Krugman is still beating the war drums about China’s export-dependence. I believe this is his sixth such condemnation of the year, though in the fourth he recognized that not everyone agrees with his analysis:
“There have been all sorts of calculations purporting to show that the renminbi isn’t really undervalued, or at least not by much. But if the renminbi isn’t deeply undervalued, why has China had to buy around $1 billion a day of foreign currency to keep it from rising?”
Federal Reserve Chairman Ben Bernanke seems to have the answer: “In a closed economy investment would equal national saving in each period; but, in fact, virtually all economies today are open economies, and well-developed international capital markets allow savers to lend to those who wish to make capital investments in any country, not just their own.” Unfortunately this is not the case in China, which restricts capital outflows while encouraging foreign direct investment. Your average Wang can’t use RMB savings to purchase USD assets or to invest in a Wisconsin cheese company. China makes it relatively easy to bring money in but tough to get money out.
As Jiawen Yang and Isabelle Bajeux-Besnainou explain in the International Research Journal of Finance and Economics: “If Chinese investors were allowed to adjust their investment portfolio and diversify into international asset holdings, it would certainly create a significant downward pressure on China’s currency… China’s rapid accumulation of international reserves has mainly been built through increases in capital inflows, which are a result of a few key non-market driven factors (such as controls on capital outflows and the preferential treatment of foreign investment).”
Or in the words of Linda Yeuh, Director of the China Growth Centre at Oxford, writing for the IMF, “This growth of credit in an economy with capital outflow controls means investments will be largely domestic, increasing the likelihood of asset bubbles in the stock and housing markets and generating concerns about a banking crisis… With enough capital outflows, appreciation pressures on the currency may even ease.”
Does this mean the RMB is overvalued? Well it’s hard to say exactly, and probably not, but we must start by recognizing that China’s capital controls (before FOREX purchases) actually encourage RMB appreciation. Then, the People’s Bank offsets the relative absence of capital outflows with centralized FOREX purchases, which could be seen as a sort of pressure valve to keep the RMB from appreciating faster than it already is against a wide basket of currencies. That does help exporters by preventing artificial appreciation and stabilizing prices, but the RMB would be overvalued if they didn’t. By how much is hard to say. I’m just not as confident as Krugman because I don’t know how much money would flow if the capital restrictions were lifted (and hopefully, but gradually, they will be).
Capital outflow controls are a form of currency manipulation, but I don’t see how or why this is all one grand scheme to protect exports. There just isn’t enough evidence that China’s economic growth is export-dependent. In 2009, despite a precipitous drop in exports, domestic demand grew by 12.3% and production output grew by 9%. Think of it this way: it would be weird if China was risking a trade war and geopolitical conflict just to defend 10% of value added to the country’s gross domestic product. If you don’t believe me or Jonathan Anderson , maybe believe DeutscheBank: “The impact of 3-4% annual RMB appreciation on the economy is modest. If the RMB appreciates 3% vs. the USD per year, it reduces GDP growth by 0.2%.” That would bring China’s GDP growth down from like 11.4% to 11.2%… scary stuff. This is an important point, because it undercuts the alleged motive behind China’s ‘mercantilist’ currency practices. If China is not an export-dependent economy, what incentive would they have for aggressively devaluing the RMB? You can’t have it both ways.
Would an appreciating RMB be overwhelmingly positive for the US? Probably not, as more than half of China’s exports are produced by foreign companies. So basically you would tax those globally-focused companies who are striving to compete in the global economy, and you would raise prices for US consumers (and make saving even harder). You would also encourage a trade war with one of the fastest-growing consumer of US products, like our world-class, savory chicken feet. Some of China’s production would probably shift to Indonesia or Vietnam, or more impoverished regions of China, and maybe a few manufacturing jobs would remain in the US for a few more months — but the reality of globalization won’t disappear. And neither will the need to train future generations to compete and/or be self-sustaining in the future global economy. Krugman helps me to make this case:
“The undervalued renminbi is good for politically influential export companies. But these companies hoard cash rather than passing on the benefits to their workers, hence the recent wave of strikes.”
Krugman was presumably referring to the well-publicized strikes at Honda Motor Company — the Japan-based automotive giant that manufactures components in China. How a Japanese industry leader becomes politically influential in Chinese government circles is beyond me. Regardless, this is just one small example of how major multinational companies benefit from global supply chains that drive down prices for consumers everywhere. Lower input costs allow for greater sales and better margins, meaning that companies can grow, research, invest, and hire. As economies grow, so do wages and so do living standards. That’s exactly what we’re seeing. Believe it or not, China is now loosing jobs to lower-cost manufacturing hubs throughout Southeast Asia. We should be celebrating this — free markets are bring people around the world out of poverty in mass.
If Krugman really wants to address the US trade deficit, he should set his sights on the single greatest contributor: petroleum. And the long-term market opportunities for US-based companies in Saudi Arabia, Iran, Venezuela, Russia and Qatar are almost insignificant compared to those in East Asia, places like India and China. With the overwhelming majority of US-based companies operating in China for market access (and not cheap labor), now is not the time for burning bridges. Instead, we should focus on promoting greater market access and legal protections for US companies in China. More importantly, we should drop the victim complex and go to work. Part of that will require figuring out how to get Americans, who are still some of the world’s most productive and capable workers, more involved in global (in particular, Asian) economic development. China will eventually consume more than the US, and be a bigger economy, and we want to be involved when it does. China is already on the cusp of running an account deficit with the world, although per capita income in China is only fraction of that in the US. As domestic consumption continues to increase in China, so will the opportunities for US companies.
In all of Krugman’s rants about China’s predatory currency policies, he refuses to even tip his hat to the opportunities of globalization. That’s not constructive judgment — it’s just complaining.