The Yuan, the Chinese Trade Balance and the US, Again

…through the Lens of Multiple Regression

I hesitate to add to the welter of commentary on President Hu Jintao’s state visit (e.g., [0]), but Professor Mark Wu’s recent NYT Op-Ed China’s Currency Is Not Our Problem inspired me to think again about how econometrics can inform policy.

Bivariate vs. Multivariate

In the article, Professor Wu states:

Many Americans believe that the Chinese jobs being preserved by an artificially low currency come at the expense of American jobs. There are three common explanations behind this theory.

First, a stronger currency would increase the purchasing power of Chinese consumers and decrease the relative cost of American goods in China, spurring more Chinese to buy more American products. Second, a stronger currency increases the relative cost of Chinese goods in third markets, like Europe or Latin America. So if the renminbi appreciates, consumers in other countries will shy away from Chinese products in favor of American products. Third, a stronger currency would increase labor costs in China, making it less attractive for American companies to move jobs to China and thus keeping more people employed at home.

These claims, however, are more wishful thinking than actual truths. Consider the first idea, that a strengthened Chinese currency would increase the growth rate of American exports to China. From 2005 to 2008, the renminbi appreciated nearly 20 percent against the dollar. Yet, American exports to China over those three years grew at a slightly slower pace than in the previous three-year period when the renminbi did not appreciate at all (71 percent versus 89 percent).

The description of the data is hard to deny. And, in addition, the Chinese global trade balance also rose as the renminbi appreciated on a trade weighted basis. Figure 1 illustrates the time series.


Figure 1: Log CPI deflated trade weighted value of Chinese yuan (blue line, left axis), Chinese trade balance, monthly in billions of USD, customs basis (red line, right axis), and 12 month trailing moving average (purple line, right axis). NBER defined recession dates shaded gray. Source: BIS for exchange rate, IMF, International Financial Statistics for trade data, updated with news reports, NBER, and author’s calculations.

The correlation between CNY value and the trade balance is positive, thereby seemingly buttressing Professor Wu’s skepticism. But this is why multiple regression was developed; that is, we typically think of macroeconomic relationships as involving more than just two variables.

Briefly put, Chinese exports could at a minimum be thought of as depending on rest-of-world economic activity, productive capacity in China, and the relative price of Chinese exports, a function itself of the exchange rate and the price level. Imports could be thought of as depending on Chinese economic activity, the relative price of Chinese imports, a function itself of the exchange rate and the price level. Hence, the Chinese trade balance at a minimum should depend on Chinese GDP, rest-of-world GDP, Chinese manufacturing capacity, and the real exchange rate. If one thought that there were other determinants, such as trade barriers, that would make the list of relevant determinants even bigger. Making this realization means at a minimum, bivariate correlations are highly suspect. (Another variable of interest would be productivity, which we know has grown rapidly in China; this suggests the proper relative price would be the unit labor cost deflated real exchange rate [primer], as suggested on page 12 of the last IMF Article IV on China).

Professor Wu continues, by arguing that even if there is an effect, it is likely to be minimal, since US exporters and Chinese exporters don’t compete head to head in third markets, and further US exports are capital goods (aerospace and power generation are the examples cited). These arguments make sense, but for me, I’d want to refer to what the statistical evidence indicates about quantitative magnitudes of responses, rather than a priori judgments.

New Econometric Results

Three years ago, I would’ve agreed substantively with Professor Wu’s assessment that the degree of substitutability between Chinese and non-Chinese goods was low, and hence price elasticities low. But since then, variation in trade flows have provided evidence of greater sensitivity to relative prices. For instance, Ahmed (2009) obtains a quasi-long run export price elasticity of 1.8, estimated over a sample ending in 2009 (Ahmed’s figure is for growth rates on growth rates, since he uses a first differences specification). Further, as I noted in a post from September 2010, I also obtain a pretty high elasticity of exports with respect of the real exchange rate.

To obtain this conclusion, I used an error correction specification, where exp is log real total Chinese goods exports, and y* is rest-of-world log GDP, and q is the log trade weighted exchange rate for the China (CPI deflated, from the IMF).

