korea to be swallowed by the South. But, with a peace treaty, the North may let-up like Myanmar, and prosperity may begin, although the Kim dynasty will need a tsunami revolution to change for the better!
Best regards, Eu Ming
Wednesday, September 17, 2014
June 11, 2012.
Haro,
Ayam taking the liberty of sending you this long article for your reading pressure - if you are interested to reach such!
This Aussie friend of mine - Dr Alan McPhate is in his 80s, once Presbyterian - and now still active as a humanist, and much involved in his local cummunity projects. I have known him since my Melbourne University days - some 50 years ago hahahahahah! - and he is still up todate on world affairs, especially China and its huge impact on Aussie land, as China is the largest buyer of Aussie coal and iron ore.
He picks my brain to comment on this and that subject - and I oblige, do some research and write - to ward off the A-Z Hammer Disease (you know it as "Alzheimer"!) for starters, and keep myself updated as well! My Next Life: I will do my PhD (permanent head damage) on Public Policy and International Affairs!
If not interested, please delete and 1000 Apologies.
Eu Ming
---------- Forwarded message ----------
From: Eu Ming Yeow
Date: Mon, Nov 5, 2012 at 11:19 PM
Subject: Re: China's Econmy
To: Alan McPhate
Hi Alan,
Sorry for this late reply.
I have been trying to build an internet/online website business lately, and, from an illiterate computer guy like me, and going through the rather difficult/not easy to understand mechanics for me, on how to build this website! I am nearly done - and let's see whether it is so easy to make $ while in your pyjamas, hahahaha!
China' Economic Growth: Hard or Soft Landing?:
Bloomberg:
In August 2012 review, it remarked that China's 7.6% p.a. growth rate in Q2 was the slowest pace of growth in three years.
Bloomberg also stated that State-owned enterprises and banks continue to produce huge misallocation of resources and priorities, and that no effort has been made to build a market that promotes increased domestic consumption.
The Shanghai Composite Index (SHCOMP) is down 13% so far for Q3 2012.
HSBC Survey:
Very closely watched as HSBC is next door, based in Hongkong.
According to HSBC in their September 2012 report, China's manufacturing activity contracted for an 11th straight month to September 2012, as factories struggled with weak demand and hard-to-sell inventories., underscoring broader economic weakness and shrinking demand in key overseas markets.
The key Purchasing Managers' Index (PMI) is closely watched as it gauges nationwide manufacturing activity, a key sector of China, the world's second largest economy. HSBC estimated the PMI for September to be 47.8 - anything below 50 points indicate contraction.
Tsinghua University Beijing (China's top university):
According to Tsinghua University's think tank, the Centre For China In The World Economy (CCWE) forecasts in September 2012, China's economy is expected to grow by 7.7% in the first three quarters of 2012, while for the whole year, the growth rate will be 7.8%.
China still has potential for rapid growth in the medium and long term, and urbanization will be the greatest boost for the country's future development, according to this report.
The CCWE estimated that China's GDP will grow by 8.2% y-o-y in the first half of 2013, while the whole of 2013 will be 8.0%. Inflation rate is estimated at 2.8% ths year, while for the coming years, consumer prices will grow by 3-5% annually.
Li Daokui, head of CCWE, reckons there is no hard-landing risk in the short term, but the next three to five years will be a difficult period for China's economy, during which the global economic and financial situation will remain turbulent. Economic adjustments in the U.S. will recur a few times, he added, and these will bring new waves of economic and financial turmoil to the rest of the world. Li is also a former advisor to China's Central Bank.
Moran Zhang of Nomura Securities:
In his September 2012 analysis, MZ is bullish on China, and expects the economy to rebound, stronger than expected!
He said that leading indicators in the housing sector picked up strongly in August 2012, e.g. land sales improved sharply, and new housing starts growth also improved to 14% y-o-y in August - from a 27% decline in july 2012. Property sold improved to 2.2% y-o-y in the January to August 2012 period - against a-0.5% decline in the January to July period in value terms. Hence, these three indicators performed well, and he is of the view that there is a good chance that housing investments will rebound in the coming months, which is earlier than the market expects.
Housing and infrastructure investments combined account for half of the total fixed assets investment, which in turn accounts for nearly half of GDP. If both improved in Q4, China will then see a visible rebound in GDP growth to 8.8% he estimates.
The consensus forecast for 2012 GDP, on a quarterly basis, expects growth to slow down from 7.6% in Q2 to 7.5% in Q3, before recovering to 7.7% in Q4.
As stated, Zhang disagrees with this consensus view, and estimates Q4 to be 8.8%! - mainly because he estimates fixed asset investment (FAI) growth will be 21% y-o-y by December 2012 against 20.2% in August on same y-o-y basis, while consensus expects FAI growth to slow down to 19.5%.
Here, he cites China's powerful economic planning body - the National Reform and Development Commission - recent announcements of approvals for several huge infrastructure projects, including 25 subways and 13 highways, and the estimated costs of these, by analysts, at more than 1 trillion yuan (USD 158 billion), roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008!
Pieter Bottelier, Carnegie Endowment For International Peace, in International Economic Bulletin 26 July, 2012 issue:
China's economy is slowly becoming more normal, he said. Growth in the coming years will likely be both robust and more sustainable, while the structural reforms that are central to the 12th Five Year Plan (2011 - 2015) will become somewhat easier to achieve, he added.
The greatest risk facing China today, he said, is stagnant political reform, including the promotion of the rule of law. Without progress on this front, the social inequality and perceived unfairness that the current political system has generated could jeopardise long-term economic prospects.
The oncoming changes in political leadership that will come with the crucial 10/11/2012 key Congress meeting is expected to cement strategies for further/future economic growth, but political "correctness" is not expected to change at all - the top leadership will still be nominated and elected accordingly.
(Pieter Bottelier, former chief of the World Bank's resident mission in Beijing, is a non-resident scholar in Carnegie's International Economics program, and Senior Adjunct Professsor of China Studies at the School of Advanced International Studies (SAIS) at Johns Hopkins University).
China's Official Growth Rate of 7.4% for Q3 2012 Announced:
China's National Bureau of Statistics said GDP grew 7.4% in Q3 July-September 2012 - representing a sharp slowdown for China, with 9.2% in 2011, and average annual rate of near 10% for three decades. This growth was the seventh straight quarter slowdown.
The government targets growth of 7.5% for full year - reduced in 2012 from the previous 8% target - and the consensus forecast of economists polled by Reuters is that it will deliver on it, with an expansion of 7.7%.
China's Problematic Coal Plan:
In March 2012, China's powerful National Development and Reform Commission released its long-awaited 12th Five Year Plan (2011 - 2015) for its coal industry, which is to curb China's national coal production and consumption at around 3.9 billion tons by 2015.
China has long relied on domestically abundant coal - which accounts for 95% of the country's proven fossil reserves - to fuel its booming economy. Currently, coal still accounts for nearly 70% of China's national energy consumption and about 80% of its electricity production. In 2009, carbon emissions from Chinese coal combustion alone exceeded total U.S. carbon dioxide emissions! Thus, China ia facing tremendous pressure - arising from the destructive environmental effects of the coal consumption spike - to accelerate the peaking of its national coal production and consumption.
China produced 3.24 billion tons of coal in 2010, and capping national coal production at 3.9 billion tons by 2015 corresponds to an annual coal supply growth rate of 3.8%. Assuming that the coal supply to GDP elasticity during this 12th Five Year Plan period is identical as the previous one at 0.59, China's coal production target can be translated into an average annual GDP growth rate of 6.5% by 2015. Since China's annual GDP growth goal has been set at 7.0% for these next five years (against the much higher growth rates quoted above), capping China's coal production at around 3.9 billion tons by 2015 seems to be a reasonable, achievable, government target.
However, few key facts may fundamentally alter the intended impact of the Coal Plan:
(a) Beijing has decided to slow down China's rapid economic expansion in order to achieve a more sustainable and efficient economic growth during this 5YP - its political intentions here coinciding with a widely-accepted consensus among economists that Chinese GDP growth will likely be lower in this near- to medium-term than it was in the previous decade.
(b) The quality of China's coal statistical reporting has become increasingly questionable in recent years, which leads to legitimate concerns over the credibility of any government-issued coal industry targets. For example, after two revisions in 2006 and 2010, China's national coal production in 2000 was updated to 13.88 billion tons, which is 39% higher than the originally reported production level of 9.98 billion tons!
To make matters worse, the statistical discrepancy between national and provincial coal consumption (especially local governments' strong desire for double-digit growth!) keeps widening, reaching 18.1% in 2010!
(c) As China's economy rebalances towards a much more sustainable form of growth, it automatically means this growth will be less commodity-intensive.
(d) Surging Chinese hard commodity purchases in the past few years fuelled not just growing domestic needs but also a rapidly growing inventory. Such high inventory levels will not be able to support the lower level of economic growth as generally agreed by consensus will happen during this period.
For example, data from the China Coal Transport and Distribution Association showed that coal inventories at Qinhuangdao Port rose to 9.3 million tons on June 17, 2012, the highest since 2008.
Coal mining in China is mainly concentrated in the country's northern regions - a "coal belt" that stretches from Heilongjiang, Shanxi, Inner Mongolia to Xinjiang, along with a couple of areas in Sichuan and Guizhoou. From these Northwestern regions, the coal then clocks up thousands of kilometres traversing China's web of highways to reach the coal production factories dotted across the country.
Desertification is particularly severe in the Northwest "coal belt" where the wind picks up dust - coal ash, a waste product - and sends it all over the country. Every four tons of coal burned produced one ton of coal ash. And each year, without fail, Beijing is attacked by these severe and notorious dust storms.
The most dangerous pollutant to be released from coal is CO2. China is now the world's largest emitter of greenhouse gases, and carbon emissions is the main contributor to climate change.
As stated, the 12th Five Year Plan places a cap of 3.9 billion tons of coal use by 2015. But key provinces usage of coal keeps increasing, making Beijing's controls weaker, and one analyst goes so far as to say that by 2015, he expects coal prices to collapse, China's purchases will certainly be lower in view of forecasted and expected lower economic growth during this period.
Iron and Steel Plan in China's 12th Five Year Plan (2011-2015):
China intends to restructure the iron and steel industry sector under this new 5YP as follows:
(a) The steel sector's growth rate is set to slow during this 5YP period, with growth forecasted at 5 to 6% per annum, against 22% growth in the 10th Five Year Plan (2001 - 2005), and 11% in the 11th FYP (2006 - 2010).
(b) Rapid growth of China's steel sector in the past 10 years has led to over-capacity, heavy pollution, and a fragmented industry structure. In the last decade, the steel industry grew at an average annual rate of 17%, reaching around 600 million tons of crude steel output in 2010.
(c) Total steel capacity in China is estimated at 720-750 million tons per year. According to one estimate, around 100 million tons of steel capacity is unnecessary!
(d) Small steel players will be forced to close or agree to M&A, since these small players also impede progress on 5YP environmental targets, are less efficient and cause more pollution per unit of production than larger companies.
(e) China's Top 10 steel producers are expected to expand through M&A, and will represent 60% of the country's total steel output by 2015, up from 48% in 2010.
These 5YP initiatives are consistent with the "Development Policies for the Iron and Steel Industry" released in 2005. This law aims to increase the output of the top 10 steel groups to 70% of the nation's total by 2020 through M&A.
(f) China plans to relocate steel companies to coastal regions and interior waterways like:
***** Caofeidian Port in Hebei Province;
***** ZXhanjiang in Guangdong Province
so as to reduce logistic costs and for environmental reasons. Production based in these areas will represent 40% of the total output by 2015.
(g) *** Steel sector growth is expected to slow to 5-6% p.a. during this 5YP;
*** The government's 5YP target of building 36 million units of affordable housing will help
contribute to increased steel demand;
*** Property and infrastructure are China's dominant steel users, accounting for over 50% of steel use - this pattern will likely remain in place.
*** Specialty steel for railways, nuclear farms and wind plants will see increased usage during this 5YP, e.g. the 25 new subways and 13 highways to be built during this period.
(h) Pricing of iron ore, a key steel input, has been a contentious issue between China's steelmakers and the world's Big 3 miners.
From 2005 to 2010, China's reliance on imported steel ore has been steadily increasing (over 60% of the total in 2010). A key goal of this 5YP is increasing the proportion of domestic iron ore production to 45% by 2015.
China's steel industry is the largest in the world, but has been frustrated by its inability to win price concessions for iron ore with the world's big three miners - Vale, BHP Billiton and Rio Tinto.
Rising iron ore prices have placed pressure on local steel company margins. The average profit margin of China's 77 largest steel companies slipped below 3% in 2010 - a sharp decline from the 8% profit margins seen during the 2001 to 2005 period.
Two solutions are proposed here during this 5YP:
*** expand domestic iron ore porduction faster;
*** purchase equity in overseas companies, and China's target is purchasing 40-50% of iron ore from its own overseas assets, up from the current 15%. However, political considerations and so-called "national security" questions will dogged and block such China purchases in too many cases.
