Chinese? CA Surplus grew rapidly. China s strong exports are problematic to the U.S.?

China’s miraculous growth in exports • CA Surplus grew rapidly Since 2000, China’s exports grew at phenomenal 25% annually In 2000, China became the l...
Author: Tracy Pitts
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China’s miraculous growth in exports • CA Surplus grew rapidly Since 2000, China’s exports grew at phenomenal 25% annually In 2000, China became the largest contributor to the U.S. trade deficit In 2004, China also surpassed Japan in the world’s share of exports In 2005, the U.S. trade deficit with China is $201.5 billion (27% of total), more than double of Japan’s figure ($82.5 billion)

Trade war again, but w/ Chinese? U.S. Trade Balance, TB w/ Japan and China Millions of dollars 50000.0 0.0 1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

-50000.0 -100000.0 -150000.0 -200000.0 -250000.0

TB TB-JP TB-CH

-300000.0 -350000.0 -400000.0 -450000.0

China’s strong exports are problematic to the U.S.? • U.S. current accounts are deteriorating rapidly ¾ $800 billion, 6% of US GDP (2006) ¾ $2.5 trillion (21% of GDP, 2006) owed to foreigners ¾ Some alarm the possibility of harsh economic adjustment (rise in i, drop in U$, recession?) – Edwards (2005): The size of US CA deficits is unusually high both historically and compared to other industrialized countries – Mussa (2004) calculates that a sustained current account deficit of 5% will result in a net foreign liabilities position of 100% of GDP

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“Global Imbalances”

Source: IMF, WEO, Sept. 2005

Current account and capital account China

United States

Current account and capital account China Exports > Imports = trade surplus ≈ current account surplus

United States Exports < Imports = trade deficit ≈ current account deficit

2

Current account and capital account $$$

China

$$$$$$

United States Exports < Imports = trade deficit ≈ current account deficit

Exports > Imports = trade surplus ≈ current account surplus

Current account and capital account $$$

China

$$$$$$

United States Exports < Imports = trade deficit ≈ current account deficit

Exports > Imports = trade surplus ≈ current account surplus

“Recycled” in US Treasury Bills

China’s Current Account and IR Holding China Total reserves (includes gold, current US$)

Japan Total reserves (includes gold, current US$)

China Current account balance (% of GDP)

Japan Current account balance (% of GDP)

% of GDP

8

1,000

6

800

4

600

2 0 -2 1980 -4 -6

$ Billion 1,200

10

1985

1990

1995

2000

2005

400 200 0

3

Japan's Yen and China's Yuan again the US Dollar Japan-FOREX

China-FOREX 250

10 9

(left s cale)

225

8

200

7 6

175

5 150

4 (right s c ale)

3

125

2

100

1 0

75 1980

1985

1990

1995

2000

2005

Traditional “Twin Deficits” argument • The main cause is US dissaving – i.e., public dissaving = gov’t budget deficits since 2002 Æ –4.7% as of 2004 – While corporate sector is saving recently, individuals and the public sector are big dissavers – Relatively good performance in equity and housing markets Æ dissaving factors

US Budget Balances and Current Account Balances as a ratio to GDP, 1970 - 2004 4 budget balance

3

CA balance

2 1 0 1970

-1

1972 1974

1976 1978

1980 1982

1984 1986

1988 1990

1992 1994

1996 1998

2000 2002

2004

-2 -3 -4 -5 -6 -7

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Those who run CA surpluses are to be blamed! The “savings glut” argument – “Asia, esp. China, saves too much!” – The Asian region savings lead to CA surplus – With closed financial markets, CA surplus = IR accumulates – Heaving FOREX intervention => IR accum. more – IRs were invested in US gov’t bonds, contributing to lower long-term interest rates – Therefore, the Asian savings feed (fed?) the housing bubble, and allows the U.S. gov’t to continue running budget deficits

The savings glut argument is popular in Washington (2000s) • China (or East Asia) is the biggest contributor to U.S. CA deficit • China, with manipulative currency policy, keeps its currency undervalued and keeps dumping exports to U.S. markets • China needs to revalue its currency, and • develop and liberalize its financial markets, so that • China’s excessively high saving rate will go down, and that • China’s enormous current account surplus will be recycled within the country (or the region), not flowing into the U.S.