Δ exp t = β 0 + φ exp t-1 + β 1 y t-1* + β 2 q t-1 + β 3 z t-1 + γ 0 Δ exp t-1 + γ 2 Δ y *t-1 + γ 3 Δ y USt-2 + γ 4 Δ q t-1 + γ 5 Δ q t-2 + u t

Estimating this over specification over the 2000Q1-2009Q4 period yields an adjusted-R2 of 0.94, SER=0.032, and passes a LM test for serial correlation of order 2, at the 10% msl. The implied long run price elasticity is 0.75 (and is statistically significant). The rate of reversion is 0.46 per quarter, implying a half-life of a deviation is a little over 1 quarter.

This 0.75 long run elasticity is quite a bit higher than the Cheung et al. (2010) estimate of between 0.34 to 0.64, estimated over the 1993-2006 period. (For caveats about the empirics, see the original post).

Where I agree with Professor Wu is that it is unclear that rest-of-world exports to China (global Chinese imports) would increase with an appreciation of the Chinese yuan. That’s because, like Marquez and Schindler and Cheung et al. (2010), I was unable to obtain a reasonable estimate of a price elasticity for Chinese imports using an analogous ECM specification incorporating Chinese GDP and the real exchange rate. This result might be in part due to inappropriate aggregation of ordinary and processing imports, but I think that is only part of the story, since in Cheung et al. (2010), we are unable to obtain sensible price elasticities even after disaggregation. One hypothesis is the period includes substantial import substitution.

One could assume that an appreciated currency would induce greater imports, as Cline (2010) does. In the absence of reasonable estimates, I prefer to remain agnostic. (By the way, this explains why Cline obtains a substantially larger $170 billion impact on the trade balance for the 10% appreciation.)

However, one can still make some conclusions regarding exports. The results indicate that, holding all else constant, a 10% appreciation of the trade weighted real value of the yuan will induce a 7.5% reduction in Chinese exports. To get a feeling for the quantities involved, Chinese nominal exports in the 2009Q3-10Q4 period were $1.385 trillion. A 7.5% reduction of this amount is $104 billion; but a change in the value of the yuan should induce a partially offsetting $32 billion increase in total nominal value of exports (assuming 25% pass through, and 10% appreciation). The net dollar impact would then be only about $72 billion. This is not an unsubstantial impact, given 2009Q3-10Q2 trade balance was $155.6 billion (or the $200 billion forecast by China Economic Quarterly, or $212 billion in the IMF’s Article IV review of China).

Yin-Wong Cheung and I are now starting work to undertake an updated, and more comprehensive, look at Chinese elasticities.

China, and China Plus East Asia

The assertion the America’s trade balance would be largely unaffected by Chinese appreciation is in part predicated by the view that only Chinese exports would be affected. But as I stressed in this October IMF panel on China, trend Chinese yuan appreciation would likely induce trend appreciation of other East Asian currencies. Figure 2 (from this post) highlights the 2005-07 experience.


Figure 2: Chinese yuan (black), and other East Asian currencies against the USD, all normalized to 2005M06=1. “Down” is defined as appreciation. Source: IMF, International Financial Statistics, St. Louis Fed FRED II, and author’s calculations.

Professor Wu concludes:

…it is unlikely that a stronger renminbi would bring many jobs back home. Instead, companies would most likely shift labor-intensive production to Vietnam, Indonesia and other low-wage countries. And in any case many high-skilled jobs will continue to flow overseas, as long as cheaper talent can be found in India and elsewhere. Only in a few industries, like biomedical devices, would a stronger Chinese currency combined with quality issues tempt American companies to keep more manufacturing at home.

I agree that if it were only China shifting its exchange rate, Professor Wu’s assessment would be make sense. However, it has never been “just China”. From Thorbecke and Smith (2010) ([wp version]):

China’s global current account surplus equaled 9% of Chinese GDP in 2006 and 11% of GDP in 2007. Many argue that a renminbi appreciation would help to rebalance China’s trade. Using a panel dataset including China’s exports to 33 countries we find that a 10% renminbi (RMB) appreciation would reduce ordinary exports by 12% and processed exports by less than 4%. A 10% appreciation of all other East Asian currencies would reduce processed exports by 6%.A 10% appreciation throughout the region would reduce processed exports by 10%. Since ordinary exports tend to be simple, labor-intensive goods while processed exports are sophisticated, capital-intensive goods, a generalized appreciation in East Asia would generate more expenditure-switching towards US and European goods and contribute more to resolving global imbalances than an appreciation of the RMB or of other Asian currencies alone.