(i) Iron ore generates the most revenue for London-based Rio Tinto and Melbourne-based BHP. China is the largest customer for both companies, providing 31% of sales to Rio and 28% to BHP in the last 5 years.
BHP CEO Marius Kloppers estimate China's steel output will climb to 1.1 billion tons by 2025. Rio Tinto, the second biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67% of the total seaborne trade of iron ore, according to a Bloomberg estimate.
(j) Iron ore prices will fall about 19% before finding a "long term, sustainable" level as China's economy slows, said the CEO Neville Power of Fortescue Metals, Australia's third biggest producer. The price will drop to about $110 per metric ton, he said on 03 June 2012.
(k) Baosteel Group, China's third largest mill by output, and Wuhan Iron, the fourth largest, won approval in May 2012 to build $21 billion of new plants, to boost its output to 53 million tons and 45 million tons respectively, and help push China's economic growth engines.
China's southern province of Guandong, where Baosteel's new project will be, at Zhanjiang port, is home to the Chinese units of Japanese carmakers including Honda Motor Co. and Toyota Motor Corp - need more than 50 million tons of steel products a year!
Marc Jacques - author of "When China Rules The World: The End Of The Western World And The Birth Of A New Global Order". Publisher: Penguin, 848 pages.
This is the updated and second edition of Marc Jacques widely-acclaimed book on China. The first edition was subtitled: "The Rise Of The Middle Kingdom And The End Of The Western World". This second edition, suggesting an evolution, is subtitled: "The End Of The Western World And The Birth Of A New World Order." Sure to sell!
Jacques' chief arguments remain intact: that China will be dominant economically and culturally, it will not essentially be Westernised, and China will be ascendant despite multiple challenges. China's ascendancy would result from both its own efforts and the decline of the West simultaneously.
In this edition, he cites The Economist projection that the Chinese economy will become the world's biggest by 2018. Now the IMF predicts it will be in 2016.
Unlike many China pundits, particularly critics, Jacques believes China will not succumb to the weight of its own promise. He does not accept that China has to westernise or democratise before it can fully develop and prosper.
Jacques also rejects the alarmist Western notion that today's China is re-arming aggressively. He finds Chinese defense expenditure as a proportion of GDP falling between the 1970s and 1990s, and since then, only keeping pace with GDP growth.
He attributes Western spurning of this information and its stubborness to a mixture of unfamiliarity, ignorance, prejudice, denial, stereotyping, racism and Cold War ideology against a non-western country that is communist, at least in name.
He does not see China as a global superpower because it is historically absorbed in its own internal governance, as it is a very difficult country to govern.
Despite its 800+ pages, the book has sold a quarter of a million copies (and counting) in its first edition and in a dozen languages! His critics have yet to match that kind of appeal in whatever they have to say!
China's Next Leader - Xi Jinping (currently Chinese Vice President):
Xi Jinping is expected to take over as head of the Communist Party of China (the ruling party) in the 10 November 2012 Beijing session and become President in 2013.
Xi Jinping spent much of his youth living in a dug-out cave as his home in the remote northern community centre of Liangjiahe, China, a tiny community of cave dwellings dug into hills and fronted by dried mud walls with wooden lattice entryways. He spent seven years here, toiling alongside villagers by day and sleeping on bricks by night, in stark contrast to his pampered early years in Beijing.
He was born into the communist elite, but in the choatic years of Mao Zedung's disastrous Cultural Revolution , and after his father fell out of favor with Chairman Mao, he was sent to this rural hinterland to learn peasant virtues at age 15.
He has an elite, educated background with links to communist China's founding fathers that are a crucial advantage in the country's politics.
He has a daughter at Harvard University under an assumed name. Tall, heavyset and married to a popular folk singer in the military, Xi is at ease in groups, in contrast to China's typically stiff and aloof leaders, such as current President Hu Jintao.
A Xi administration is expected to pursue a more forceful foreign policy, based on Beijing's belief that its chief rival Washington is in decline, and that China's rise to global pre-eminence is within reach.
After a brief spell in charge of Shanghai, he was brought to Beijing and handed the high-profile task of overseeing the 2008 BeijingOlympics. He is also in charge of managing relations with the former British colony of Hong Kong, now part of China.
He has made half a dozen trips to the US, but not known to have visited his daughter at Harvard, and China watchers are of the view that Xi will be more asseretive in dealings with U.S. than that under Hu.
Sorry Alan, 1000 Apologies for these long long notes, but hopefully, it gives you a better picture of China, its coal and iron and steel industry position vis-a-vis Australia's coal and iron ore positions.
Best Regards, Ming
Haro,
Ayam taking the liberty of sending you this long article for your reading pressure - if you are interested to reach such!
This Aussie friend of mine - Dr Alan McPhate is in his 80s, once Presbyterian - and now still active as a humanist, and much involved in his local cummunity projects. I have known him since my Melbourne University days - some 50 years ago hahahahahah! - and he is still up todate on world affairs, especially China and its huge impact on Aussie land, as China is the largest buyer of Aussie coal and iron ore.
He picks my brain to comment on this and that subject - and I oblige, do some research and write - to ward off the A-Z Hammer Disease (you know it as "Alzheimer"!) for starters, and keep myself updated as well! My Next Life: I will do my PhD (permanent head damage) on Public Policy and International Affairs!
If not interested, please delete and 1000 Apologies.
Eu Ming
---------- Forwarded message ----------
From: Eu Ming Yeow
Date: Mon, Nov 5, 2012 at 11:19 PM
Subject: Re: China's Econmy
To: Alan McPhate
Hi Alan,
Sorry for this late reply.
I have been trying to build an internet/online website business lately, and, from an illiterate computer guy like me, and going through the rather difficult/not easy to understand mechanics for me, on how to build this website! I am nearly done - and let's see whether it is so easy to make $ while in your pyjamas, hahahaha!
China' Economic Growth: Hard or Soft Landing?:
Bloomberg:
In August 2012 review, it remarked that China's 7.6% p.a. growth rate in Q2 was the slowest pace of growth in three years.
Bloomberg also stated that State-owned enterprises and banks continue to produce huge misallocation of resources and priorities, and that no effort has been made to build a market that promotes increased domestic consumption.
The Shanghai Composite Index (SHCOMP) is down 13% so far for Q3 2012.
HSBC Survey:
Very closely watched as HSBC is next door, based in Hongkong.
According to HSBC in their September 2012 report, China's manufacturing activity contracted for an 11th straight month to September 2012, as factories struggled with weak demand and hard-to-sell inventories., underscoring broader economic weakness and shrinking demand in key overseas markets.
The key Purchasing Managers' Index (PMI) is closely watched as it gauges nationwide manufacturing activity, a key sector of China, the world's second largest economy. HSBC estimated the PMI for September to be 47.8 - anything below 50 points indicate contraction.
Tsinghua University Beijing (China's top university):
According to Tsinghua University's think tank, the Centre For China In The World Economy (CCWE) forecasts in September 2012, China's economy is expected to grow by 7.7% in the first three quarters of 2012, while for the whole year, the growth rate will be 7.8%.
China still has potential for rapid growth in the medium and long term, and urbanization will be the greatest boost for the country's future development, according to this report.
The CCWE estimated that China's GDP will grow by 8.2% y-o-y in the first half of 2013, while the whole of 2013 will be 8.0%. Inflation rate is estimated at 2.8% ths year, while for the coming years, consumer prices will grow by 3-5% annually.
Li Daokui, head of CCWE, reckons there is no hard-landing risk in the short term, but the next three to five years will be a difficult period for China's economy, during which the global economic and financial situation will remain turbulent. Economic adjustments in the U.S. will recur a few times, he added, and these will bring new waves of economic and financial turmoil to the rest of the world. Li is also a former advisor to China's Central Bank.
Moran Zhang of Nomura Securities:
In his September 2012 analysis, MZ is bullish on China, and expects the economy to rebound, stronger than expected!
He said that leading indicators in the housing sector picked up strongly in August 2012, e.g. land sales improved sharply, and new housing starts growth also improved to 14% y-o-y in August - from a 27% decline in july 2012. Property sold improved to 2.2% y-o-y in the January to August 2012 period - against a-0.5% decline in the January to July period in value terms. Hence, these three indicators performed well, and he is of the view that there is a good chance that housing investments will rebound in the coming months, which is earlier than the market expects.
Housing and infrastructure investments combined account for half of the total fixed assets investment, which in turn accounts for nearly half of GDP. If both improved in Q4, China will then see a visible rebound in GDP growth to 8.8% he estimates.
The consensus forecast for 2012 GDP, on a quarterly basis, expects growth to slow down from 7.6% in Q2 to 7.5% in Q3, before recovering to 7.7% in Q4.
As stated, Zhang disagrees with this consensus view, and estimates Q4 to be 8.8%! - mainly because he estimates fixed asset investment (FAI) growth will be 21% y-o-y by December 2012 against 20.2% in August on same y-o-y basis, while consensus expects FAI growth to slow down to 19.5%.
Here, he cites China's powerful economic planning body - the National Reform and Development Commission - recent announcements of approvals for several huge infrastructure projects, including 25 subways and 13 highways, and the estimated costs of these, by analysts, at more than 1 trillion yuan (USD 158 billion), roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008!
Pieter Bottelier, Carnegie Endowment For International Peace, in International Economic Bulletin 26 July, 2012 issue:
China's economy is slowly becoming more normal, he said. Growth in the coming years will likely be both robust and more sustainable, while the structural reforms that are central to the 12th Five Year Plan (2011 - 2015) will become somewhat easier to achieve, he added.
The greatest risk facing China today, he said, is stagnant political reform, including the promotion of the rule of law. Without progress on this front, the social inequality and perceived unfairness that the current political system has generated could jeopardise long-term economic prospects.
The oncoming changes in political leadership that will come with the crucial 10/11/2012 key Congress meeting is expected to cement strategies for further/future economic growth, but political "correctness" is not expected to change at all - the top leadership will still be nominated and elected accordingly.
(Pieter Bottelier, former chief of the World Bank's resident mission in Beijing, is a non-resident scholar in Carnegie's International Economics program, and Senior Adjunct Professsor of China Studies at the School of Advanced International Studies (SAIS) at Johns Hopkins University).
China's Official Growth Rate of 7.4% for Q3 2012 Announced:
China's National Bureau of Statistics said GDP grew 7.4% in Q3 July-September 2012 - representing a sharp slowdown for China, with 9.2% in 2011, and average annual rate of near 10% for three decades. This growth was the seventh straight quarter slowdown.
The government targets growth of 7.5% for full year - reduced in 2012 from the previous 8% target - and the consensus forecast of economists polled by Reuters is that it will deliver on it, with an expansion of 7.7%.
China's Problematic Coal Plan:
In March 2012, China's powerful National Development and Reform Commission released its long-awaited 12th Five Year Plan (2011 - 2015) for its coal industry, which is to curb China's national coal production and consumption at around 3.9 billion tons by 2015.
China has long relied on domestically abundant coal - which accounts for 95% of the country's proven fossil reserves - to fuel its booming economy. Currently, coal still accounts for nearly 70% of China's national energy consumption and about 80% of its electricity production. In 2009, carbon emissions from Chinese coal combustion alone exceeded total U.S. carbon dioxide emissions! Thus, China ia facing tremendous pressure - arising from the destructive environmental effects of the coal consumption spike - to accelerate the peaking of its national coal production and consumption.
China produced 3.24 billion tons of coal in 2010, and capping national coal production at 3.9 billion tons by 2015 corresponds to an annual coal supply growth rate of 3.8%. Assuming that the coal supply to GDP elasticity during this 12th Five Year Plan period is identical as the previous one at 0.59, China's coal production target can be translated into an average annual GDP growth rate of 6.5% by 2015. Since China's annual GDP growth goal has been set at 7.0% for these next five years (against the much higher growth rates quoted above), capping China's coal production at around 3.9 billion tons by 2015 seems to be a reasonable, achievable, government target.
However, few key facts may fundamentally alter the intended impact of the Coal Plan:
(a) Beijing has decided to slow down China's rapid economic expansion in order to achieve a more sustainable and efficient economic growth during this 5YP - its political intentions here coinciding with a widely-accepted consensus among economists that Chinese GDP growth will likely be lower in this near- to medium-term than it was in the previous decade.
(b) The quality of China's coal statistical reporting has become increasingly questionable in recent years, which leads to legitimate concerns over the credibility of any government-issued coal industry targets. For example, after two revisions in 2006 and 2010, China's national coal production in 2000 was updated to 13.88 billion tons, which is 39% higher than the originally reported production level of 9.98 billion tons!
To make matters worse, the statistical discrepancy between national and provincial coal consumption (especially local governments' strong desire for double-digit growth!) keeps widening, reaching 18.1% in 2010!
(c) As China's economy rebalances towards a much more sustainable form of growth, it automatically means this growth will be less commodity-intensive.
(d) Surging Chinese hard commodity purchases in the past few years fuelled not just growing domestic needs but also a rapidly growing inventory. Such high inventory levels will not be able to support the lower level of economic growth as generally agreed by consensus will happen during this period.