Déjà vu of the pre-Plaza accord period (1981 – 1985) • Japan is the biggest contributor to U.S. CA deficit • Japan, with manipulative currency policy, keeps its currency undervalued and keeps dumping exports to U.S. markets • Japan needs to revalue its currency, and • develop and liberalize its financial markets, so that • Japan’s excessively high saving rate will go down, and that • Japan’s enormous current account surplus will be recycled within the country (or the region), not flowing into the U.S.

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Similarities b/w Japan during the early 1980s and China now Japan in the early 1980s • CA Surplus grew rapidly 0% in 1981 to 4% in 1985 US CA deficit Æ 0% in 1981 to 3% in 1985 J contributed 45% of US trade deficit in 1985

U.S. in the early 1980s • The White House was hesitant to intervene –“strong dollar, strong America” – Yen-dollar committee • Congress became protectionist – Gephardt resolution – 20% tariff on Japanese imports unless it corrects

its “unfair trade practices”

Plaza Accord in September 1985 • G5 agreed to jointly intervene the FOREX market to guide yen and DM to appreciate • By 1989, Yen appreciated by 50% • In 1987, J’s CAS started declining • Although it did not lead to complete reversal of U.S.-J. trade imbalances, it left a significant impact on international finance in the Asian region in the following years – Creation of the bubble economy – High yen trend continued till 1995 – Japan’s FDI increased considerably in the Asian region

Similarities b/w Japan during the early 1980s and China now U.S. in the early 2000s • The White House was relatively hesitant to intervene – Yuan-dollar committee

• Congress became protectionist – Schumer-Graham bill – 27.5% tariff on Chinese imports unless it corrects its “manipulative currency policy” – Grassley-Baucus bill – require Treasury to work w/ IMF to fix the Yuan value

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Second Plaza Agreement? Fred Bergsten, president of IIE • “The second Bush administration should take a page from the second Reagan administration and do a midcourse correction” • China needs to revalue Yuan by 10% • G7 and IMF should joint the U.S. efforts and achieve China’s alteration of currency policy and coordinated appreciation of other Asian currencies • If China does not cooperate, there should be sanctions

Differences in the Economic Structures • China in the 2000s differs much from Japan during the 1980s – capital/labor ratio – exchange rate regime / role of currency – productivity growth and its difference from the U.S.

• China particularly lags behind Japan in financial development and openness of financial systems – China is equipped w/ dysfunctional financial system, unlike Japan during the 1980s

• China is expected to follow the path Japan has been through in terms of young and dependency ratios

So, What will happen? • The tug-of-war b/w China and the U.S. will continue • So will the quasi-fixed exchange rate system • In the meanwhile, FR keeps accumulating – To prepare for future financial liberalization – To prepare against a possible currency crisis (e.g., what happened to Korea, HK, Malaysia, and Thailand)

• There continues to be potential inflation threat (and the asset bubble)

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Macroeconomic reasons for foreign reserves accumulation • Rising unemployment • Foreign intervention keeps the economy inflated (= expansionary policy) • Slow progress in streamlining of SOEs • Huge amount of NPLs – Official estimates of non-performing loans in financial system at 40% GDP…could be 60-70% GDP, who knows!

• Massive bad loans can be maintained only if strong growth in economy. • Chinese leaders do not want China to be “another Japan.”

Is China’s miraculous growth sustainable? Political concerns • Another swing of the pendulum?, i.e., another Tian’anmen Sq.? • Socialist market mechanism??, i.e., can a politically socialist nation have a capitalist economic system? • Rise in nationalism • Social unrest related to property rights vs. Gov’t industrial policy

Economic concerns • • • •

Income disparity across regions Inflation in the real asset sector, i.e., bubble economy? Rise in labor cost (among tech.-skilled workers) industrial transformation and education policy

International concerns • • • •

Rivalry w/ Japan Natural resources policy (esp. oil) and other environmental concerns Trade war(?) w/ the U.S., EU, Japan, and Korea Increase in China’s presence in IR

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