If Chinese consumers decrease spending, I doubt Japan or Europe or the U.S. will pick up the slack.
When thinking about China, I think it is prudent to recall that the stock market and the economy of any particular country aren't the same thing. The downward movement in the stock market--and the real estate market--has been engineered by the Chinese government. They don't want double digit growth and they don't want an inflationary spiral, and so have steadily tightened rates for at least the past 6 or 7 months or so. My understanding is that the provinces in China have more power than, e.g., the states in the US do, except when Beijing really wants to throw its weight around, which makes things tricky there. But they seem to be still growing at at least a healthy 6-8% clip, and I don't think the Chinese govt wants to go any lower than that if they can help it. There has also been labor unrest in several provinces, forcing some pay raises, with at least one highly publicized hike of over 30% as well as others not as publicized. This could well lead to a serious increase in overall purchasing power, which the rest of world certainly needs at this point, especially if they follow up their words about allowing the yuan to rise (see article below). We will have to see whether the Chinese govt can engineer a "Goldilocks" landing, but personally, I am leaning to the opinion that they will manage to do it.
June 19, 2010
China Signals a Gradual Rise in Value of Its Currency
By KEITH BRADSHER
nytimes.com
HONG KONG — China announced on Saturday evening that it would allow greater flexibility in the value of its currency, a move that could defuse growing international criticism of its fiscal policies.
The announcement by China’s central bank was the clearest sign yet that the country would allow its currency to appreciate gradually against the dollar. It comes just a week before President Obama and President Hu Jintao will meet in Canada at an economic summit meeting at which China’s refusal to allow its currency to rise against the dollar appeared bound to be a source of conflict.
A movement in Congress to take trade action against China if it did not adjust its currency policies had been gaining ground.
Mr. Obama and the Treasury secretary, Timothy F. Geithner, immediately praised the development. “China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Mr. Obama said in a statement.
But the People’s Bank of China was very cautious in its statement about how far its currency might move, saying that “the basis for large-scale appreciation” of the exchange rate does not exist. The careful wording left it unclear to what extent it would allow the currency to float from its peg against the dollar, and thus how significantly it might rebalance the global trade picture.
While welcoming the announcement, Mr. Geithner also sounded a note of caution in his reaction. “This is an important step, but the test will be how far and how fast they let the currency appreciate,” he said.
The central bank said that the Chinese economy was strengthening after the global financial crisis and that it was “desirable to proceed further with reform” of the currency, known as the renminbi or yuan. Tellingly, the announcement was made simultaneously in Chinese and in English, and Chinese officials advised foreign governments before the announcement that they were about to take a new stance on currency policy, according to an American official.
The renminbi has already risen with the dollar by 15 percent against the euro in the past two months. That has made Chinese officials nervous about the ongoing competitiveness of Chinese sales to Europe, which is the biggest market for Chinese exports.
For Mr. Obama, China’s currency has been a particularly sticky problem, especially at a time that he is leaning on the Chinese government to help contain the nuclear programs of Iran and North Korea, act as one of the main engines to pull the world economy out of a deep hole, and to moderate its efforts to gain exclusive access to raw materials around the world needed to fuel China’s huge growth.
But his leverage over the Chinese has been minimal, and in the end it may have been the threat of protectionist actions against Chinese imports that convinced the country’s leadership that it had to begin to free its currency.
Some lawmakers in Congress have been unflinching in pressing for a Chinese currency revaluation in an effort to reduce a huge trade deficit by making Chinese goods more expensive in the United States and American-made products more competitive in China’s consumer culture.
“China’s currency practice has cost American jobs and hurt American ranchers, farmers and small businesses,” said Max Baucus, Democrat of Montana, the chairman of the Senate Finance Committee. “Today’s announcement is a welcome first step to help keep American businesses competitive and create more American jobs,” he said. However, China’s currency appreciation must be meaningful to ensure American ranchers, farmers and small businesses are competing on a level playing field in the global economy.”
If Saturday’s announcement is followed by significant appreciation of the renminbi, goods from the United States and other countries could start displacing Chinese exports in many consumers’ purchasing decisions. That could help fuel economic growth in many of China’s trading partners, while braking growth in China’s economy, which has been expanding so fast that inflation is now accelerating.
Rising wages in China after recent labor unrest, combined with a stronger currency, may make China a more attractive consumer market for international companies. But this could help Europe more than the United States.
American exports to China have been weak and concentrated in a few categories like aircraft, turbines and soybeans, while European companies have been more successful in selling high-end consumer goods to China.
The announcement comes a week before world leaders gather in Canada for the Group of 20 and Group of 8 summit meetings. A growing number of countries have been calling for China to let the renminbi appreciate, including not just the United States and European nations, but India, Brazil and Singapore in recent weeks.
The first sign of how much currency appreciation will be tolerated is likely to come on Monday morning, when the People’s Bank of China will set the initial trading band for the value of the renminbi in Shanghai currency trading.
China’s announcement strongly echoed the central bank’s decision in July 2005 to begin allowing the renminbi to rise against the dollar. The renminbi then rose 21 percent over the next three years, until the central bank informally repegged the renminbi at 6.83 to the dollar in July 2008, as the international financial system and the global economy began deteriorating rapidly.
The renminbi barely rose for weeks after the initial adjustment in July 2005, and did not start climbing briskly until the start of 2008, as the Chinese government allowed time for exporters to renegotiate contracts with foreign buyers. That precedent has caused economists to be skeptical about how much further the renminbi will be allowed to rise against the euro, and how much it will be allowed to climb against the dollar.
The central bank’s statement on Saturday, like the statement nearly five years earlier, said that the People’s Bank of China would set the value of the renminbi in relation to various currencies, and not just the dollar.
But in contrast with the 2005 announcement, the People’s Bank did not include any immediate appreciation of the renminbi. In 2005, the new currency policy was accompanied by a one-time, 2 percent rise in the currency against the dollar, followed by further, gradual appreciation against the dollar.
For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the Chinese government has started to make an energetic effort to improve the standard of living of industrial workers.
The Chinese government has handled currency policy very gingerly, fearing that its own people might see currency appreciation as a step taken in response to foreign pressure that might not be in China’s interest.
But many economists inside and outside China have argued that currency appreciation is in China’s interest most of all. The country has been spending nearly one-tenth of its annual economic output to buy Treasury notes and bonds and other foreign securities while printing and selling renminbi, all in an effort to prevent the renminbi from rising against the dollar.
By linking the renminbi to a basket of unidentified currencies, not just the dollar, the Chinese central bank could end up with the renminbi actually falling in value against the dollar, if the rest of the currencies in the basket fall against the dollar. But the last time the central bank said that it was following a basket of currencies, from 2005 to 2008, the renminbi rose slowly but steadily against the dollar.
Statistical analysis suggested then that the basket was just a ruse for the benefit of Chinese public opinion, as the value of the renminbi seemed to show no correlation with any currency except for its slow rise against the dollar.
Cui Tiankai, a vice foreign minister, said on Friday that the value of the renminbi was not a subject for global discussion, the latest in a series of remarks by Chinese officials indicating strong nationalistic sensitivities about currency policy.
But people familiar with Chinese currency policymaking have been saying for two months that the Chinese leadership agreed in early April to a change of direction in currency policy. A devastating earthquake in western China in mid April followed by worries about economic turmoil in Europe delayed implementation of the leadership’s decision.
David E. Sanger and Sewell Chan contributed reporting from Washington. |