For example, data from the China Coal Transport and Distribution Association showed that coal inventories at Qinhuangdao Port rose to 9.3 million tons on June 17, 2012, the highest since 2008.
Coal mining in China is mainly concentrated in the country's northern regions - a "coal belt" that stretches from Heilongjiang, Shanxi, Inner Mongolia to Xinjiang, along with a couple of areas in Sichuan and Guizhoou. From these Northwestern regions, the coal then clocks up thousands of kilometres traversing China's web of highways to reach the coal production factories dotted across the country.
Desertification is particularly severe in the Northwest "coal belt" where the wind picks up dust - coal ash, a waste product - and sends it all over the country. Every four tons of coal burned produced one ton of coal ash. And each year, without fail, Beijing is attacked by these severe and notorious dust storms.
The most dangerous pollutant to be released from coal is CO2. China is now the world's largest emitter of greenhouse gases, and carbon emissions is the main contributor to climate change.
As stated, the 12th Five Year Plan places a cap of 3.9 billion tons of coal use by 2015. But key provinces usage of coal keeps increasing, making Beijing's controls weaker, and one analyst goes so far as to say that by 2015, he expects coal prices to collapse, China's purchases will certainly be lower in view of forecasted and expected lower economic growth during this period.
Iron and Steel Plan in China's 12th Five Year Plan (2011-2015):
China intends to restructure the iron and steel industry sector under this new 5YP as follows:
(a) The steel sector's growth rate is set to slow during this 5YP period, with growth forecasted at 5 to 6% per annum, against 22% growth in the 10th Five Year Plan (2001 - 2005), and 11% in the 11th FYP (2006 - 2010).
(b) Rapid growth of China's steel sector in the past 10 years has led to over-capacity, heavy pollution, and a fragmented industry structure. In the last decade, the steel industry grew at an average annual rate of 17%, reaching around 600 million tons of crude steel output in 2010.
(c) Total steel capacity in China is estimated at 720-750 million tons per year. According to one estimate, around 100 million tons of steel capacity is unnecessary!
(d) Small steel players will be forced to close or agree to M&A, since these small players also impede progress on 5YP environmental targets, are less efficient and cause more pollution per unit of production than larger companies.
(e) China's Top 10 steel producers are expected to expand through M&A, and will represent 60% of the country's total steel output by 2015, up from 48% in 2010.
These 5YP initiatives are consistent with the "Development Policies for the Iron and Steel Industry" released in 2005. This law aims to increase the output of the top 10 steel groups to 70% of the nation's total by 2020 through M&A.
(f) China plans to relocate steel companies to coastal regions and interior waterways like:
***** Caofeidian Port in Hebei Province;
***** ZXhanjiang in Guangdong Province
so as to reduce logistic costs and for environmental reasons. Production based in these areas will represent 40% of the total output by 2015.
(g) *** Steel sector growth is expected to slow to 5-6% p.a. during this 5YP;
*** The government's 5YP target of building 36 million units of affordable housing will help
contribute to increased steel demand;
*** Property and infrastructure are China's dominant steel users, accounting for over 50% of steel use - this pattern will likely remain in place.
*** Specialty steel for railways, nuclear farms and wind plants will see increased usage during this 5YP, e.g. the 25 new subways and 13 highways to be built during this period.
(h) Pricing of iron ore, a key steel input, has been a contentious issue between China's steelmakers and the world's Big 3 miners.
From 2005 to 2010, China's reliance on imported steel ore has been steadily increasing (over 60% of the total in 2010). A key goal of this 5YP is increasing the proportion of domestic iron ore production to 45% by 2015.
China's steel industry is the largest in the world, but has been frustrated by its inability to win price concessions for iron ore with the world's big three miners - Vale, BHP Billiton and Rio Tinto.
Rising iron ore prices have placed pressure on local steel company margins. The average profit margin of China's 77 largest steel companies slipped below 3% in 2010 - a sharp decline from the 8% profit margins seen during the 2001 to 2005 period.
Two solutions are proposed here during this 5YP:
*** expand domestic iron ore porduction faster;
*** purchase equity in overseas companies, and China's target is purchasing 40-50% of iron ore from its own overseas assets, up from the current 15%. However, political considerations and so-called "national security" questions will dogged and block such China purchases in too many cases.
(i) Iron ore generates the most revenue for London-based Rio Tinto and Melbourne-based BHP. China is the largest customer for both companies, providing 31% of sales to Rio and 28% to BHP in the last 5 years.
BHP CEO Marius Kloppers estimate China's steel output will climb to 1.1 billion tons by 2025. Rio Tinto, the second biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67% of the total seaborne trade of iron ore, according to a Bloomberg estimate.
(j) Iron ore prices will fall about 19% before finding a "long term, sustainable" level as China's economy slows, said the CEO Neville Power of Fortescue Metals, Australia's third biggest producer. The price will drop to about $110 per metric ton, he said on 03 June 2012.
(k) Baosteel Group, China's third largest mill by output, and Wuhan Iron, the fourth largest, won approval in May 2012 to build $21 billion of new plants, to boost its output to 53 million tons and 45 million tons respectively, and help push China's economic growth engines.
China's southern province of Guandong, where Baosteel's new project will be, at Zhanjiang port, is home to the Chinese units of Japanese carmakers including Honda Motor Co. and Toyota Motor Corp - need more than 50 million tons of steel products a year!
Marc Jacques - author of "When China Rules The World: The End Of The Western World And The Birth Of A New Global Order". Publisher: Penguin, 848 pages.
This is the updated and second edition of Marc Jacques widely-acclaimed book on China. The first edition was subtitled: "The Rise Of The Middle Kingdom And The End Of The Western World". This second edition, suggesting an evolution, is subtitled: "The End Of The Western World And The Birth Of A New World Order." Sure to sell!
Jacques' chief arguments remain intact: that China will be dominant economically and culturally, it will not essentially be Westernised, and China will be ascendant despite multiple challenges. China's ascendancy would result from both its own efforts and the decline of the West simultaneously.
In this edition, he cites The Economist projection that the Chinese economy will become the world's biggest by 2018. Now the IMF predicts it will be in 2016.
Unlike many China pundits, particularly critics, Jacques believes China will not succumb to the weight of its own promise. He does not accept that China has to westernise or democratise before it can fully develop and prosper.
Jacques also rejects the alarmist Western notion that today's China is re-arming aggressively. He finds Chinese defense expenditure as a proportion of GDP falling between the 1970s and 1990s, and since then, only keeping pace with GDP growth.
He attributes Western spurning of this information and its stubborness to a mixture of unfamiliarity, ignorance, prejudice, denial, stereotyping, racism and Cold War ideology against a non-western country that is communist, at least in name.
He does not see China as a global superpower because it is historically absorbed in its own internal governance, as it is a very difficult country to govern.
Despite its 800+ pages, the book has sold a quarter of a million copies (and counting) in its first edition and in a dozen languages! His critics have yet to match that kind of appeal in whatever they have to say!
China's Next Leader - Xi Jinping (currently Chinese Vice President):
Xi Jinping is expected to take over as head of the Communist Party of China (the ruling party) in the 10 November 2012 Beijing session and become President in 2013.
Xi Jinping spent much of his youth living in a dug-out cave as his home in the remote northern community centre of Liangjiahe, China, a tiny community of cave dwellings dug into hills and fronted by dried mud walls with wooden lattice entryways. He spent seven years here, toiling alongside villagers by day and sleeping on bricks by night, in stark contrast to his pampered early years in Beijing.
He was born into the communist elite, but in the choatic years of Mao Zedung's disastrous Cultural Revolution , and after his father fell out of favor with Chairman Mao, he was sent to this rural hinterland to learn peasant virtues at age 15.
He has an elite, educated background with links to communist China's founding fathers that are a crucial advantage in the country's politics.
He has a daughter at Harvard University under an assumed name. Tall, heavyset and married to a popular folk singer in the military, Xi is at ease in groups, in contrast to China's typically stiff and aloof leaders, such as current President Hu Jintao.
A Xi administration is expected to pursue a more forceful foreign policy, based on Beijing's belief that its chief rival Washington is in decline, and that China's rise to global pre-eminence is within reach.
After a brief spell in charge of Shanghai, he was brought to Beijing and handed the high-profile task of overseeing the 2008 BeijingOlympics. He is also in charge of managing relations with the former British colony of Hong Kong, now part of China.
He has made half a dozen trips to the US, but not known to have visited his daughter at Harvard, and China watchers are of the view that Xi will be more asseretive in dealings with U.S. than that under Hu.
Sorry Alan, 1000 Apologies for these long long notes, but hopefully, it gives you a better picture of China, its coal and iron and steel industry position vis-a-vis Australia's coal and iron ore positions.
Best Regards, Ming
July 17, 2014.
THE MING AND QING CIVIL SERVICE EXAMS SURPRISES
1. I am very surprised and intrigued how 1 examinee can spend literally his whole adult life pursuing this rather elusive “Keju” civil service examination degrees, which has 3 major stages he must passed, if he is to get anywhere!
2. The competition is intense – so much so, cheating, bribing exam officials were rampant, and they resort to even buying these degrees in the hope of landing government official positions.
3. Rote learning by memorization of these essential Confucian classics forming the major part of these civil service exams was fundamental to a person’s success in these exams. Past model performance essays were bought and memorized by heart. Thus, critics have argued that such rote learning nowhere made them Confucian experts, but instead, they stultify China’s intellectual growth, as well as limiting the individual’s growth and true progress in trying to run his part of the government machinery.
Hoi K. Suen and Lan Yu termed this weakness as “construct irrelevant” in their article: [“Chronic Consequences of High-Stakes Testing? Lessons From The Chinese Civil Service Exam” as in: http://suen.ed.psu.edu] “ ……. memorization of model essays from previous exams is construct irrelevant as its sole purpose is to perform well on the exam, without necessarily understanding Confucius’s thoughts.” (p. 52).
4. What was even more galling, as the video “A Short On The Civil Exam” show – is that both the Ming and Qing governments were guilty of conniving to sell these degrees “even to men who did not have any academic degree” especially when the Mongols invaded in 1451, and in their frantic efforts to raise cash to pay for their military expeditions to stop the Mongol hordes!
5. As such, the millions who will fail these exams over the years, will be left unfulfilled and angry at this exam system.
It is said that Hong Houxin (or his other name, Hong Xiuquan), failed the second-stage provincial exams at four different times that he sat. He had a big hatred at this Confucian state system, and later claimed that he now absorbed Christian beliefs and that he was the second man to Jesus Christ, when he founded the Taiping Tianquo (“Heavenly Kingdom”), and launched the “Taiping Rebellion” (1850-1864), against the Qing state. It was one of the bloodiest wars in human history, claiming some 20 million lives. Hong Xiuquan was finally defeated, but his mystic inspirations remained inexplicable – a “Christian” education system he helped introduced during this Rebellion (which was later abandoned) – did not solve his frustrations against the State civil service exam system.
6. Another surprising turnabout which became an unfortunate legacy – was that millions of such classically literate men who passed, but never reached the top palace exam or Dianshi level to become the “jinshi” (or “advanced scholar” or “literatus”) never then got into government official positions. They then had to employ their talents for many non-official positions such as physicians, pettifoggers, fiction writers, examination essay teachers etc – a sheer waste of talents and money spent – and again, ending up totally frustrated and angry at what they perceived as incompetent State control of the civil service examination system.
Radical reforms thus had to be instituted in the aftermath of the Taiping Rebellion, and more urgently, in the face of growing Western imperialism against a weakening Qing government. This finally led to the delegitimization and decanonization of this imperial “Keju’ civil service examination system, and abolishing its political, social and cultural functions. These were completed by 1904-1905.
Notwithstanding, it would appear that the ghost of some features of this imperial Qing exam system still survived in the new China school entrance exam system in 1912 (when Dr Sun Yat-sen took over and formed the First Republic of China) and to date – albeit in a different fashion and format. In this respect, the “old” “Keju” system still scored a moral victory and may have had the last laugh.
Yeow Eu Ming
10 July 2014.
THE MING AND QING CIVIL SERVICE EXAMS SURPRISES
1. I am very surprised and intrigued how 1 examinee can spend literally his whole adult life pursuing this rather elusive “Keju” civil service examination degrees, which has 3 major stages he must passed, if he is to get anywhere!
2. The competition is intense – so much so, cheating, bribing exam officials were rampant, and they resort to even buying these degrees in the hope of landing government official positions.
3. Rote learning by memorization of these essential Confucian classics forming the major part of these civil service exams was fundamental to a person’s success in these exams. Past model performance essays were bought and memorized by heart. Thus, critics have argued that such rote learning nowhere made them Confucian experts, but instead, they stultify China’s intellectual growth, as well as limiting the individual’s growth and true progress in trying to run his part of the government machinery.
Hoi K. Suen and Lan Yu termed this weakness as “construct irrelevant” in their article: [“Chronic Consequences of High-Stakes Testing? Lessons From The Chinese Civil Service Exam” as in: http://suen.ed.psu.edu] “ ……. memorization of model essays from previous exams is construct irrelevant as its sole purpose is to perform well on the exam, without necessarily understanding Confucius’s thoughts.” (p. 52).