See also this post.

Will renminbi appreciation solve the problems of the US. Here I agree with Professor Wu; on sustaining long term growth and reducing the current account deficit over the long term, increasing investment in human and physical capital and reining in the long term structural budget deficit are important. But to get to the long term, we need to survive the short term, and here expenditure switching via exchange rate changes is one important tool that can be effected much more quickly than in restructuring the US educational system.

Statistical Evidence on Foreign Official Flows and Current Account Balances

Finally, Professor Wu’s implicit argument that China’s current account surplus would be largely unaffected by reduced foreign exchange intervention flies in the face of statistical correlations. Using a cross-country panel regression methodology similar to that implemented by Chinn and Ito [1] [2], Joseph Gagnon writes:

External financial policies are the most important drivers of current account imbalances in
developing economies, but they are not significant drivers in advanced economies. These policies include,
for example, preventing exchange rate appreciation after positive shocks to net exports by sterilized
intervention in foreign exchange markets. Such policies enable current accounts to remain positive
indefinitely because they shut off the normal adjustment channel of real exchange rate appreciation. These
policies are more common in developing economies than in advanced economies, in part because greater
capital mobility in advanced economies makes sterilized intervention less effective. The current account
tends to increase by 40 to 50 percent of any increase in net official financial outflows (including reserve
accumulation), and the effect may be even larger in some developing economies. This result supports calls
for increased exchange rate flexibility (i.e., reduced accumulation of foreign exchange reserves and other
official assets) in developing economies with current account surpluses.

This suggests to me that US, the world — as well as China [3] [4] — would benefit from more rapid appreciation of the renminbi, and the associated decrease in Chinese foreign exchange reserve accumulation.

26 thoughts on “The Yuan, the Chinese Trade Balance and the US, Again

  1. don

    “This suggests to me that US, the world — as well as China [3] [4] — would benefit from more rapid appreciation of the renminbi, and the associated decrease in Chinese foreign exchange reserve accumulation.”
    Agree with the first part – which actually seems tautological – but not the second. I think a reduction in foreign currency intervention would reduce aggregate demand for China’s output and reduce their rate of economic growth. I doubt seriously the notion that they don’t know what is in their own best interests and that it is merely political pressure from a minority that maintains their currency policies. In fact, despite recent inflation, I still think they have considerable unemployed or underemployed labor that has not yet been absorbed in their market economy.

  2. Ricardo

    All-things-equal econometrics works. But we do not live in an all-things-equal world.
    Traders make their decisions on many variables and usually a weak or strong currency creates conditions where all things are not equal. As China has appreciated the RMB against the dollar the US has depreciated the dollar against most other major currencies. Yet China’s exports have grown steadily.
    China is still growing at almost a 10% rate with the IMF forecasting a 9.5% growth rate for the next 5 years.
    It is instructive to note what happened in the 1970s between the US and Japan. John Tamny notes the following:
    China should still call Washington’s bluff, and it should base its decision on Japanese economic history beginning in 1971. It was then that President Nixon severed the dollar’s link to gold, and with the dollar lacking any definition, it went into freefall.
    Japan smartly did not follow our 1970s lead, and the happy result for a country still recovering from the death and destruction of World War II was that it did not suffer the inflation that fostered a “lost decade” for the U.S. economy in the ‘70s. Japan’s economy boomed thanks to it issuing a relatively strong yen, while the U.S. faltered as a weak dollar drove investment into hard, commoditized, unproductive assets of the past least conducive to economic growth.
    While a dollar bought 360 yen in 1971, by 1980 the weakened greenback only purchased 240, and by 1994 the yen had appreciated 250% against the dollar. But far from an economic negative, or something that harmed the ability of its producers to export, Japan’s avoidance of our inflation corresponded with it becoming a first world economic power.
    In truth the world cannot be shoved into a neat little econometric box. Economics is a behavioral science not a mathematical science. If you check you brain and reason at the door the numbers and curves can lead you right over a cliff.
    It will be interesting to see if the real world confirms Professor Wu’s projections.

