AHEAD of a looming Sino-American summit, it’s once again time for newspapers to allocate ink to coverage of the spat over the value of China’s currency. Happily, we seem to be seeing an improved understanding that movement in the nominal dollar-yuan exchange rate is not the most important factor shaping imbalances. Tim Geithner (who, bless him, once got in trouble for saying that the dollar needed to decline) declared today that the yuan is “substantially undervalued” and needs to strengthen. But he later elaborated:
“This is a pace of about 6 percent a year in nominal terms, but significantly faster in real terms because inflation in China is much higher than in the United States,” Geithner said. Taking inflation into account, the yuan is rising at a rate of about 10 percent a year, “so if that appreciation was sustained over time, it would make a very substantial difference,” he said in response to a question after the speech.
Yes, China continues to manipulate its currency. This much is clear from the latest data on Chinese reserve accumulation. Here’s the Washington Post:
At issue is the imbalance in their financial relationship. China’s central bank said Tuesday that Beijing’s holdings of foreign cash and securities amount to $2.85 trillion – a jump of 20 percent over the year before – despite Chinese promises to try to balance its trade and investment relations with the United States and other countries.
China added $200 billion to that stockpile in the last three months of the year alone, as the country socked away capital from the rest of the world at a torrid pace.
That reserve accumulation is directly connected to China’s interventions in currency markets to keep the yuan cheap against the dollar. But the Post makes a mistake in saying that:
The reserves are so large and the recent run-up so rapid that it’s casting new doubts over whether Beijing is reforming the handling of its currency and curbing its heavy reliance on exports as a source of jobs and growth.
And the reason has everything to do with China’s limited ability to control its real exchange rate. A cheap yuan makes for dear Chinese imports and excess demand for Chinese goods, leading to rising Chinese inflation. That’s makes Chinese goods more expensive to foreign buyers—just what a nominal appreciation would accomplish.
When garment buyers from New York show up next month at China’s annual trade shows to bargain over next autumn’s fashions, many will face sticker shock.
“They’re going to go home with 35 percent less product than for the same dollars as last year,” particularly for fur coats and cotton sportswear, said Bennett Model, chief executive of Cassin, a Manhattan-based line of designer clothing. “The consumer will definitely see the price rise.”
Chinese inflation is running consistently higher than American inflation, which is scarcely above 1%. That translates into rapid real appreciation despite the slow movement in the nominal exchange rate. And that should produce a decline in Sino-American imbalances, which seems to be emerging. In December, China’s trade surplus fell sharply its November level, from $22.9 billion to $13.1 billion.
It appears that markets are pushing the real exchange rate in the appropriate direction, despite Chinese intervention. That will help bring trade between the countries closer to balance. But it’s up to the governments in China and America to facilitate this process and reduce its cost to citizens by removing structural obstacles to adjustment.
THE Economist’s Big Mac index is a fun guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of a basket of goods and services around the world. At market exchange rates, a burger is 44% cheaper in China than in America. In other words, the raw Big Mac index suggests that the yuan is 44% undervalued against the dollar. But we have long warned that cheap burgers in China do not prove that the yuan is massively undervalued. Average prices should be lower in poor countries than in rich ones because labour costs are lower. The chart above shows a strong positive relationship between the dollar price of a Big Mac and GDP per person.
PPP signals where exchange rates should move in the long run. To estimate the current fair value of a currency we use the “line of best fit” between Big Mac prices and GDP per person. The difference between the price predicted for each country, given its average income, and its actual price offers a better guide to currency under- and overvaluation than the “raw” index. The beefed-up index suggests that the Brazilian real is the most overvalued currency in the world; the euro is also significantly overvalued. But the yuan now appears to be close to its fair value against the dollar—something for American politicians to chew over.
China’s foreign exchange regulator said that speculative “hot money” inflows are putting pressure on the economy, with the volume of illegal currency exchanges rising by 26% in the first half of the year, Caixin reported. The State Administration of Foreign Exchange (SAFE) announced that 1,800 illegal exchange operations have been shut down so far this year, involving more than US$16 billion worth of currency. The organization said it will continue to monitor hot money inflows and crack down on illegal currency conversions. China’s current account surplus hit US$69.9 billion in the second quarter, while its capital account surplus rose to US$67 billion. The country’s foreign exchange reserves, managed by SAFE, increased by US$136.9 billion over the same period to reach US$3.2 trillion.
BEIJING, Aug. 18 (Xinhuanet) – The State Administration of Foreign Exchange (SAFE) pledged to keep up the pressure against “hot money”, as it seeks to deal with speculative capital inflows amid rising inflation and ample global liquidity.
In a statement posted on its website on Wednesday, the regulator said it had dealt with 1,865 cases in violation of the foreign exchange regulations in the first half of 2011, involving a total of $16 billion, 26 percent more than the same period last year.
SAFE has joined hands with law enforcement authorities and uncovered 10 cross-border cases, such as illegal private banks and online arbitrage transactions, with more than 10 billion yuan ($1.6 billion) involved.
“Facing a complicated economic situation at home and abroad, SAFE will continue fighting illegal cross-border capital flows and maintain high pressure on the inflow of hot money,” the statement said.
SAFE’s statement came as the exchange rate of the yuan against the dollar rose to a 17-year high this week and the US Federal Reserve Board announced it would hold interest rates at record lows in the long term.