4. What was even more galling, as the video “A Short On The Civil Exam” show – is that both the Ming and Qing governments were guilty of conniving to sell these degrees “even to men who did not have any academic degree” especially when the Mongols invaded in 1451, and in their frantic efforts to raise cash to pay for their military expeditions to stop the Mongol hordes!
5. As such, the millions who will fail these exams over the years, will be left unfulfilled and angry at this exam system.
It is said that Hong Houxin (or his other name, Hong Xiuquan), failed the second-stage provincial exams at four different times that he sat. He had a big hatred at this Confucian state system, and later claimed that he now absorbed Christian beliefs and that he was the second man to Jesus Christ, when he founded the Taiping Tianquo (“Heavenly Kingdom”), and launched the “Taiping Rebellion” (1850-1864), against the Qing state. It was one of the bloodiest wars in human history, claiming some 20 million lives. Hong Xiuquan was finally defeated, but his mystic inspirations remained inexplicable – a “Christian” education system he helped introduced during this Rebellion (which was later abandoned) – did not solve his frustrations against the State civil service exam system.
6. Another surprising turnabout which became an unfortunate legacy – was that millions of such classically literate men who passed, but never reached the top palace exam or Dianshi level to become the “jinshi” (or “advanced scholar” or “literatus”) never then got into government official positions. They then had to employ their talents for many non-official positions such as physicians, pettifoggers, fiction writers, examination essay teachers etc – a sheer waste of talents and money spent – and again, ending up totally frustrated and angry at what they perceived as incompetent State control of the civil service examination system.
Radical reforms thus had to be instituted in the aftermath of the Taiping Rebellion, and more urgently, in the face of growing Western imperialism against a weakening Qing government. This finally led to the delegitimization and decanonization of this imperial “Keju’ civil service examination system, and abolishing its political, social and cultural functions. These were completed by 1904-1905.
Notwithstanding, it would appear that the ghost of some features of this imperial Qing exam system still survived in the new China school entrance exam system in 1912 (when Dr Sun Yat-sen took over and formed the First Republic of China) and to date – albeit in a different fashion and format. In this respect, the “old” “Keju” system still scored a moral victory and may have had the last laugh.
Yeow Eu Ming
10 July 2014.
Thursday, September 04, 2014
Re: Currency Appreciation
euming yeow
5/3/10
to Alan
RE: THE CHINESE YUAN (ALSO KNOWN AS RENMINBI) - TO APPRECIATE?
Hi Alan,
Sorry for not replying earlier to your March 26, 2010 email on China's position as to the constant US call for its currency yuan (or renminbi) appreciation.
1. Pegging the Yuan to the USD:
1.1. China's rise as an economic powerhouse was helped greatly by its pegging of the Chinese yuan to the US dollar, and making trading arrangements with the U.S. - in 1985 when it began, China's exports to US was around $4 million. By 2008, China's exports to US totalled $337.8 billion!
1.2. From 1985 to 2008, US exports to China was around one-third of China's exports to the US. Thus the Chinese peg to the US$ was beneficial to China's export business as foreign investors were now more confident in China's currency yuan, which then, was virtually unknown outside China.
1.3. The constant bitching from the US is that China's meteoric rise as an economic powerhouse is simply because China pegs its yuan to the US$ at a very low and artificial rate - not based on standard interest rate policy like most other countries' central banks' monetary policies, but on Chinese banks' reserve requirements. Thus the yuan is controlled by China's central bank - called The Peoples' Bank of China - on a fixed exchange rate basis, and here, if the banks' reserve requirements are increased, the money supply in the economy will be reduced and conversely. Traditional interest-rate policies are not used here insofar as exchange rates are concerned.
2. The Yuan/Dollar Relationship:
2.1. The regular US argument is that China is benefitting more each year from such fixed exchange rate regime, to the detriment of US manufacturers and exporters, who cannot compete against the cheaper Chinese goods. But then, cost of production - in every aspect - is definitely cheaper in China than US. Just look at the ridiculous high wages and benefits paid to say, US auto workers in General Motors which has been saved from bankruptcy by the US government pumping in billions $ in 2009.
On the other hand, GM China is No. 1 in China in terms of sales and profits. How did this happen? The Wuling Sunshine van is selling at around $4,500 basic model (about 7% above its Chinese competitors) and is China's best-selling vehicle, with 597,000 units sold last year. GM China built these vans so efficiently with its two Chinese
partners that this Wuling venture is the cornerstone of its growth strategy, and GM is pushing this low-cost business model in Asia, starting with India. It is so confident of its successes (GM already a market leader in China with their Buick and Chevrolet brands) GM is now investing $250 million R&D centre on its Shanghai campus of its new international HQ. See the differences in strategies, thinking etc?
2.2. China's standard argument is that their currency peg is meant to foster economic stability, and abandoning this currency peg would lead to economic chaos in China. An undervalued yuan means lower prices of Chinese goods to US customers, lower inflationary pressure, and lower input prices for US manufacturers that uses Chinese inputs. A lower yuan makes US exports more expensive to Chinese consumers and thus reduces US exports to China. But, as things stand today, nothing from the US to China or anywhere else is cheap because of their high cost of labour, inputs etc!
2.3. As of today, the yuan/dollar peg is 6.8339, that is, US$1.00 = Yuan 6.8339, and this peg has remained since July 2008.
3. Realities about China's Huge Balance of Payments Surpluses:
3.1. This China-bashing is fierce and emotional, so much so master critic Nobel Laureate Paul Krugman even contended that China had since taken millions of jobs globally, especially from the United States!
3.2. China's balance of payments surpluses or trade surpluses came very slowly in the 90s and rose sharply since 2004 (amounting to 3.%% of GDP) to reach a high of 10.8% GDP in 2007. The surplus has now moderated slightly, e.g. March 2010 imports exceeded exports by US$390 million, China's first trade deficit in six years, undermining United States' constant yuan criticism!
3.3. Asymmetric market liberalization in China initiated by the late Premier Teng Siao Peng meant that the factors of production - labour, capital, land, energy and environment in China - became highly distorted in the rush to industrialization and massive export-oriented economy thinking. For example, China's huge labour pool is the key to its worldwide manufacturing exports successes. But in controlling the huge rural labour movements to the cities, labour immobility results and exploitation of millions of these rural migrants led to low pay, and an inefficient, out-of-date welfare system meant that payroll costs should be at least 35-40% higher, according to one internal Chinese study!
3.4. Likewise, land is State-owned mostly, and industrial land use are not based on market price mechanism, but usually sold/given away cheaply to stimulate industrial investment.
3.5. Likewise, energy prices are low and State-subsidized, and environmental control and pollution is serious and not costed in either.
3.6. These capital market distortions it is estimated, contributed to some 40% of overall costs of production, which is not costed in properly, and these structural imbalances will not go away. So the root cause of these factors of production distortions, distorted incentives for investors, producers and exporters must be seriously tackled successfully first by China to arrive at a truer, and higher, cost of production.
3.7. Thus, looking at the picture in this respect, the undervalued yuan is just one element in this big jigsaw puzzle!
4. China's Savings Ratio:
4.1. Another favourite Western bashing is that China saves more, and spends very much less, thereby not stimulating their own internal economy. For over 15 years, China's household savings rate has been stable at about 30% - nothing unusual here, as most Asian countries definitely save around these % or more, against the US, where the propensity to spend is adversely affected by their low propensity to save!
4.2. Corporate savings it is estimated, are growing exponentially largely due to China's huge exports, and this is a major factor accounting for its huge balance of payments surpluses, not the savings rate.
5. The Yuan Exchange Rate Options - How Much to Rise?:
5.1. The usual Paul Krugman-type thinking is to let the yuan rise to "a certain margin" to eliminate the undervaluation - but this then begs the question: how much is right/correct/equitable? And definitely China and US and Europe all see this so-called "equalization" factor very differently from each other!
5.2. Goldman Sachs, in an April 2010 report stated that "....... our model suggest that the RMB (renminbi or yuan) is very close to the price that it should be...... The model used to suggest that the currency was undervalued by about 20%, but it has moved by that degree over the past five years."
5.3. A 2009 research paper of Goldstein and Lardy at the US Peterson Institute estimated a 12-16% undervaluation.
5.4. But here's the interesting notes: Between mid-2005 and end-2008, the yuan appreciated by 19%, and this after it appreciated some 30% over past 10 years since January 1994! Yet, China's balance of payments surpluses surged during these periods!
I don't see any comments on these phenomenon by Paul Krugman or any other Western economists, monetarists etc.
5.5. It is generally accepted that any large, sudden, foreign exchange adjustments will cause long-term and permanent damage to any economy, and, in China's case, will not
solve its huge BoP surpluses unless and until its huge internal structural market distortions to its factors of production are resolved satisfactorily.
5.6. Suggestions have always been made that China should adopt a more "flexible exchange rate policy" and here again, this begs the question of what is "flexible" and to China, maintaining economic stability and growth are key issues and factors affecting this flexible exchange rate.
5.7. Moreover, empirical studies have shown that there is no correlation, systematic or reliable relationship between its BoP position and exchange rate flexibility. That is to say, no significant benefits are going to accrue to say, US, from China adopting "a more flexible" exchange rate policy, and its trade surpluses will continue to grow regardless.
5.8. Any significant yuan appreciation will not reduce in any sizable form, the huge and ballooning US BoP deficits: in the US Federal Reserve exchange rates basket for the greenback, the yuan contributes only 15%. So, even a 20% appreciation of the yuan will only mean a 3% appreciation against the dollar!
5.9. Moreover, the US is not going to win any major support from Asean and Asian countries like Singapore, Malaysia, South Korea, Taiwan, Indonesia, in its quest for appreciating the yuan.
According to a recent Bloomberg study, the Korean Won rose five times as fast as China's yuan currency in the 12 months after Beijing last relaxed its foreign-exchange regime in July 2005. Singapore $ climbed three times as much, the Indonesian Rupiah five times, and the Malaysian Ringgit twice as much.
5.10. As President Obama pressed Chinese President Hu Jintao in Washington during the latter's visit to US in April 2010, to let the yuan rise at a faster rate, China, i believe, will now do so(but, of course, at its own pace, not US pace). since an appreciating Yuan will boost China's power to buy Malaysian palm oil, Indonesian coal to Indian copper! Such revaluation or appreciation of the Yuan will also enabled the Asian nations to do the same with their own currencies, without damaging exports, while fuelling US trade, and assist the global economy to emerge from its deepest postwar recession. The rising costs of imports will also spur Taiwan to let its dollar appreciate.
5.11. Some latest Nomura Japan estimates:
***** The Chinese yuan will appreciate 6.8% to 6.36 against the US$;
***** The Korean Won and Indonesian Rupiah may climb 13% against Japanese Yen, and 9.6% to 1,025 per US$ for the Korean Won;
***** Singapore $ to appreciate 9.1% to $1.28 against the US$;
***** The Taiwan $ up 5.3% to NT$30 per dollar by end March 2011.
5.11. Goldman Sachs' latest forecasts:
China's currency won't gain more than 4.9% to 6.49 in the next 12 months against the US$, as the Korean Won will jump 6.7% and the Taiwan $ 5.2% against the greenback.
6. "The Yuan Peg Doesn't Matter" says Johnathan Anderson, chief Asian economist at UBS:
6.1. The Central Bank of China - called the Peoples Bank of China - is the third largest foreign holder of US Treasury debt, and the biggest source of financing for the ever-growing US budget and current accounts deficits. It ploughs more than US$100 billion into dollar markets.
6.2. Anderson stated that fixed or floating, up or down, renminbi exchangep rate policy simply does not have any major impact on the global economy.
This is because Chinese exports may have penetrated European, Japanese and US markets at some 35% growth rate per year, but overall Asian market share grew very slowly, which means that for each additional dollar industrialized countries spend on Chinese imports, imports from the rest of Asia actually fell! Again, this is because Asian countries have moved their low-end assembly functions to China, as a final stop on the production chain before shipping the finished goods to Wal-Mart or Tesco!
6.3. Roughly half of China's foreign reserve inflows come from portfolio capital, including so-called hot money flows. Chinese banks and firms then draw down their asset positions abroad, or borrowing money in foreign markets, and bringing these funds back to China - in part to speculate on a possible renminbi devaluation move. So as these speculators and agents move out of dollar into yuan, the Peoples Bank of China PBC) is forced - as part of its overall monetary policy - to buy up the dollars - and then later pump them right back into the US by way of their dollar investments! The net effect on US markets from these transactions is ....... virtually zero!
6.4. The PBC hold a huge US$ reserve, now estimated at some $450 billion. It also has a diversified asset portfolio, including a sizeable amount of euro instruments. If China sells off a large chunk of its US$ assets, the US will suffer cardiac arrest. But would China do it and why would it do it? The PBC, like any other Central Bank, is a conservative policy institution, not a speculative hedge fund body, and it would not serve China's interests to rock the G3 currency markets!