  3. Menzie Chinn

    Steven Kopits: Thanks!

    don: If you’d read the links, you’d see that some other measures would be necessary. In general, I have stated that maintaining aggregate demand via exports is not as labor intensive as by satisfying domestic consumers; that means they could absorb a larger flow of new laborers at perhaps an even lower GDP growth rate (PBoC deputy governor Yi also mentioned the issue of “quality growth” in his comments at the IMF). I even have statistical analyses to verify that (or at least Robert Feenstra does). So, please read the indicated links — I looked them up for a reason.

    In addition, I question your analysis of political economy. If a minority in the US can shanghai American fiscal policy to give tax cuts benefitting the +250K income households, at the cost to us all, why can’t a small but powerful and well financed minority in China do a similar thing to their policy regime?

  4. Bryce

    Thanks for a very worthwhile post.
    The downside is that the appreciation of Asian currencies will play an integral role in the beginning of a secular increase in long-term interest rates. Their ceasing the pegs completely means no more purchase of US & European bonds.

  5. don

    “If you’d read the links, you’d see that some other measures would be necessary.”
    I don’t think currency interventions is China’s best strategy in theory, but rather that it is the most effective one available to them in practice, at least in the current climate of deficient global AD and until the strategy seriously destabilizes fiscal balances abroad. It seems to me that our own Fed has tried to adopt the same in a backhanded manner (To me, no response to QE would seem more likely or immediate than the dollar carry trade.)
    “If a minority in the US can shanghai American fiscal policy to give tax cuts benefitting the +250K income households, at the cost to us all, why can’t a small but powerful and well financed minority in China do a similar thing to their policy regime?”
    The U.S. estate tax experience is an even better example of the interests of the few dominating those of the many. One might also ask why the U.S. unemployed don’t exercise more vigorously to oppose foreign currency mercantilism. Explanations that occur to me vary from ignorance to substantial campaign contributions by interested parties.
    Maybe my view of China is flavored by ignorance of their internal politics, but I find it hard to believe that they could have achieved the economic success they have had without their artificial export-led growth strategy.

  6. Heterosexual

    If a minority in the US can shanghai American fiscal policy to give tax cuts benefitting the +250K income households, at the cost to us all,
    You mean BENEFIT to us all.
    Fixed that for ya.
    In the US, the top 1% pay more than the bottom 95%, which is much less true in most other countries.
    The wealthy are overtaxed in the US. That is why wealth is not being created.

  7. tj

    Menzie insists on politicizing everything.
    I wonder what he thinks about libs cutting spending on education at the state and local level, then raising taxes, with the net going to fund gov’t union pension liabilities. The libs want to cut police, fire, education then raise taxes to pay for the union pension liability that is bankrupting the states and municipalities.
    The states got to the this point because state/local union bosses spent union dues on electing libs, then they bargained sweetheart pensions with the same libs they elected.
    Solution – all new govt workers get flexible benefits not defined. Existing govt’ workers near retirement get what they were promised. The rest get part defined and part flexible with the defined part increasing with tenure.
    Why should the private sector have to accept cuts in retirment benfefits but not state/lcoal government workers? State/local union members would not have such lavish benefits were it not for the cozy relationship between their union boss and their favorite congressman.
    There are plenty of unemployed looking for a job. I am sure they would jump at the chance to work in a government job with a flexible pension account, full health, dental,…

  8. 2slugbaits

    Menzie: I’m not follwing your ECM specification. In your September post the dependent variable was US imports; here it’s Chinese exports. But in the September post you said seasonal dummies were “very important” but I’m not seeing those dummies in this specification. Did you impose a restriction on this ECM? Also, there’s another variable “z” in the dynamic differencing part of your model. Back in September this was explained as the cumulative FDI. Is that what it means here as well? Finally, I can’t quite make out what kind of ECM this is. Engle-Granger? One of your points was to make a case for a multivariate approach rather than a bivariate approach…and I agree. The usual rationale for invoking an ECM approach is that each series is individually nonstationary but there is at least one stationary relationship in the residuals that keeps the system from going out of bounds. You’ve got four variables here (exp, y, q and z), but which sets of variables had cointegrating relationships? I tried following the links for your paper on this, but I must have missed it.

