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Me on China
There is more to talk about than just food:
The trade effects of a revaluation of the yuan are unlikely to be large, in part because many Chinese exporters specialize in assembly. China sends out money buying components like semiconductors and turns them into finished goods, thereby running a trade deficit with East Asia. A new and higher value for the yuan would largely be a wash for these activities. With a stronger currency, China would have a harder time selling its electronic goods, but this would be offset by its greater purchasing power over the semiconductors. It would not do much damage to the Chinese competitive position.
The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury securities; as of early 2006, the Chinese central bank held up to $470 billion in Treasury securities. This huge accumulation of relatively low-yielding assets is the investment strategy of risk-averse bureaucrats, but it may bring longer-term benefits. Those assets can someday be sold or otherwise transferred to underdiversified Chinese financial institutions. The accumulation gives the Chinese a stake in American prosperity and signals that the Chinese are committed to long-term participation in the global economy. On the American side, the Treasury market is more liquid and the budget deficit can be financed at lower cost.
Here is the full argument.
Posted by Tyler Cowen on September 7, 2006 at 08:03 AM in Economics | Permalink
Comments
I can understand why the Chinese like to have some reserves. The question is why hold dollar reserves that are likely to generate large negative returns? And why so many?
China is about to pass $1 trillion in reserves, maybe 70% of that in dollars. And they're still adding $20-30b per month! The Chinese (along with the Oil exporters) are propping up a BW2 system that hides real weaknesses in the US that will be painful to address now, but even more painful in the future. And while the good times roll in the US, the Chinese people will once again get raked over the coals as their hard-earned reserves are squandered...
Posted by: DanK at Sep 7, 2006 10:35:21 AM
We the people that spend all the more without making all that much of the money say yes to Virginia. There is a good social tooth fairy after all but fight more poverty. We the people will import more of what is produced by our own corporate America and we the people will be dumped on by the slave trade union of the not so new multiculturalism but the new age multi-nationalism for the just us only of where ever we can go corporations and that would fix most of the problems.
We are being hustled by the hedonics eyeshaders of the political regime.
Posted by: Gem Hudson at Sep 7, 2006 11:01:21 AM
Brad Setser disagrees: Tyler Cowen apparently did not read my China testimony! The RMB's value does influence trade flows
Posted by: Somebody at Sep 7, 2006 1:04:17 PM
Following up on brad setser's
unhappiness, in general, even though
there is a gain from appreciation
regarding purchasing imported inputs,
these are considerably less than the
full cost of production, and hence
the change in final goods price from
an appreciation has a greater impact
than the change in cost of inputs.
One would expect exports to decline.
The people managing the RMB/yuan rate
are not stupid. They are very afraid
of unemploying all those people pouring
off the countryside, and they do not
mind foregoing some return on their
weak dollar reserve assets in order to
maintain political-economic peace in
their non-democratic system.
Posted by: Barkley Rosser at Sep 7, 2006 2:11:15 PM
And an oink oink oink to all you free lunchers too.
Posted by: Lord at Sep 7, 2006 2:38:58 PM
I ain't buying it. If the Yuan appreciates, Chinese wages appreciate. If Chinese wages appreciate, some
manufacturing will go to Sri Lanka, Vietnam, etc. Also, China is more than just manufacturing and a higher
Yuan will slow its efforts to become an outsourcing center. I see China on a giant treadmill, constantly
having to create income to keep the peasants happy enough so they don't revolt. The treadmill is still
moving, but at some point it seems the government is going to fall off.
Posted by: China Law Blog at Sep 8, 2006 2:20:26 PM
