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Chinese Currency move might be a long way off

by Alexander G Rubio Mon Jul 11th, 2005 at 05:42:53 PM EST

Economist and former US Treasury official Brad Setser sees signs that any Chinese change in the exchange rate of the renmimbi/yuan versus the dollar might be further off than most Washington observers had hoped.

China's central bank Governor Zhou Xiaochuan hinted that might be the case recently: "The time is not ripe yet'' to scrap the fixed exchange rate of about 8.3 yuan to the dollar, Zhou said in an interview in Basel, where he is attending meetings of central bankers at the Bank for International Settlements. "Premier Wen has already said enough on the subject. I don't have anything to add.''

One problem in gauging the pressure of economic forces working on the Chinese administration is the lack of reliable numbers for economic development in the country, often leaving guestimates and tea leaves as the only guides to the future.

China is betting that domestic US politics will allow the US market to remain open to Chinese goods even as China's global trade surplus -- not to mention its bilateral trade surplus with the US -- soars. Perhaps as importantly, it also is making a bet that the US consumption growth won’t falter. Exports to the US account for a growing share of Chinese GDP. Given the size of the US current account deficit, that strikes me as a long-term risk to China. Looking ahead, the US import market almost certainly cannot continue to grow at its current rate – at least not for much longer. In other words, something's gotta give.

This article is also posted at Bitsofnews.com.

They are taking us for 200 billion a year, why risk it all for another 100 billion? The chineese do things on chineese time.
by Coriolanus on Tue Jul 12th, 2005 at 11:02:56 PM EST
But taking into account another gangbusters month for the Chinese trade surplus, which doesn't bode well for the US deficit numbers, we're getting very close to the point where the status quo is no longer politically sustainable.

One has to be an economist to not see that a free trade system breaks down when actors like China and to a lesser degree India enters the stage. The concept of "relative advantage" becomes meaningless when some actors are unbound by all labour and environmental regulation, and one actor alone could produce all the worlds manufactured goods and still not have high enough employment to drive up wages and balance the scales.

"Common people" have already understood as much, and they will sooner or later show up with torches and pitchforks at the castles of the mighty.

Bitsofnews.com Giving you the latest bits.

by Alexander G Rubio (alexander.rubio@gmail.com) on Wed Jul 13th, 2005 at 12:07:42 AM EST
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I totally agree. The problem with China is that they don't have protections for workers or the environment.  India is more difficult, I think that in the long term, India will see wage growth, because there are basic protections, and India is the world'd largest democracy. The recent victory of the Congress party shows why India can change while China can not.  India is a democracy, and more importantly in India, civil society is possible.  With the brief exception of 77-78, India has always a totally free country.  China is not, union leaders are arrested, and there is no political process.

For the floating of the Yuan, the far more important factor is that the Chinese banking system is like Swiss cheese.  Chinese banks made loans that are never going to be paid back, and they keep making bad loans.  If the yuan floated this could all fall apart, that is the biggest reason this will not happen soon.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Jul 13th, 2005 at 01:02:43 AM EST
[ Parent ]
Yes, when the day of reckoning comes China will have use for a good chunk of those reserves they've been accumulating to keep the banking sector from going tits up.

Of course a lot of what's going on in China makes little sense and would be impossible even in most centrally planned economies. As you point out a lot of the loans are non-performing, and they're sort of meant to be. Growth is paramount, not profits. That's one of the reasons, and probably a bigger one that Byzantine rules often mentioned, why the Chinese stock markets have been so lacklustre in their performance. Smart money knows that many of the export success stories are not making profits.

The mandarins know there'll be hell to pay somewhere down the road, but that, and the risk of depreciation of the value of the dollar denominated reserves, is probably seen as an acceptable price to pay for the turbo boosted industrialisation of the nation. No matter if there will be a steep bill, at the end of the day The great Leap Forward will have been achieved. And they might be right.

But as you say, they'll be in no hurry to revalue, or God forbid float, the renminbi/yuan. The wild card here of course is that they might underestimate the speed with which a popular backlash in the US and other western countries can overturn the board.

Bitsofnews.com Giving you the latest bits.

by Alexander G Rubio (alexander.rubio@gmail.com) on Wed Jul 13th, 2005 at 01:52:58 AM EST
[ Parent ]
Will collapse sooner or later, and when it goes, it will be (economically) bloody. While I don't know too much about how their foreign banking looks, their domestic scene is just awful.

In short, the problem can be summed up in two words: real-estate speculation. In that there is a huge amount of it going on, and it's entirely unchecked. In any major city in the country, you'll see half-built high rises. Not half-build as in "under construction," but as in they built half the thing and the money they got from the Bank ran out. No cranes, no construction crews, no nothing - just half a building.

That in itself won't kill the banking system, but how all those half-buildings are financed will. Currently, if a bank has a loan out on a building being built on spec, it automatically gets backed by the Government (due to some odd legal ways their banking system is set up). Hence, banks have no reason to be selective in their loans. Most banks will lend anyone with some blueprints a few million dollars at a low rate, because they have no potential to loose - worst case is that they get the principal back from the government, and they break even.

In many cases, it becomes like the old "coffin ships" before loading limits were imposed - someone will come up with a building plan, get a huge loan for it, and then only get halfway through building the thing. Of course, the companies that built (and got paid for) the half-building will be owned by the same developer, and probably by the bank (both the officers of the bank and the bank itself). The bank then goes to the Central Bank, and gets its principal back - if you will, an institutional kickback.

Problem comes when the Central Bank is forced to stop covering these loans. The banks will stop issuing new loans to cover new buildings at the rate that developers are used to in the country (because they'll need to take risk into account), and they'll push hard to renegotiate their existing ones (again, for risk). Inevitably, 2/3rds of the loans they have outstanding will default (like I said, that's the norm in commercial loans there), and the lack of coverage from the Government will kill at least half the Banks going, with the rest taking huge losses.

All in all, not a good situation. And it happens to be one more reason they're resisting calls for a flotation. Ignoring the ramifications of the currency market (which I don't know enough about, and which won't really effect real-estate development due to mostly domestic sourcing), opening up their currency will be a step towards opening up their banking system - which they simply cannot afford to do without some radical changes in commercial development practices, which would in turn slow down the economy, which the screws up their currency valuation, etc.

Long story short - it's a long ways off.

by Scipio on Wed Jul 13th, 2005 at 03:50:19 PM EST
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I can't help but think that China might end up going the way of Japan when the banks have to be solvent.  The demographic situation is nuts too.  China is going to age quicker than any country before it, and that means the labor supply is going to shrink rapidly.  The thing that gets me about China is that they are putting a lot of the problems they shoulc be dealing with now off until they're richer, but the problem is that are compounding problems, and when it hits it's going to be all the worse.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg
by ManfromMiddletown (manfrommiddletown at lycos dot com) on Wed Jul 13th, 2005 at 11:50:03 PM EST
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