  9. FutureofUSChinaTrade

    Every economist I’ve spoken to agrees that the yuan is undervalued by 15-40 percent. But. . .
    1) China’s trade surplus is not due solely to its undervalued currency. The fact is that the world wants what China is selling (for less than anyone else is selling it for). President Obama wants to sell stuff to China, but Americans want to buy stuff from China.
    2) There’s no clear indication that a revaluation of the yuan would do much to change the balance of trade between China and the United States. True, a higher-priced yuan would make Chinese exports relatively more expensive and American exports relatively more affordable, but would it be enough to tip the balance of trade scales? Many economists think it’s not likely.
    3) A revalued yuan won’t be panacea for America’s economic woes. America needs to regain its competitiveness. And, in industries where persistently-high unemployment actually signals rising productivity (existing workers and/or automation can do more, so fewer employees are needed to produce the same or more output) employees need to find new forms of productive employment (a hard transition, I know, but that is what economic progress is about).
    4) It’s easy to see why American policymakers are so eager to pin the blame for our economic woes on China. But that’s a very dangerous road to go down. Talk about “getting tough with China” like we’re hearing from both sides of the aisle in Congress is a huge gamble at a very fragile time for America’s economy. Protectionist action from the U.S. never goes unanswered by China. But a trade war (or even a skirmish) is the absolute last thing our economy needs.

  10. Michael Cain

    “…why can’t a small but powerful and well financed minority in China do a similar thing to their policy regime?”
    I might suggest that some 600M or so peasants is a substantial reason why this will not work. It is one thing for real median household income to be stagnant at $50K/yr; quite another when the median is a tenth that, or less. No one seems to have a good handle on the rural population’s income statistics. Still, the people with the political power in China seem to be working very hard at trying to spread the wealth into rural areas, and I suspect with good reason.

  11. Paul

    “2) There’s no clear indication that a revaluation of the yuan would do much to change the balance of trade between China and the United States…”
    In order to have a negative trade balance with China, the US needs to have financial assets following the other way (otherwise what are we using to pay for those good we are trading for). China’s currency manipulation causes them to buy large amounts of financial assets (mostly treasuries) which conveniently offsets the trade surplus. If China stopped buying these assets (which is what I conside “stops manipulating the currency”), I doubt that private banks would step in to finance the hundreds of billions of dollar per annum to keep the trade deficit going at the current exchange rates and levels of flows. Banks have gotten burnt many times by financing international trade deficits this way.

  12. Menzie Chinn

    2slugbaits: Good questions. In the September post, I do both US-China trade, and China global trade. I’m repeated the second here. Seasonal dummies are included — should’ve mentioned; Z is once again cumulated FDI.

    The ECM is estimated as first differenced exports on first differenced and lagged levels of RHS variables, with no constraints imposed.

    There’s a pre-test to see if a single equation ECM is valid, and it is (that is, test to see if exports are weakly exogenous for the cointegrating vector). See the approach in Chinn (2005)

  13. ppcm

    The currencies are a medium of exchange for trade of goods and services and eventually for fixed capital formation and hot capital movement.
    In aggregate Rf – Pf (Rf receipts from foreigners,Pf Payments to foreigners) do represent the balance of payment (BoP).Today the BoP is an acute and sensitive issue feeding the stock of public debts, not only in the USA but in Europe as well.
    One may look at the medium of exchange, that is the currencies exchange rate or one may look at the nature of the goods traded. So far Pr Wu is right the currency EXR is not China problem. This is an implicit invitation to look at the volume of goods traded among trade partners countries.
    The USA and European countries exports to China are showing rigidities and not elasticities to the exchange rates (Econbrowser, Back of the Envelope Estimates of Chinese Trade Elasticities.”This 0.75 long run elasticity is higher than the Cheung et al. (2010) estimate of between 0.34 to 0.64″)
    Debtors countries have two ways to look at their yawning balance of payment deficits.The exchange rates as a medium of exchange or the trade volume through their ailing banks credit allocation to consumption.
    In the past, countries like France (G d Estaing,R Barre) had set credit expansion and credit allocation stiff guidances,together with Banks balance sheets expansion constraints.

