In a forum in Beijing today, Cinese Premier Wen Jiabao spoke against protectionism blah blah blah. The major point to take home, however, is China will see its first trade deficit since 2004 in March, of about USD 8bn.
What does this mean, besides any implication on the currency debate? Well, ever since the beginning of this Great Recession (or GD2, as I would prefer to call it) Chinese exports have been a leading indicator of US consumption. So could this dramatic deficits foretell something more sinister, like a double dip? One month does not a trend make, of course, but this does raise serious alarm, especially in light with all this crazy talk of an official end to recession.
Beijing has threatened to retaliate if the United States declares China a currency manipulator and imposes trade sanctions.
The US Treasury is to rule whether China is unfairly holding down its exchange rate to gain a competitive edge in global markets.
Political pressure is growing in Washington to declare China a currency manipulator. Some US senators have threatened to slap duties on Chinese products if Beijing fails to allow the yuan’s value to rise.
Washington says China holds the yuan low so that Chinese goods can enjoy an artificial competitive edge.
Three years ago, Beijing had let the yuan climb 21 percent against the US dollar.
The International Monetary Fund and the World Bank have both urged China to let the yuan resume its ascent.
The currency debate has caused tension between the US and China. Relations between Beijing and Washington have been deteriorating over a number of issues, including the Pentagon’s arms sales to Taiwan.
THE METROPOLIS
(Shanghai, Jiangsu, Zhejiang)
Territory: 216,008 km2 (2% of total)
Population: 147 million (11% of total)
Per Capita GDP: $6,406 (#3 of 9)
Exports as % of GDP: 58%
Net Trade Balance (ex-China): $119 billion surplus
Sleek, stylish, confident—Shanghai certainly makes an impression. Its steel skyscrapers look like rocket ships ready to blast off into the future, taking China along with it. Shanghai is a very young city by Chinese standards, but the Yangtze River delta—known in ancient times as the kingdom of Wu—has always been the most commercial and cosmopolitan part of China. Like the Low Countries at the mouth of the Rhine, it is a flat watery land crisscrossed by busy canals linking a constellation of trading cities. The Back Door may succeed in breaking the rules, but only the Metropolis has the wealth and dynamism to entirely reshape them. Its treasure fleets nearly discovered Europe a century before Columbus sailed, and of the Nine Nations, it is the only one to have displaced the Yellow Land—several times—as China’s political capital.
The Metropolis likes to see itself as China’s bright and beckoning future, but the feelings it stirs in other parts of China are decidedly mixed. While its residents see themselves as adaptable and forward-thinking, to many Chinese they come across as arrogant city-slickers—cliquish, crassly materialistic, and slavishly eager to mimic foreign ways. Shanghai had a pre-war reputation as a neon-lit version of Sodom and Gomorrah, and when China was “Red,” the Metropolis paid dearly for its “Black” capitalist past. Consigned to purgatory for over 40 years, the region bore the brunt of the Cultural Revolution and was starved for development funds—essentially frozen in time—until the early 1990s.
The rebirth of the Metropolis did not take place on its own terms. It was the result of a political decision, made in Beijing, to transform the region into a carefully designed showcase of what China could achieve. The state has poured tremendous resources into industrial parks, infrastructure, and Shanghai’s glittering new financial district, attracting huge amounts of foreign direct investment. But this subsidized, scale-driven growth model—where bigger is always better—makes for an economy dangerously prone to speculation. The best hope for the Metropolis lies not in ever-greater capacity and ever-taller buildings but in smaller, nimbler, entrepreneurial enterprises that draw on the region’s distinctive flair for marketing, design, and fashion.
This may seem unremarkable at first glance, but the location was previously a circular turret building which once housed Horn’s Imbiss Stube (Horn’s Snack Bar) and Cafe Atlantic, common meeting places for many Europeans (many of whom were Jewish refugees) who lived in Hongkou district during the 1930s and 40s. Back then, it was known as the heart of Little Vienna. More background here and here.