7. So wither the US then? An exercise in futility and much ado over nothing, given their still very weak economy?
7.1. In the past two years, the US has trade deficits with 90 countries! Yet the US is pushing for a bilateral solution (namely, "forcing" China to revalue by its constant threats to tax Chinese exports) to essentially a multilateral problem. Any credible solution must
lie in multilateral approach. After all, remember that China-US trade accounts for only 12% of total annual Chinese trade.
7.2. It is now fairly well established that a stronger yuan will not reduce the huge US trade deficits, e.g. a sharp appreciation of the Yuan between June 2005 and June 2008 widened the US deficit! US imports from China rose by 39%, offseting China's US imports which (even without revaluation) had been increasing since 2002!
7.3. Moreover, higher import prices to US means a fall in the purchasing power of US income, whereas the stronger yuan will raise the purchasing power of China's producers who rely on imported raw materials! Because imports are now cheaper, Chinese exporters can now reduce their export prices to maintain their market shares!
For instance, it is estimated that the iPod cost US$150 to produce, of which only US$4 is Chinese value-added. Most of the components are made in the United States. It is then all shipped and put together in China, and exported back to the US for the full US$150 as imports from China - thereby adding to the US deficit and exaggerating the US job loss!
8. China Will Move At Its Own Pace - But A Package Deal Is Needed:
8.1. Beijing knows, Alan, as you have also pointed out in some of the Chinese studies you quoted above, that a greater exchange rate flexibility and a gradual but steady yuan appreciation is needed to streamline its own internal markets and this means it must seriouos liberalize its factors of production so as to reduce costs distortions. If done correctly, and they have the political clout and will, China will then move to a truer market economy with less distortions.
8.2. China knows it has to be equally pragmatic in restructuring its macroeconomic policies so as not to keep over-emphasizing the mantra of successive annual economic growth at the expense of anything else. It has, for example, to liberalize faster and further its financial services sectors, move out/consolidate/scrap inefficient State enterprises to the extent of privatising them, promoting more aggressively the services sector, especially encouraging more medium and small-scale industries and enterprises to flourish and not just concentrate on State behemoths which, like anywhere else, becomes lumpy and clumsy and unprofitable.
8.3. For instance, even though Chinese banks lent a record 9.6 trillion yuan (US$1.4 trillion) last year, and introduced a 4-trillion yuan stimulus package to bolster growth through the global financial crisis, it did not stop the authorities to tighten property financing in April 2010 by curbs on loans for third-home purchases, increased down-payment requirements and higher mortgage rates, to dampen the surge in domestic property prices.
Property prices in 70 cities rose by 11.7% in March 2010, and China's economy expanded by 11.9% from a year earlier in the first quarter 2010, suggesting that tighter policies are needed to cool the economy.
9. CONCLUSION:
9.1. China, as the rising global economic and political power, knows its own position and responsibilities, and will chart its own course in reforming the yuan, as President Hu Jintao told President Obama during his April 2010 US visit. He also made it clear that, whilst China would not bow to external pressures, it has always based its yuan exchange rates in accordance to its own national and economic needs. But, at the same time, he stressed, China is committed to reform, reform, reform - but at its own pace and direction to protect its economy.
9.2. As pointed out above, the US war-cry to China to appreciate the yuan is based more on political sentiments and to please the home crowd, and, as shown above time and again, any such appreciation - and it will come - will be to the US's disadvantage not advantage - and more importantly, it will in no way, help to reduce the massive US trade deficits and or give back US job losses which are all of their own making!
9.3. But, unfortunately, like in any other country, partisan politics and the control of the US media means "China-bashing" will continue, since the general public is rather ignorant of the real reasons for the huge US deficits and its perenially trade deficits for example, and blaming someone is the best game to play in these circumstances! And, coupled with the US' insatiable consumption and thereby huge imports and their propensity to spend, spend, spend, and giving little thoughts to save for a rainy day - these are the hallmarks of a failed nation!
9.4. Notwithstanding, China appears ready to loosen somewhat this US$ currency peg in the coming days, according to most internal and foreign reports. The PBC favours a prompt move, but the Commerce Ministry, aligned with China's exporters, have opposed currency appreciation.
9.5. Holding down the value of the renminbi through huge market intervention has been very very costly to China. The central bank spent 9.2% of the country's economic ouptput last year on the purchase of foreign currencies, mainly US Treasuries, that are now paying very lower interest and not that profitable to PCB.
9.6. As stated earlier, a stronger renminbi could prove to be a mixed blessing to the US: if China cuts back sharply on the purchase of Treasuries, then the Obama administraiton could find it even harder to finance US budget deficits!
9.7. With the continued booming Chinese economy, a small appreciation of the renminbi would still leave the PCB struggling with trade surpluses, and an expected tide of speculative investment into China, That could force the PCB to continue buying Treasuries - even those it is a loss-making proposition - with the extra dollars!
9.8. Inflation in China is accelerating faster than what most Western economists expected, e.g. the recent move to curb property financing, and a stronger renminbi with larger devaluation would help hold down prices and make imports cheaper. This would then give the PCB as China's central bank more room to raise interest rates and put a brake on economic growth, and help lessen the drawing of more speculative investments into the country.
Of course, the stronger renminbi would hurt the low-margin, labour-intensive industries in China, like shoes and textiles. Much of this production have already started to move to cheaper-cost countries like Vietnam and Bangladesh, since these Chinese factories now faced internal labour shortages arising from continued high-speed economic growth, including huge spendings on high-speed electric rail lines and other infrastructure investments.
9.9. The US economy grew at annual rate of 3.2% in Q1 2010, but economists cautioned that the pace of growth is still not fast enough to recover ground lost during the recession. Consumer spending was a major contributor to this expansion, growing at an annual rate of 3.6% this quarter, against 1.6% annual rate in the previous quarter.
The national debt is approaching $13 trillion, and even President Obama predicts total outstanding debt will exceed 100% of GDP by 2015! Annual deficits are running at a rate of 10% of US total output despite the near-0%-interest regime prevailing for some time, and which, by definition, should be providing the economy with abundant stimulus.
So the US is still in the shits and long way from out of the woods, and it would be in their own interests to put their own messy house in order fast. In the final analysis, as has been pointed out above repeatedly, do not expect China to devalue their yuan/renminbi sharply, say 10% -15% in 1 go, and whatever rate of devaluation that it will do soon, it will have little or no effect/benefit to the US!
Best Regards,
Eu Ming.
On Fri, Mar 26, 2010 at 7:37 AM, Alan McPhate wrote:
Hi Ming, Please tell me again why it is not in every one's best interest that China allow the value of its currency to slowly appreciate. Regards Alan
Yesterday I wrote about Chinese CEOs calling for China to bring its currency up to market rates.
Today Chinese economists are joining the call. Chinese economist Gong Shengli, in his book, China is Very Happy, calls for a strong yuan, "In order for China to survive and to continue developing, it is imperative that the renminbi goes global," says Mr Gong. "That means it is absolutely necessary and inevitable that the currency should appreciate." From the Financial Times story, A small but prominent group of economists at the Chinese Academy of Social Sciences has been pushing in recent months for a sizeable appreciation of the currency.
In an article published this year, Zhang Bin called for a 10 per cent rise and greater flexibility in daily trading limits in order to give the authorities more control over monetary policy and to restrain inflation. "There is a very urgent need" for reform of the currency system, he wrote. Zhang Shuguang, another Cass researcher, said a stronger currency was needed to boost China's services sector and reduce the emphasis on exports. The fact is that this currency imbalance distorts everything in the world economy. Chinese consumers face a barrier of up to 40% keeping them from being able to buy goods produced outside of China. Chinese businesses face the same problem. Meanwhile the rest of the world continues to lose jobs, factories and purchasing power. On April 15 the President must declare China a currency manipulator and take the necessary steps to being to remedy the p..
euming yeow
5/3/10
to Alan
RE: THE CHINESE YUAN (ALSO KNOWN AS RENMINBI) - TO APPRECIATE?
Hi Alan,
Sorry for not replying earlier to your March 26, 2010 email on China's position as to the constant US call for its currency yuan (or renminbi) appreciation.
1. Pegging the Yuan to the USD:
1.1. China's rise as an economic powerhouse was helped greatly by its pegging of the Chinese yuan to the US dollar, and making trading arrangements with the U.S. - in 1985 when it began, China's exports to US was around $4 million. By 2008, China's exports to US totalled $337.8 billion!
1.2. From 1985 to 2008, US exports to China was around one-third of China's exports to the US. Thus the Chinese peg to the US$ was beneficial to China's export business as foreign investors were now more confident in China's currency yuan, which then, was virtually unknown outside China.
1.3. The constant bitching from the US is that China's meteoric rise as an economic powerhouse is simply because China pegs its yuan to the US$ at a very low and artificial rate - not based on standard interest rate policy like most other countries' central banks' monetary policies, but on Chinese banks' reserve requirements. Thus the yuan is controlled by China's central bank - called The Peoples' Bank of China - on a fixed exchange rate basis, and here, if the banks' reserve requirements are increased, the money supply in the economy will be reduced and conversely. Traditional interest-rate policies are not used here insofar as exchange rates are concerned.
2. The Yuan/Dollar Relationship:
2.1. The regular US argument is that China is benefitting more each year from such fixed exchange rate regime, to the detriment of US manufacturers and exporters, who cannot compete against the cheaper Chinese goods. But then, cost of production - in every aspect - is definitely cheaper in China than US. Just look at the ridiculous high wages and benefits paid to say, US auto workers in General Motors which has been saved from bankruptcy by the US government pumping in billions $ in 2009.
On the other hand, GM China is No. 1 in China in terms of sales and profits. How did this happen? The Wuling Sunshine van is selling at around $4,500 basic model (about 7% above its Chinese competitors) and is China's best-selling vehicle, with 597,000 units sold last year. GM China built these vans so efficiently with its two Chinese
partners that this Wuling venture is the cornerstone of its growth strategy, and GM is pushing this low-cost business model in Asia, starting with India. It is so confident of its successes (GM already a market leader in China with their Buick and Chevrolet brands) GM is now investing $250 million R&D centre on its Shanghai campus of its new international HQ. See the differences in strategies, thinking etc?
2.2. China's standard argument is that their currency peg is meant to foster economic stability, and abandoning this currency peg would lead to economic chaos in China. An undervalued yuan means lower prices of Chinese goods to US customers, lower inflationary pressure, and lower input prices for US manufacturers that uses Chinese inputs. A lower yuan makes US exports more expensive to Chinese consumers and thus reduces US exports to China. But, as things stand today, nothing from the US to China or anywhere else is cheap because of their high cost of labour, inputs etc!
2.3. As of today, the yuan/dollar peg is 6.8339, that is, US$1.00 = Yuan 6.8339, and this peg has remained since July 2008.
3. Realities about China's Huge Balance of Payments Surpluses:
3.1. This China-bashing is fierce and emotional, so much so master critic Nobel Laureate Paul Krugman even contended that China had since taken millions of jobs globally, especially from the United States!
3.2. China's balance of payments surpluses or trade surpluses came very slowly in the 90s and rose sharply since 2004 (amounting to 3.%% of GDP) to reach a high of 10.8% GDP in 2007. The surplus has now moderated slightly, e.g. March 2010 imports exceeded exports by US$390 million, China's first trade deficit in six years, undermining United States' constant yuan criticism!
3.3. Asymmetric market liberalization in China initiated by the late Premier Teng Siao Peng meant that the factors of production - labour, capital, land, energy and environment in China - became highly distorted in the rush to industrialization and massive export-oriented economy thinking. For example, China's huge labour pool is the key to its worldwide manufacturing exports successes. But in controlling the huge rural labour movements to the cities, labour immobility results and exploitation of millions of these rural migrants led to low pay, and an inefficient, out-of-date welfare system meant that payroll costs should be at least 35-40% higher, according to one internal Chinese study!
3.4. Likewise, land is State-owned mostly, and industrial land use are not based on market price mechanism, but usually sold/given away cheaply to stimulate industrial investment.
3.5. Likewise, energy prices are low and State-subsidized, and environmental control and pollution is serious and not costed in either.
3.6. These capital market distortions it is estimated, contributed to some 40% of overall costs of production, which is not costed in properly, and these structural imbalances will not go away. So the root cause of these factors of production distortions, distorted incentives for investors, producers and exporters must be seriously tackled successfully first by China to arrive at a truer, and higher, cost of production.
3.7. Thus, looking at the picture in this respect, the undervalued yuan is just one element in this big jigsaw puzzle!
4. China's Savings Ratio:
4.1. Another favourite Western bashing is that China saves more, and spends very much less, thereby not stimulating their own internal economy. For over 15 years, China's household savings rate has been stable at about 30% - nothing unusual here, as most Asian countries definitely save around these % or more, against the US, where the propensity to spend is adversely affected by their low propensity to save!
4.2. Corporate savings it is estimated, are growing exponentially largely due to China's huge exports, and this is a major factor accounting for its huge balance of payments surpluses, not the savings rate.
5. The Yuan Exchange Rate Options - How Much to Rise?:
5.1. The usual Paul Krugman-type thinking is to let the yuan rise to "a certain margin" to eliminate the undervaluation - but this then begs the question: how much is right/correct/equitable? And definitely China and US and Europe all see this so-called "equalization" factor very differently from each other!