  14. Bob_in_MA

    Have you looked at the effects of relative inflation? This is something Michael Pettis has referred to as partially substituting for revaluation.
    My understanding of the concept is as follows: say the exchange rate is locked 6.6 y/$. And say wage inflation here is ca. 2%, and wage inflation in China is ca. 10%. Over five years, you have a fairly significant change in relative wages in dollar terms.
    I wonder if anyone has tried to quantify that effect?
    I don’t understand how anyone can take Wu’s argument seriously. If the fixing of the Yuan wasn’t important to the trade balance, why would the Chinese own absurd piles of Treasuries? And why would they be buying obviously dicey Greek and Portuguese bonds? That argument is nonsense, prima facie.

  15. anon

    China thinks that the right way to go forward is to increase the spending power of the consumers which is several percetage points below world average by the following:
    1. to raise the wages incrementally(already starting this year, a few major export provinces are reported to have in store plan to raise min wages of some 7-11% this year);
    2. to bring down housing costs by building sufficent amount of low cost housing and bringing down commercial property prices, thus reducing the amount of saving needed for buying a house;
    3. to increase many social benefits such as lower heathcare costs, education costs, subsidized consumer goods for rural population and so on to let the population free up more savings for other consumption;
    4. the 12th 5year plan starting this year is the period where China has ambitious plan to restructure its economy and move up the value chain, and to raise the earning power of Chinese workers.
    5. there are others which I could not remember now
    Personally, what China is doing is good and right for the general populace and its economy in the long term, instead of the simplistic move of raising the value of Renminbi. China just need to increase its consumption share of GDP by a few percebtage points to more than wipe off its current trade surplus

  16. anon

    US labor cost is around 10 times that of China and China’s major manufactured products exported to US has margins generally 2-5%. To claim that the Renminbi needs to be undervalued by 25-40% so that China could earn 2-5% margin despite their labor cost 10 times cheaper is just ridiculous. From the ways China organised and their performance in Olympics, World expo, their space and military program, do the Chinese seem so terribly inefficient to need such a undervalued currency to compete?

  17. anon

    China has little trade imbalance on the whole with ROW and US has trade deficits with more than a hundred countries, including China. If China raised its Renminbi to make the trade balance with US, then it is likely to be having a deficit with ROW. I think US overconsumption is the problem. It is a luxury(even for US)for a country that spends some 800 billions annually on military and wars to expect favorable trade balance. Why is it so hard to see and understand this?

  18. don

    “But a trade war (or even a skirmish) [with China] is the absolute last thing our economy needs.”
    Yeah, as Krugman notes, they are “holding an unloaded squirtgun to our head.”
    “If China raised its Renminbi to make the trade balance with US, then it is likely to be having a deficit with ROW.”
    The issue is the amount by which China’s currency intervention causes its trade balance to be more positive than it otherwise would be under a freely floating yuan. China should not raise the renminbi to get balanced trade with the U.S. – insisting on balanced bilateral trade flows is economic nonsense. But it is true that a freely floating yuan would probably put China in an overall deficit position, which is the natural state for countries growing much faster than ROW.
    The head of JP Morgan recently stated that the yuan was not overvalued. This would require that hundreds of billions of dollars in foreign curency interventions each year are not affecting the value of the yuan or China’s trade balance. That means that without the interventions, China’s private capital flows would change to exacly offset the change in official capital flows (which would go to zero). (That is, private Chinese firms and individuals would start to lend more abroad on net, or foreign investors would curtail loans to China.) Why would this happen? Well, one might opine that China’s intervention comes in response to so-called ‘hot money’ flows that are entirely mistaken as to the actual free floating value of the yuan and would evaporate if the interventions were halted. (That is, the interventions themselves create the hot money flows they are meant to offset.) So, does this seem likely, or does it seem more likely that either the head of JP Morgan doesn’t know what he is talking about, or that he is “talking his book?”

  19. Paul

    “The issue is the amount by which China’s currency intervention causes its trade balance to be more positive than it otherwise would be under a freely floating yuan.”
    Good to see that somebody else gets it. Chinese policy is to sell huge amounts of Yuan and buy huge amounts of dollars. Since the Forex market has to balance (there needs to be a buyer for every seller) someone needs to take the opposite side of this trade. Since China doesn’t allow Foreign Direct Investment, of course they run a trade surplus, it is the only place where the Forex imbalance which is caused by their central bank can be settled.