Its doomed demolition began sometime around September of last year and I watched week by week as the roof and walls came down.
Its doomed demolition began sometime around September of last year and I watched week by week as the roof and walls came down.
By January of this year, it had become a near empty plot of land, save for the side skeleton of what used to be shophouse fronts.
I found it odd that this worker was building a brick wall around a demolished site. Upon closer inspection, I realised that one of the shop fronts, all of which were made of old stone, was in English.
I came to the conclusion that the place was most likely once owned by a European family. It made the most sense given its location. After the mass exodus of foreigners from Shanghai post 1949, the shop head was covered rather than painted over, with new headers, which evolved from cloth banners to wooden sign boards to what are now mostly plastic sign boxes with fluorescent tube lights attached within.
If you see old shophouse buildings being refurbished, there is a chance you might spot an old stone shophouse front, almost guaranteed to be in Chinese.
A fortuitous deed for posterity, a little tell tale sign of history, but gone the last time I stopped by.
If Google (GOOG) closes its Google.cn Chinese search portal, it will be tough luck for the American company which looked forward to getting an increasing shares of its revenue from the People’s Republic’s 400 million internet users. It is also tough luck for Google’s partners, most of which use the Google search feature on their sites.
Several companies that sell advertising for Google in China have expressed their concerns to the central government but they hae also warned Google that they may try to get financial compensation from it for loses to their investors and clients. It is an odd request since Google’s trouble in the world’s most populus nation began when its servers were hacked into. Google can make the case that none of its data is safe so long as it keeps Google.cn open and operates it email service in China.
Google’s partners will make the case that its withdrawal from China was a willful act on Google’s part and one that it did not have to take. That may be to some extent true. Google could continue to censor its results and the Chinese government would almost certainly allow it to stay. Google’s partner would contend that its exit from China was not necessary at all.
There may be no morals clause in Google’s agreement with it Chinese partners, nothing that says that Google will always be good and will fight evil wherever it is found. So, Google may take the high ground with two financial risks–on to its revenue in China and one due to losses to partners because of its actions. But, if Google leaves the mainland of its own accord it is likely to swallow hard and pay what may be a higher price for its actions than it expected at first. It is the cost of being morally better than everyone else.
A Word for Axel Merk – The Debate Over China’s Yuan Peg Continues
The Economist offers a refreshing rebuttal to Crudeman’s … err… sorry, I mean Krugman’s latest tirade over the Yuan Peg in their piece The Return of the “get tough” approach to China this week. In this amusing piece Krugman is dealt with the satire he deserves…
His view of what ought to be done is perplexing. First, he calls on the Treasury department to label China an official currency manipulator. I’m not sure why he believes that anyone in China or America is confused about what the Obama adminstration thinks of the dollar peg. They’ve been quite clear. I’m also not sure what effect this is supposed to have.
And one hardly needs to lift a finger to contemplate how ill-thought out his views are from a political and market stand point.
This is really remarkable. Mr Krugman is careful to explain why we shouldn’t fear that China, as a major creditor, has the leverage to punish America, but it seems as though he has given no thought at all to what leverage America has over China. Neither does he seem to pay the least mind to the potential fallout from such a reckless rush to a more aggressive approach to China. Perhaps the decision to impose these surcharges will have the desired effect. Or perhaps, the Chinese government will retaliate, touching off a trade war at the worst possible economic moment. The potential upside to Mr Krugman’s recommendation is trifling; the potential downside is massive.
But it’s the earlier reference to Scott Sumner which really caught my attention:
As our Leader points out this week, it is probably in everyone’s interest for China to allow the renminbi to appreciate at this point, though I’m sympathetic to Scott Sumner’s argument that during the depths of the global recession, China’s peg was highly stimulative to the Chinese economy and helped to end the global economic freefall. But while appreciation of the RMB would be good for mostly everyone:
[I]t would not be a magic bullet, either within China or outside. Rebalancing China’s economy will require big structural reforms, from tax to corporate governance, as well as a stronger currency. A stronger yuan would not suddenly bring back millions of jobs to America. Since America no longer makes most of the products it imports from China, a stronger yuan would initially act more like a tax on consumers.