5.2. Goldman Sachs, in an April 2010 report stated that "....... our model suggest that the RMB (renminbi or yuan) is very close to the price that it should be...... The model used to suggest that the currency was undervalued by about 20%, but it has moved by that degree over the past five years."
5.3. A 2009 research paper of Goldstein and Lardy at the US Peterson Institute estimated a 12-16% undervaluation.
5.4. But here's the interesting notes: Between mid-2005 and end-2008, the yuan appreciated by 19%, and this after it appreciated some 30% over past 10 years since January 1994! Yet, China's balance of payments surpluses surged during these periods!
I don't see any comments on these phenomenon by Paul Krugman or any other Western economists, monetarists etc.
5.5. It is generally accepted that any large, sudden, foreign exchange adjustments will cause long-term and permanent damage to any economy, and, in China's case, will not
solve its huge BoP surpluses unless and until its huge internal structural market distortions to its factors of production are resolved satisfactorily.
5.6. Suggestions have always been made that China should adopt a more "flexible exchange rate policy" and here again, this begs the question of what is "flexible" and to China, maintaining economic stability and growth are key issues and factors affecting this flexible exchange rate.
5.7. Moreover, empirical studies have shown that there is no correlation, systematic or reliable relationship between its BoP position and exchange rate flexibility. That is to say, no significant benefits are going to accrue to say, US, from China adopting "a more flexible" exchange rate policy, and its trade surpluses will continue to grow regardless.
5.8. Any significant yuan appreciation will not reduce in any sizable form, the huge and ballooning US BoP deficits: in the US Federal Reserve exchange rates basket for the greenback, the yuan contributes only 15%. So, even a 20% appreciation of the yuan will only mean a 3% appreciation against the dollar!
5.9. Moreover, the US is not going to win any major support from Asean and Asian countries like Singapore, Malaysia, South Korea, Taiwan, Indonesia, in its quest for appreciating the yuan.
According to a recent Bloomberg study, the Korean Won rose five times as fast as China's yuan currency in the 12 months after Beijing last relaxed its foreign-exchange regime in July 2005. Singapore $ climbed three times as much, the Indonesian Rupiah five times, and the Malaysian Ringgit twice as much.
5.10. As President Obama pressed Chinese President Hu Jintao in Washington during the latter's visit to US in April 2010, to let the yuan rise at a faster rate, China, i believe, will now do so(but, of course, at its own pace, not US pace). since an appreciating Yuan will boost China's power to buy Malaysian palm oil, Indonesian coal to Indian copper! Such revaluation or appreciation of the Yuan will also enabled the Asian nations to do the same with their own currencies, without damaging exports, while fuelling US trade, and assist the global economy to emerge from its deepest postwar recession. The rising costs of imports will also spur Taiwan to let its dollar appreciate.
5.11. Some latest Nomura Japan estimates:
***** The Chinese yuan will appreciate 6.8% to 6.36 against the US$;
***** The Korean Won and Indonesian Rupiah may climb 13% against Japanese Yen, and 9.6% to 1,025 per US$ for the Korean Won;
***** Singapore $ to appreciate 9.1% to $1.28 against the US$;
***** The Taiwan $ up 5.3% to NT$30 per dollar by end March 2011.
5.11. Goldman Sachs' latest forecasts:
China's currency won't gain more than 4.9% to 6.49 in the next 12 months against the US$, as the Korean Won will jump 6.7% and the Taiwan $ 5.2% against the greenback.
6. "The Yuan Peg Doesn't Matter" says Johnathan Anderson, chief Asian economist at UBS:
6.1. The Central Bank of China - called the Peoples Bank of China - is the third largest foreign holder of US Treasury debt, and the biggest source of financing for the ever-growing US budget and current accounts deficits. It ploughs more than US$100 billion into dollar markets.
6.2. Anderson stated that fixed or floating, up or down, renminbi exchangep rate policy simply does not have any major impact on the global economy.
This is because Chinese exports may have penetrated European, Japanese and US markets at some 35% growth rate per year, but overall Asian market share grew very slowly, which means that for each additional dollar industrialized countries spend on Chinese imports, imports from the rest of Asia actually fell! Again, this is because Asian countries have moved their low-end assembly functions to China, as a final stop on the production chain before shipping the finished goods to Wal-Mart or Tesco!
6.3. Roughly half of China's foreign reserve inflows come from portfolio capital, including so-called hot money flows. Chinese banks and firms then draw down their asset positions abroad, or borrowing money in foreign markets, and bringing these funds back to China - in part to speculate on a possible renminbi devaluation move. So as these speculators and agents move out of dollar into yuan, the Peoples Bank of China PBC) is forced - as part of its overall monetary policy - to buy up the dollars - and then later pump them right back into the US by way of their dollar investments! The net effect on US markets from these transactions is ....... virtually zero!
6.4. The PBC hold a huge US$ reserve, now estimated at some $450 billion. It also has a diversified asset portfolio, including a sizeable amount of euro instruments. If China sells off a large chunk of its US$ assets, the US will suffer cardiac arrest. But would China do it and why would it do it? The PBC, like any other Central Bank, is a conservative policy institution, not a speculative hedge fund body, and it would not serve China's interests to rock the G3 currency markets!
7. So wither the US then? An exercise in futility and much ado over nothing, given their still very weak economy?
7.1. In the past two years, the US has trade deficits with 90 countries! Yet the US is pushing for a bilateral solution (namely, "forcing" China to revalue by its constant threats to tax Chinese exports) to essentially a multilateral problem. Any credible solution must
lie in multilateral approach. After all, remember that China-US trade accounts for only 12% of total annual Chinese trade.
7.2. It is now fairly well established that a stronger yuan will not reduce the huge US trade deficits, e.g. a sharp appreciation of the Yuan between June 2005 and June 2008 widened the US deficit! US imports from China rose by 39%, offseting China's US imports which (even without revaluation) had been increasing since 2002!
7.3. Moreover, higher import prices to US means a fall in the purchasing power of US income, whereas the stronger yuan will raise the purchasing power of China's producers who rely on imported raw materials! Because imports are now cheaper, Chinese exporters can now reduce their export prices to maintain their market shares!
For instance, it is estimated that the iPod cost US$150 to produce, of which only US$4 is Chinese value-added. Most of the components are made in the United States. It is then all shipped and put together in China, and exported back to the US for the full US$150 as imports from China - thereby adding to the US deficit and exaggerating the US job loss!
8. China Will Move At Its Own Pace - But A Package Deal Is Needed:
8.1. Beijing knows, Alan, as you have also pointed out in some of the Chinese studies you quoted above, that a greater exchange rate flexibility and a gradual but steady yuan appreciation is needed to streamline its own internal markets and this means it must seriouos liberalize its factors of production so as to reduce costs distortions. If done correctly, and they have the political clout and will, China will then move to a truer market economy with less distortions.
8.2. China knows it has to be equally pragmatic in restructuring its macroeconomic policies so as not to keep over-emphasizing the mantra of successive annual economic growth at the expense of anything else. It has, for example, to liberalize faster and further its financial services sectors, move out/consolidate/scrap inefficient State enterprises to the extent of privatising them, promoting more aggressively the services sector, especially encouraging more medium and small-scale industries and enterprises to flourish and not just concentrate on State behemoths which, like anywhere else, becomes lumpy and clumsy and unprofitable.
8.3. For instance, even though Chinese banks lent a record 9.6 trillion yuan (US$1.4 trillion) last year, and introduced a 4-trillion yuan stimulus package to bolster growth through the global financial crisis, it did not stop the authorities to tighten property financing in April 2010 by curbs on loans for third-home purchases, increased down-payment requirements and higher mortgage rates, to dampen the surge in domestic property prices.
Property prices in 70 cities rose by 11.7% in March 2010, and China's economy expanded by 11.9% from a year earlier in the first quarter 2010, suggesting that tighter policies are needed to cool the economy.
9. CONCLUSION:
9.1. China, as the rising global economic and political power, knows its own position and responsibilities, and will chart its own course in reforming the yuan, as President Hu Jintao told President Obama during his April 2010 US visit. He also made it clear that, whilst China would not bow to external pressures, it has always based its yuan exchange rates in accordance to its own national and economic needs. But, at the same time, he stressed, China is committed to reform, reform, reform - but at its own pace and direction to protect its economy.
9.2. As pointed out above, the US war-cry to China to appreciate the yuan is based more on political sentiments and to please the home crowd, and, as shown above time and again, any such appreciation - and it will come - will be to the US's disadvantage not advantage - and more importantly, it will in no way, help to reduce the massive US trade deficits and or give back US job losses which are all of their own making!
9.3. But, unfortunately, like in any other country, partisan politics and the control of the US media means "China-bashing" will continue, since the general public is rather ignorant of the real reasons for the huge US deficits and its perenially trade deficits for example, and blaming someone is the best game to play in these circumstances! And, coupled with the US' insatiable consumption and thereby huge imports and their propensity to spend, spend, spend, and giving little thoughts to save for a rainy day - these are the hallmarks of a failed nation!
9.4. Notwithstanding, China appears ready to loosen somewhat this US$ currency peg in the coming days, according to most internal and foreign reports. The PBC favours a prompt move, but the Commerce Ministry, aligned with China's exporters, have opposed currency appreciation.
9.5. Holding down the value of the renminbi through huge market intervention has been very very costly to China. The central bank spent 9.2% of the country's economic ouptput last year on the purchase of foreign currencies, mainly US Treasuries, that are now paying very lower interest and not that profitable to PCB.
9.6. As stated earlier, a stronger renminbi could prove to be a mixed blessing to the US: if China cuts back sharply on the purchase of Treasuries, then the Obama administraiton could find it even harder to finance US budget deficits!
9.7. With the continued booming Chinese economy, a small appreciation of the renminbi would still leave the PCB struggling with trade surpluses, and an expected tide of speculative investment into China, That could force the PCB to continue buying Treasuries - even those it is a loss-making proposition - with the extra dollars!
9.8. Inflation in China is accelerating faster than what most Western economists expected, e.g. the recent move to curb property financing, and a stronger renminbi with larger devaluation would help hold down prices and make imports cheaper. This would then give the PCB as China's central bank more room to raise interest rates and put a brake on economic growth, and help lessen the drawing of more speculative investments into the country.
Of course, the stronger renminbi would hurt the low-margin, labour-intensive industries in China, like shoes and textiles. Much of this production have already started to move to cheaper-cost countries like Vietnam and Bangladesh, since these Chinese factories now faced internal labour shortages arising from continued high-speed economic growth, including huge spendings on high-speed electric rail lines and other infrastructure investments.
9.9. The US economy grew at annual rate of 3.2% in Q1 2010, but economists cautioned that the pace of growth is still not fast enough to recover ground lost during the recession. Consumer spending was a major contributor to this expansion, growing at an annual rate of 3.6% this quarter, against 1.6% annual rate in the previous quarter.
The national debt is approaching $13 trillion, and even President Obama predicts total outstanding debt will exceed 100% of GDP by 2015! Annual deficits are running at a rate of 10% of US total output despite the near-0%-interest regime prevailing for some time, and which, by definition, should be providing the economy with abundant stimulus.
So the US is still in the shits and long way from out of the woods, and it would be in their own interests to put their own messy house in order fast. In the final analysis, as has been pointed out above repeatedly, do not expect China to devalue their yuan/renminbi sharply, say 10% -15% in 1 go, and whatever rate of devaluation that it will do soon, it will have little or no effect/benefit to the US!
Best Regards,
Eu Ming.
On Fri, Mar 26, 2010 at 7:37 AM, Alan McPhate
Hi Ming, Please tell me again why it is not in every one's best interest that China allow the value of its currency to slowly appreciate. Regards Alan
Yesterday I wrote about Chinese CEOs calling for China to bring its currency up to market rates.
Today Chinese economists are joining the call. Chinese economist Gong Shengli, in his book, China is Very Happy, calls for a strong yuan, "In order for China to survive and to continue developing, it is imperative that the renminbi goes global," says Mr Gong. "That means it is absolutely necessary and inevitable that the currency should appreciate." From the Financial Times story, A small but prominent group of economists at the Chinese Academy of Social Sciences has been pushing in recent months for a sizeable appreciation of the currency.
In an article published this year, Zhang Bin called for a 10 per cent rise and greater flexibility in daily trading limits in order to give the authorities more control over monetary policy and to restrain inflation. "There is a very urgent need" for reform of the currency system, he wrote. Zhang Shuguang, another Cass researcher, said a stronger currency was needed to boost China's services sector and reduce the emphasis on exports. The fact is that this currency imbalance distorts everything in the world economy. Chinese consumers face a barrier of up to 40% keeping them from being able to buy goods produced outside of China. Chinese businesses face the same problem. Meanwhile the rest of the world continues to lose jobs, factories and purchasing power. On April 15 the President must declare China a currency manipulator and take the necessary steps to being to remedy the p..
Re: Revaluation of the YUAN?
Euming yeow
1/11/10
to Alan
Hi Alan,
REVALUATION OF THE YUAN?