  20. Ivars

    Politically, to solve growing delayed problems , if China moves to the left, the USA will move to the right, and if the USA will move to the right, China will move to the left.
    That USA could move to the left and China to the right, seems impossible to me, given the effect of Chinas current “right” policies on inflation and most poor masses, the support base of the communist party. These two things are incompatible, the communist party staying at power, building its military muscle and erosion of support in >900 million poor people.
    So China to the left, the USA to the right, both rather radically. Who first?
    The double dip in the USA may come as early as Q1 2012. That would give ground for right to claim left and the Republican House has messed it up totally, so 2012 will be won by Tea party.
    China, seeing double dip in the USA, will move to grab the opportunity and expand its power, which means consolidation of CCP power and militarization on the expense of current capitalist economic growth engine. So, in 2012 Party reshuffle nationalization and militarization plus reduction of income inequality will win, removing middle class from equation.
    With China moving to the left and double dip Palin will grab the Presidents post and have Tea Party soon officially running the Congress and, may be, also Senate.
    That will lead to further leftism in China on ideological basis, confirmed in spring 2013 National congress.
    The basis for increasing confrontation with Chinese seeking to gain benefits on opportunities economically weak and politically divided ( the left will radicalize in the USA as a reaction to the Tea Party win), and America fighting back.
    That all on the background of rising commodity prices in all paper currencies, including USD. So the volatile inflation component will become permanent,and , by usual logic, monetary easing must stop while the USA is in recession.
    Does anyone see a simple solution of this equation?

  21. Ivars

    Chinese communists does not see the economic growth translated to the wellbeing of richest and general population as the ultimate good.
    Economic development of last 30 years is a temporary phenomena that can be reduced in order to pursue other more important ideological priorities- export of Chinese model and militarization. That may include such means as nationalization, including foreign owned companies, elimination of the wealthiest and middle class, confrontation over territories that possess resources Central Asia, Russian Far East) , technology (Taiwan, South Korea) , export of capital to buy economic influence ( in detriment to local needs of capital) .
    Chinese are well known for their ability to give away food needed for their own population to pursue higher goals of their MODEL superiority, and expand worldwide influence. They are not done yet, they took a break for the last 30 years, which for them is a fleeting moment in their history, necessary revisionism to build up economic force to attack capitalism once again.
    All their market institutions like central bank are still run by CCP and can be turned in planned economy with one decision of CCP Politbureau, consisting of 9 engineers who may think they are able to engineer economy without the invisible hand.
    West just can not truly imagine what Chinese might do. Russians can, and Merkel ( since she grew up in GDR) can. Vietnamese can. Perhaps even South Koreans still can. Japanese-they know they are a target Nr.1. due to 1930-ties war atrocities- they are in very vulnerable position and must be allowed (allow themselves) to militarize, although, with aging population, who is going to serve?

  22. jonathan

    I’m not sure I agree with the elasticity measures because, looking through the sources including your own older post, there is a lot of uncertain data.
    You might make clear in these lines that you’re talking about the global effect measured in dollars; people might think you’re applying all reductions in Chinese exports to the US:
    “To get a feeling for the quantities involved, Chinese nominal exports in the 2009Q3-10Q4 period were $1.385 trillion. A 7.5% reduction of this amount is $104 billion; but a change in the value of the yuan should induce a partially offsetting $32 billion increase in total nominal value of exports (assuming 25% pass through, and 10% appreciation). The net dollar impact would then be only about $72 billion.”

  23. don

    “To get a feeling for the quantities involved, Chinese nominal exports in the 2009Q3-10Q4 period were $1.385 trillion. A 7.5% reduction of this amount is $104 billion; but a change in the value of the yuan should induce a partially offsetting $32 billion increase in total nominal value of exports (assuming 25% pass through, and 10% appreciation). The net dollar impact would then be only about $72 billion.”
    I don’t see why this should give a useful impression of the magnitudes involved. The 10% of exports number is completely arbitrary. Why not take a Chinese trade deficit equal to something like 3% of its GDP, which would be a very normal result for a country growing much faster than ROW (although perhaps not in the first year if currency interventions stopped immediately).

  24. Anon

    Chinese consumption share of GDP(5-6 thrillions) is about 36% last year. If consumption can be raised to 40% of GDP, this translate to about 200b additional consumption. If this could happen, then China ‘s trade surplus problem could be reduced and eliminated eventually as consumption share of GDp is being structurally built into China’s economy right now.

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