China’s foreign exchange reserves increased by $274.9 billion in the first half to a record $3.2 trillion as of the end of June.
Liu Mingkang, head of the country’s top banking regulator, said on Wednesday that the pressure of imported inflation was persisting because of excessive liquidity globally.
“The slowdown of global economic growth, which leads to decreasing overseas market demand, is posing challenges to China,” Liu was quoted by the People’s Daily as saying.
Monetary easing in major developed economies is bringing stronger flows of short-term capital into emerging economies, further pushing up domestic inflation, he added.
“Emerging economies boast higher growth rates and interest rates and larger room for currency appreciation. Thus, they could easily become the destination of hot money,” said Zhang Ming, a researcher with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.
The consumer price index, a main gauge of inflation, reached 6.5 percent in July, the highest level in the past 37 months, causing the central bank to reiterate that price controls will remain its priority in the second half.
World Bank President Robert Zoellick said in Sydney on Sunday that China might let its currency appreciate to curb rising price pressures, which suggests the world’s second-largest economy will attract more global speculative capital.
“What’s more dangerous than actual appreciation is the expectation of appreciation,” said Guo Tianyong, director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics.
“But once the yuan actually appreciates, the pressure will be eased.”
Guo said that with expectations for a third round of quantitative easing by the United States and an expected weak dollar in the long term, China must be vigilant, watching every possible direction and form of “hot money” inflows.
“While plugging loopholes, we should also find ways to guide some inbound capital to be used properly; we can encourage such capital to flow into small and medium-sized enterprises,” Guo said, adding that the mainland’s latest policy to allow the inflow of capital from Hong Kong is advisable.
BEIJING, Aug. 17 (Xinhuanet) — China remains an attractive destination for foreign direct investment (FDI) despite a decline last month, experts said.
FDI fell to $8.3 billion, with year-on-year growth of 19.8 percent, the Ministry of Commerce said on Tuesday.
“The monthly FDI figure is relatively volatile and a decline does not mean anything substantial,” said Zhang Zhiwei, chief China economist of Nomura Holdings Inc.
Compared with other emerging economies, China remains competitive in attracting investment and FDI inflows should be positive for the full year, he said.
Emerging industries in China will be a new engine for economic growth and attract more capital inflows, analysts said.
With support policies for the strategic emerging industries to be launched during the second half, foreign investment in manufacturing will continue to grow, said Luo Jun, chief executive officer of the Asian Manufacturing Association.
China has designated industries such as energy conservation and environmental protection, new information technology, advanced equipment and new energy as the keys to sustainable growth.
“The development of emerging industries will spark a new round of foreign investment, as these sectors offer golden opportunities that foreign investors can’t pass up,” Luo said.
China is also revising its guidelines for foreign investment to expand market access for overseas companies. These guidelines are expected to be announced in the coming months.
FDI jumped 18.6 percent year-on-year in the first seven months to $69.2 billion. Foreign investors set up about 15,600 new companies during the period, up 7.89 percent.
The Ministry of Commerce didn’t give detailed information on FDI for July.
During the first half, however, FDI from the US contracted 22.32 percent year-on-year.
“Signs of US economic weakness mounted in the past few months. Both the negative outlook for the US economy and the decelerating PMI have contributed to the decline in investment from the US,” said Zhang.
According to the Institute for Supply Management, the US Purchasing Managers Index (PMI) fell from 55.3 percent in June to 50.9 percent in July.
“Many US firms are facing financial difficulties due to the turbulent financial market in the US and that has affected their investment in overseas markets, including China,” said Li Zhongmin, an investment researcher with the Chinese Academy of Social Sciences.
But the discouraging prospects for economic recovery in the US and Europe will make the growing Chinese market more appealing to investors from those areas, he said.
Over the next five years we forecast that aggregate E&M global spending will rise to $1.9 trillion in 2015, a 5.7% compound annual advance driven by economic growth, but masking the accelerating shift of spending from traditional to digital platforms.
- Currently digital accounts for 26% of all spending but by 2015 we expect digital’s share to rise to 33.9%.
- Advertising, the most cyclically sensitive of the three E&M spending streams, recorded the largest year-on-year swing, rebounding at 5.8% in 2010 from an 11% slump in 2009. Overall global advertising will increase at a 5.5% compound annual rate to $578 billion in 2015.
- In contrast Internet access spending was barely affected by the economic cycle and is expected to rise to $408 billion in 2015, an 8.6% compound annual increase.
- Video-on-demand spending will pass pay-per-view in 2011 and reach $4.7 billion in 2015, a 9.8 percent compound annual increase from $2.9 billion in 2010.
- Mobile advertising spending in EMEA in 2015 is predicted to grow at 33.2% CAGR, to $2 billion, putting EMEA on a par with North America, but behind Asia Pacific which will still lead with $4.5 billion.
- Recorded music is the only segment where consumer/end-user spending will be lower in 2015 than in 2010, declining at 1.1% CAGR to $22 billion. Global recorded music revenues are not expected to show growth again until 2014, the year when spending on digital music will overtake physical spending.
- Newspaper publishing revenues will continue to see strong growth in some countries. For example, Asia Pacific’s fastest-growing newspaper markets will be Indonesia, at a CAGR of 9.9 percent, and India, at 9.4 percent compounded annually.