Yes, I have read Paul Krugman's article - I assume you are referring to his NYT Column article called "The Chinese Disconnect" dated October 23, 2009.
His is one of the typical Western economists' cry of "Foul" and "Wolf" in the way China handles its own foreign exchange reserves. Many countries - especially in the Asean region scarred by that 1997/1998 Asian economic/financial crisis triggered by US hedge funds attacks on the Thai baht which then precipitated this crisis - are tying their own currency to a basket of currencies, including the USD, Euro etc., and you see this arrangement in Singapore, Malaysia, Thailand etc. And why not? Why should Asian countries again be at the mercy of the mighty greedy US currency speculators, since, to them, currency is a "commodity" to be played about!
Krugman's bitching is that since the Chinese yuan (also called "renminbi"or RMB) is always kept at a fixed rate to the US$, with the continuing deterioration of the $ value, the Yuan is in effect being constantly devalued, making Chinese goods extremely cheap on the world market. So, is this China's fault or is it the $ which is the main culprit?
Perhaps it is pertinent here to look at China's banking policies in relation to its continuing economic development.
China's Economic Development and Monetary Policies:
China's exports totalled US$1.07 trillion for the first 11 months of 2009, overtaking Germany's 734.6 billion euros or US$1.05 trillion for the same period - to become the world's top exporter.
In actual fact, the Chinese government, and elsewhere globally, is faced with a continued uncertain global environment, so much so, that in the first 8 months of 2009, exports actually dropped by 22.2%, whilst imports by 22.7%. So the task of structural adjustments remains formidable.
On Thursday January 7, 2010, China's central bank - The People's Bank of China - raised the interest rate on its three-month bills by four basis points - which analysts see as an incremental step in its desire to mop up excess liquidity, but which could also indicate the beginning of a more serious tightening of credit. It is a sign that its policymakers are not going to allow a repeat of last year's record expansion of credit, as that gave rise to fears of asset bubbles.
Since September 2008, People's Bank of China has lowered the benchmark interest rates five times and reduce the reserve requirement ratios on four occasions, for the purpose of maintaining adequate liquidity for the banking sector and promoting stable growth of monetary and credit supply. In this respect, China expects to maintain stable economic growth by boosting domestic demand and reducing dependence on external demand, thus helping in its efforts to stabilize the global economy.
It is estimated therefore, that new credit will fall to less than 2.6 trillion yuan ( US$381 billion) in Q1 2009 against 4.58 trillion yuan (US$671 billion) in the same period a year earlier.
Rating Problems and the "Herd" Mentality Arising from Outsourcing:
The global financial system relies heavily on the external credit ratings for investment decisions and risk management. This rating industry is dominated by a few large players, e.g. Moodys, and specific ratings from the big three tend to be highly correlated and they combined to form a strong cyclical force. Virtually all market players adopt these ratings from the three agencies, creating massive "herd behaviour" at the institutional level. Moreover, these rating process is filled with conflicts of interest e.g. issuers also pay for the rating agencies' advisory services on restructuring their products. So can we say they are all truly "objective" in their analyses?
The rating models for mortgage-related structured products have now been found to be fatally flawed. The current global financial crisis arising from the US subprime mess saw high, unrealistic ratings assigned to many subprime products which crashed with massive huge and fast downgrades, leading to huge unprecedented losses of well-known financial institutions like AIG, Citibank, Bank of America etc.
The institutional users viz. the money managers and financial institutions, of credit ratings should be ultimately accountable to their customers and shareholders and should exercise their own judgement of risk, not just outsource risk assessment duties to the rating agencies. You still don't see this happening in US or ECC countries to date!
Thus, financial instruments to control these excesses were virtually non-existent and/or ineffective - if we want to believe in the US version of "fair play" and should every other country including China suffer from their greedy excesses?
China's US$2.1 Trillion Holdings of US Bonds and Foreign Assets:
Krugman believes, he said, like many other economists, that "China's asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis".
I reckon this is unbelievable crap coming from a Nobel Prize in Economics holder! Everyone knows, as shown above, that the subprime mess was created and nurtured in US' own backyards and is the main cause of their own housing bubble, and, if anything, all these sophisticated crooked bundling of inflated and highly-rated "assets" which were then sold off worldwide to all and sundry financial institutions, fell down fast like a pack of cards, when redemption time came! The greediest of all - AIG - even upped the ante by "re-insuring" these paper assets, and, of course, lost billions, only saved again by Uncle Sam's generous bailout using US citizens' $!
Unlike the US, which keeps interest rates at zero to fuel debt-fueled asset-price speculation, at least China has a plan to generate savings among her citizens (with a savings rate of return of better than zero for sure!).
US household savings rate is currently around 4%, whereas China's exceed 20%. the same is true for most Asian countries, where household savings rates are all higher than US - that is, we don't spend our way to bankruptcy as US citizens are doing and have been doing all these years!
The US has got to get its act together, since high savings rates, including government and business savings, are one of the surest indicators of a country's long-term financial health. By running massive perennial deficits - 2009 it is US$1.4 trillion! - is definitely unsustainable.
China has much reasons to worry about the Fear Factor - the US Dollar has fallen some 15% since March 2009, in large part because of increasing fears that the US' huge debts are becoming unmanageable.
So, is China just to sit back and watch its own investments in USD going down the drain by the billions? Krugman is definitely not a "panda hugger" - that time-worn epithet used for anyone who has anything good to say about China - but, regrettably, he is part of a string of China-bashing "experts" who will not accept the fact that China is striving to become what it has not yet become. It is upwardly mobile, consciously, avowedly, and proudly so.
Some Highlights of Pump-Priming Exercises of US and China:
Of the first US stimulus spending package of $787 billion passed by Congress, only $144 billion went to direct infrastructure spending up to end 2009 - against an American Society of Civil Engineers that the US must invest some $1.6 trillion over the next five years to upgrade and revamped its overall ageing infrastructure.
When the financial tsunami hit China late last year, Beijing approved a stimulus package of $585 billion to be spent over next two years. Nearly 50% of this emergency spending was directed at projects that accelerated China's massive infrastructure programs.
These targetted massive infrastructure spending includes the unveiling on Saturday December 26, 2009, of the fastest rail link in the world - a train connecting the modern cities of Guangzhou and Wuhan, at an average speed of 350 kilometres (217 miles) an hour. This super-high-speed train reduces the 1,069 kilometre journey to a three hour ride, cutting the previous journey time by more than seven and a half hours!
It's fastest speed in the world is rated at 394.2 kilometre an hour - against Japan's bullet-train (Shinkanshen) at 243kmh, and France's TGV at 277 kmh.
Work on this route started in 2005, and it will connect to the capital Beijing later. By 2012, 42 high-speed lines are expected to be built, increasing the national rail network from current 86,000km to 120,000km, making it the most extensive rail system outside the US, and definitely, the most modern.
China's high-tech rail system uses technology developed in cooperation with foreign firms such as Siemens of Germany, Bombardier of Canada, and Alstom of France.
The point I am trying to make here is that this kind of infrastructure spending goes straight into the real economy - exactly going back to our University-days Keynesian economics, which has now found flavour again! Krugman must know this surely!
China is at the same time going "Green" as fast as possible, and one section of this plan calls for 13 of China's biggest cities to have all-new and all-electric buses within five years - whilst the US (and Australia? Or is Penny Wong working harder here?) still struggles with its endless debates on carbon emission. A single China new company (I never heard of it though) - BYD Company - is in the forefront of developing a reliable, cheap electric-car battery - and they employ 10,000 engineers on this job!
Conclusion:
I don't think Krugman has got all his sums right: he looks at how the US is suffering vis-a-vis China's booming international reserves, but China rightly sees it its own way - these are mine, I have to be careful how I spend it, not spend it the way you want me to spend it!
Do you know for example, that General Motors, in JV with a local Chinese auto company, is China's biggest car seller - and in the US they are bankrupt! Their US chiefs should get down on their Chinese shopfloors and see how this is possible, notwithstanding now they are forced to give up their private jets!
China holds US$2.2 trillion of the world's $6.5 trillion in USD as at only end Q1 2009, which is some 50% of its GDP, and of this total, some 35% remains invested in US Treasuries.
China knows it must get out of this mighty $ trap in view of the continuing weakness of the US$, exacerbated by its Government's excessive spending and imprudent financial policies, but can the Chinese Yuan ( or Renminbi RMB) ever become an international reserve currency?
The Triffin Dilemma:
A Reserve Currency (RC) means that foreigners can hold large amounts of that currency that can move freely in and out. Hence, one of the pre-requisites of any RC is the ability of the issuing central bank to control the value of the RC though its appropriate monetary policy. This implies a stable exchange rate and a low level of inflation.
The problems here are: No country is able to tighten monetary policy alone for fear of inviting "hot money" which will negate such policy. Likewise, no country is able to tighten financial regulations because then foreign businesses will seek migration to other cheaper financial centres. And also, no country by itself can raise taxation without fear of massive tax arbitage.
So the RMB cannot do it: this is precisely the problems faced by the US Dollar - and this is called the "Triffin Dilemma", named after Belgian-American economist Robert Triffin, who first identified the problem in 1960.
This Dilemma arose simply because the US Dollar is of course its country's national currency, but it is used worldwide as the global reserve currency. So whatever US national monetary policy is often conflicted against global monetary policy when such opposing needs arise and often.
In short, the Triffin Dilemma imposes large costs on the reserve currency country, because if the world demands greater liquidity, the RC country must run a huge deficit to increase the global money supply. This the US has done - and continues to do so - by printing trillions of US Dollar paper money. But if the RC country runs a huge deficit - as the US is wont to do - then a global financial crisis is inevitable, and still happening now!
The sad reality today is that we have a global economy without a global monetary policy, global financial regulation and global fiscal system!
The Chiangmai (Thailand) Initiative:
The Finance Ministers and Central Bank Governors of the ASEAN Member States, China, Japan and Korea (ASEAN + 3), and the Monetary Authority of Hong Kong, China, on 28/12/2009, signed the Chiang Mai Initiative Multilateralization (CMIM) Agreement, following the ASEAN+3 Finance Ministers (AFMM+3) Meeting in May 2009 in Bali, Indonesia.
The CMIM, with a fund of USD120 billion, will provide financial support through currency swap transactions to the CMIM participants facing balance-of-payments and short-term liquidity difficulties.
Each CMIM participant is entitled to swap its local currency with USD for an amount up to its contribution multiplied by its purchasing multiplier, for example:
Country Financial Contribution Purchasing Multiple
US$bil % times
China (excl HK) 34.20 28.50 0.5
HK, China 4.20 3.50 2.5
Japan 38.40 32.00 0.5
Korea 19.20 16.00 1.0
Plus 3 96.00 80.00 -
IndonesiaThailand/ 4.77 3.97 2.5
Malaysia/Singapore
- same each:
ASEAN 24.00 20.00 -
TOTAL 120.00 100.00 -
Critics already have their say: This Fund is too small, and it is still in USD!
The Tobin Tax:
There is now a growing renewed interest to implement a "Tobin Tax" in many countries, as a measure of a truly global reform that is urgently needed if we are ever to contain and overcome the current global financial crisis.
Named after the US economist James Tobin who first propounded this idea, the tax is intended to put a penalty on short-teerm speculation on currencies, so that the likes of Soros' making his USD 1.0 billion betting on the Pound Sterling, and the excessive speculation and manipulation of the Thai baht by foreign unregulated hedge fund players culminating in our 1997-1998 Asian Financial Crisis, can be more stringently controlled, and then taxed accordingly.
Global foreign exchange turnover for 2007 is estimated at USD900 trillion - tonnes of paper money! If a Tobin tax of, say 0.005% is imposed on such transactions worldwide, it would yield $45 billion - near equivalent to the US$50 billion pledged for Africa! Imagine if such tax is 1.0%!
A Tobin Tax is a user-pay tax, like a casino gambling tax, and therefore less regressive.
Secondly, such a tax is counter-cyclical, that is, it will increase or decrease depending on the level of speculative fever in any market at any time.
Thirdly, such a tax can help finance the purchase of global public goods for the benefit of the global society.
Fourthly, such a tax will also reduce the excessive profits of financial robber barons like Goldman Sachs, and hence reduce their ability and capacity to pay excessive bonuses (more so when these institutions' 2008 near collapse were saved by Uncle Sam's public US$ trillion generous bailouts!), which comes about through using excessive risk-taking decisions - win all mine, lost all yours!
Thus, in the end, it is not China that is "Disconnect" as Krugman wants to put it - the Fault, Dear Brutus - is firstly the Great US of A itself spending its way to bankruptcy and blaming everyone else, and the resultant US$' weak position as the international RC. The Buck or the "Disconnect" Stops at Obama and he has to put his own house in order before crying "Wolf" too many times!
Eu Ming.
On Wed, Jan 6, 2010 at 7:14 AM, Alan McPhate wrote:
Hi Ming,
Thank you for your humorous comments and your political insights.
I would be interested in your reply to Paul Krugman's request that China revalues the YUAN.
He claims that it would be in every-one's interest
Regards
Alan
Euming yeow
1/11/10
to Alan
Hi Alan,
REVALUATION OF THE YUAN?
Yes, I have read Paul Krugman's article - I assume you are referring to his NYT Column article called "The Chinese Disconnect" dated October 23, 2009.
His is one of the typical Western economists' cry of "Foul" and "Wolf" in the way China handles its own foreign exchange reserves. Many countries - especially in the Asean region scarred by that 1997/1998 Asian economic/financial crisis triggered by US hedge funds attacks on the Thai baht which then precipitated this crisis - are tying their own currency to a basket of currencies, including the USD, Euro etc., and you see this arrangement in Singapore, Malaysia, Thailand etc. And why not? Why should Asian countries again be at the mercy of the mighty greedy US currency speculators, since, to them, currency is a "commodity" to be played about!
Krugman's bitching is that since the Chinese yuan (also called "renminbi"or RMB) is always kept at a fixed rate to the US$, with the continuing deterioration of the $ value, the Yuan is in effect being constantly devalued, making Chinese goods extremely cheap on the world market. So, is this China's fault or is it the $ which is the main culprit?
Perhaps it is pertinent here to look at China's banking policies in relation to its continuing economic development.
China's Economic Development and Monetary Policies:
China's exports totalled US$1.07 trillion for the first 11 months of 2009, overtaking Germany's 734.6 billion euros or US$1.05 trillion for the same period - to become the world's top exporter.
In actual fact, the Chinese government, and elsewhere globally, is faced with a continued uncertain global environment, so much so, that in the first 8 months of 2009, exports actually dropped by 22.2%, whilst imports by 22.7%. So the task of structural adjustments remains formidable.
On Thursday January 7, 2010, China's central bank - The People's Bank of China - raised the interest rate on its three-month bills by four basis points - which analysts see as an incremental step in its desire to mop up excess liquidity, but which could also indicate the beginning of a more serious tightening of credit. It is a sign that its policymakers are not going to allow a repeat of last year's record expansion of credit, as that gave rise to fears of asset bubbles.
Since September 2008, People's Bank of China has lowered the benchmark interest rates five times and reduce the reserve requirement ratios on four occasions, for the purpose of maintaining adequate liquidity for the banking sector and promoting stable growth of monetary and credit supply. In this respect, China expects to maintain stable economic growth by boosting domestic demand and reducing dependence on external demand, thus helping in its efforts to stabilize the global economy.
It is estimated therefore, that new credit will fall to less than 2.6 trillion yuan ( US$381 billion) in Q1 2009 against 4.58 trillion yuan (US$671 billion) in the same period a year earlier.
Rating Problems and the "Herd" Mentality Arising from Outsourcing:
The global financial system relies heavily on the external credit ratings for investment decisions and risk management. This rating industry is dominated by a few large players, e.g. Moodys, and specific ratings from the big three tend to be highly correlated and they combined to form a strong cyclical force. Virtually all market players adopt these ratings from the three agencies, creating massive "herd behaviour" at the institutional level. Moreover, these rating process is filled with conflicts of interest e.g. issuers also pay for the rating agencies' advisory services on restructuring their products. So can we say they are all truly "objective" in their analyses?
The rating models for mortgage-related structured products have now been found to be fatally flawed. The current global financial crisis arising from the US subprime mess saw high, unrealistic ratings assigned to many subprime products which crashed with massive huge and fast downgrades, leading to huge unprecedented losses of well-known financial institutions like AIG, Citibank, Bank of America etc.
The institutional users viz. the money managers and financial institutions, of credit ratings should be ultimately accountable to their customers and shareholders and should exercise their own judgement of risk, not just outsource risk assessment duties to the rating agencies. You still don't see this happening in US or ECC countries to date!
Thus, financial instruments to control these excesses were virtually non-existent and/or ineffective - if we want to believe in the US version of "fair play" and should every other country including China suffer from their greedy excesses?
China's US$2.1 Trillion Holdings of US Bonds and Foreign Assets:
Krugman believes, he said, like many other economists, that "China's asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis".
I reckon this is unbelievable crap coming from a Nobel Prize in Economics holder! Everyone knows, as shown above, that the subprime mess was created and nurtured in US' own backyards and is the main cause of their own housing bubble, and, if anything, all these sophisticated crooked bundling of inflated and highly-rated "assets" which were then sold off worldwide to all and sundry financial institutions, fell down fast like a pack of cards, when redemption time came! The greediest of all - AIG - even upped the ante by "re-insuring" these paper assets, and, of course, lost billions, only saved again by Uncle Sam's generous bailout using US citizens' $!
Unlike the US, which keeps interest rates at zero to fuel debt-fueled asset-price speculation, at least China has a plan to generate savings among her citizens (with a savings rate of return of better than zero for sure!).
US household savings rate is currently around 4%, whereas China's exceed 20%. the same is true for most Asian countries, where household savings rates are all higher than US - that is, we don't spend our way to bankruptcy as US citizens are doing and have been doing all these years!
The US has got to get its act together, since high savings rates, including government and business savings, are one of the surest indicators of a country's long-term financial health. By running massive perennial deficits - 2009 it is US$1.4 trillion! - is definitely unsustainable.
China has much reasons to worry about the Fear Factor - the US Dollar has fallen some 15% since March 2009, in large part because of increasing fears that the US' huge debts are becoming unmanageable.
So, is China just to sit back and watch its own investments in USD going down the drain by the billions? Krugman is definitely not a "panda hugger" - that time-worn epithet used for anyone who has anything good to say about China - but, regrettably, he is part of a string of China-bashing "experts" who will not accept the fact that China is striving to become what it has not yet become. It is upwardly mobile, consciously, avowedly, and proudly so.
Some Highlights of Pump-Priming Exercises of US and China:
Of the first US stimulus spending package of $787 billion passed by Congress, only $144 billion went to direct infrastructure spending up to end 2009 - against an American Society of Civil Engineers that the US must invest some $1.6 trillion over the next five years to upgrade and revamped its overall ageing infrastructure.
When the financial tsunami hit China late last year, Beijing approved a stimulus package of $585 billion to be spent over next two years. Nearly 50% of this emergency spending was directed at projects that accelerated China's massive infrastructure programs.
These targetted massive infrastructure spending includes the unveiling on Saturday December 26, 2009, of the fastest rail link in the world - a train connecting the modern cities of Guangzhou and Wuhan, at an average speed of 350 kilometres (217 miles) an hour. This super-high-speed train reduces the 1,069 kilometre journey to a three hour ride, cutting the previous journey time by more than seven and a half hours!
It's fastest speed in the world is rated at 394.2 kilometre an hour - against Japan's bullet-train (Shinkanshen) at 243kmh, and France's TGV at 277 kmh.
Work on this route started in 2005, and it will connect to the capital Beijing later. By 2012, 42 high-speed lines are expected to be built, increasing the national rail network from current 86,000km to 120,000km, making it the most extensive rail system outside the US, and definitely, the most modern.
China's high-tech rail system uses technology developed in cooperation with foreign firms such as Siemens of Germany, Bombardier of Canada, and Alstom of France.
The point I am trying to make here is that this kind of infrastructure spending goes straight into the real economy - exactly going back to our University-days Keynesian economics, which has now found flavour again! Krugman must know this surely!
China is at the same time going "Green" as fast as possible, and one section of this plan calls for 13 of China's biggest cities to have all-new and all-electric buses within five years - whilst the US (and Australia? Or is Penny Wong working harder here?) still struggles with its endless debates on carbon emission. A single China new company (I never heard of it though) - BYD Company - is in the forefront of developing a reliable, cheap electric-car battery - and they employ 10,000 engineers on this job!
Conclusion:
I don't think Krugman has got all his sums right: he looks at how the US is suffering vis-a-vis China's booming international reserves, but China rightly sees it its own way - these are mine, I have to be careful how I spend it, not spend it the way you want me to spend it!
Do you know for example, that General Motors, in JV with a local Chinese auto company, is China's biggest car seller - and in the US they are bankrupt! Their US chiefs should get down on their Chinese shopfloors and see how this is possible, notwithstanding now they are forced to give up their private jets!
China holds US$2.2 trillion of the world's $6.5 trillion in USD as at only end Q1 2009, which is some 50% of its GDP, and of this total, some 35% remains invested in US Treasuries.
China knows it must get out of this mighty $ trap in view of the continuing weakness of the US$, exacerbated by its Government's excessive spending and imprudent financial policies, but can the Chinese Yuan ( or Renminbi RMB) ever become an international reserve currency?
The Triffin Dilemma:
A Reserve Currency (RC) means that foreigners can hold large amounts of that currency that can move freely in and out. Hence, one of the pre-requisites of any RC is the ability of the issuing central bank to control the value of the RC though its appropriate monetary policy. This implies a stable exchange rate and a low level of inflation.
The problems here are: No country is able to tighten monetary policy alone for fear of inviting "hot money" which will negate such policy. Likewise, no country is able to tighten financial regulations because then foreign businesses will seek migration to other cheaper financial centres. And also, no country by itself can raise taxation without fear of massive tax arbitage.
So the RMB cannot do it: this is precisely the problems faced by the US Dollar - and this is called the "Triffin Dilemma", named after Belgian-American economist Robert Triffin, who first identified the problem in 1960.
This Dilemma arose simply because the US Dollar is of course its country's national currency, but it is used worldwide as the global reserve currency. So whatever US national monetary policy is often conflicted against global monetary policy when such opposing needs arise and often.
In short, the Triffin Dilemma imposes large costs on the reserve currency country, because if the world demands greater liquidity, the RC country must run a huge deficit to increase the global money supply. This the US has done - and continues to do so - by printing trillions of US Dollar paper money. But if the RC country runs a huge deficit - as the US is wont to do - then a global financial crisis is inevitable, and still happening now!
The sad reality today is that we have a global economy without a global monetary policy, global financial regulation and global fiscal system!
The Chiangmai (Thailand) Initiative:
The Finance Ministers and Central Bank Governors of the ASEAN Member States, China, Japan and Korea (ASEAN + 3), and the Monetary Authority of Hong Kong, China, on 28/12/2009, signed the Chiang Mai Initiative Multilateralization (CMIM) Agreement, following the ASEAN+3 Finance Ministers (AFMM+3) Meeting in May 2009 in Bali, Indonesia.
The CMIM, with a fund of USD120 billion, will provide financial support through currency swap transactions to the CMIM participants facing balance-of-payments and short-term liquidity difficulties.
Each CMIM participant is entitled to swap its local currency with USD for an amount up to its contribution multiplied by its purchasing multiplier, for example:
Country Financial Contribution Purchasing Multiple
US$bil % times
China (excl HK) 34.20 28.50 0.5
HK, China 4.20 3.50 2.5
Japan 38.40 32.00 0.5
Korea 19.20 16.00 1.0
Plus 3 96.00 80.00 -
IndonesiaThailand/ 4.77 3.97 2.5
Malaysia/Singapore
- same each:
ASEAN 24.00 20.00 -
TOTAL 120.00 100.00 -
Critics already have their say: This Fund is too small, and it is still in USD!
The Tobin Tax:
There is now a growing renewed interest to implement a "Tobin Tax" in many countries, as a measure of a truly global reform that is urgently needed if we are ever to contain and overcome the current global financial crisis.
Named after the US economist James Tobin who first propounded this idea, the tax is intended to put a penalty on short-teerm speculation on currencies, so that the likes of Soros' making his USD 1.0 billion betting on the Pound Sterling, and the excessive speculation and manipulation of the Thai baht by foreign unregulated hedge fund players culminating in our 1997-1998 Asian Financial Crisis, can be more stringently controlled, and then taxed accordingly.
Global foreign exchange turnover for 2007 is estimated at USD900 trillion - tonnes of paper money! If a Tobin tax of, say 0.005% is imposed on such transactions worldwide, it would yield $45 billion - near equivalent to the US$50 billion pledged for Africa! Imagine if such tax is 1.0%!
A Tobin Tax is a user-pay tax, like a casino gambling tax, and therefore less regressive.
Secondly, such a tax is counter-cyclical, that is, it will increase or decrease depending on the level of speculative fever in any market at any time.
Thirdly, such a tax can help finance the purchase of global public goods for the benefit of the global society.
Fourthly, such a tax will also reduce the excessive profits of financial robber barons like Goldman Sachs, and hence reduce their ability and capacity to pay excessive bonuses (more so when these institutions' 2008 near collapse were saved by Uncle Sam's public US$ trillion generous bailouts!), which comes about through using excessive risk-taking decisions - win all mine, lost all yours!
Thus, in the end, it is not China that is "Disconnect" as Krugman wants to put it - the Fault, Dear Brutus - is firstly the Great US of A itself spending its way to bankruptcy and blaming everyone else, and the resultant US$' weak position as the international RC. The Buck or the "Disconnect" Stops at Obama and he has to put his own house in order before crying "Wolf" too many times!
Eu Ming.
On Wed, Jan 6, 2010 at 7:14 AM, Alan McPhate
Hi Ming,
Thank you for your humorous comments and your political insights.
I would be interested in your reply to Paul Krugman's request that China revalues the YUAN.
He claims that it would be in every-one's interest
Regards
Alan
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