This is something which Axel Merk has alluded to as well. I like Axel Merk, he gets straight to the point where it concerns currencies – especially the US Dollar. Readers will know we’ve made reference to him before, he’s a voice growing in stature, in my opinion. Back on 16th March 2010 I wrote about his appearance on CNBC.
For those who think I’m off my rocker for suggesting that the US may not be running a “strong dollar policy” have a listen to what Axel Merk said on CNBC last night – it all starts with the phrase: “…they don’t try to devalue their currency like the US does…” – very open and direct opining here, I’m impressed, worth listening to the end!
The notion that America’s export business will be granted a life line by a revaluation of the Chinese currency is practically not founded on any observations I have made in the real World here in Asia. What America is suddenly going to start exporting sneakers to Vietnam now, as Merk puts it in his latest piece: Strong Yuan in China’s Interest? That’s funny. Also, he alludes to Scott Sumner’s point about a stronger Yuan hike acting like a tax on US consumers, rather than a euphoric liberation of the manufacturing base. The Chinese may have more pricing power than they think, he says. He also comments on how China can use the Yuan to more easily regulate inflation, should they need to – something which we have been saying for some time now (China Basher’s Believe What You Want to Believe) in fact the currency peg in this instance could be a much more effective inflation control-level.
I encourage you to read this, typically entertaining, piece but if you’re too lazy, here are some of the highlights for you [emphasis/edits mine]…
Domestic Demand
It appears to us that U.S. policy makers would want the Chinese government to hand out credit cards to boost domestic demand [haha!]. If the Chinese only spend more, they could buy more U.S. made goods. This has to be taken with a grain of salt; while the Chinese love American brands, most of them are made in China or elsewhere in Asia. Those items China would like to buy, say commodity producers or nuclear technology, the U.S. is far more reluctant to export. Further, the Chinese reject this approach because they don’t want to promote a U.S. style, debt driven consumer boom.
The Chinese, in contrast, like to build consumer spending the old-fashioned way. By raising the standard of living, consumers may be able to afford more and thus spend more. So far, so good. But to boost growth, China almost exclusively seems to focus on infrastructure building, along the lines of: if you build a highway prosperity will come. That approach has been very effective in executing a stimulus plan that actually works; however, we believe infrastructure spending alone is insufficient in fostering a more balanced economy.
Inflation
China’s inflation has reached a 16-month high. The government is struggling to cool what may be runaway loan growth, increasing wage pressures and property prices that are rising at an alarming pace. One of the ways to bet on a stronger yuan is to buy real estate; such “hot money,” or speculative funds, would go away if the exchange rate reflected market forces.
It has become almost a ritual that loan growth explodes early each year, as borrowers fear the government may step in to restrict lending later in the year. It would be far more efficient to work with market forces, i.e. a stronger yuan, than to regulate economic growth. An economy driven by regulation encourages abuse. People will find ways around the rules, causing further distortions and, depending on the scale, they will turn to further regulations and even scandals. Allowing the yuan to appreciate and ultimately float would free up forces to focus on building competitive businesses.
If the yuan is not allowed to appreciate as a valve to contain inflation, the government has to restrict loan growth at banks and try to tame inflation using regulation. These tools are inefficient and, in our assessment, may ultimately fail to contain inflation.
Australia’s central bank just issued a report on the importance of flexibility; the analysis credits the floating exchange rate – and it has been a volatile ride for the Australian dollar – to keep inflationary pressures low.
Value Chain argument
China may be concerned that an appreciating yuan could be too effective in slowing economic growth. After all, many businesses may only be staying alive because their exports are subsidized through an artificially cheap exchange rate. Also, China is concerned about Japan’s experience of having a soaring yen cripple its economy. However, this fear must not be the only guide. China’s economy has long embarked on a course to be ready for a stronger yuan. In particular, China’s low-end industries have gradually moved to lower cost countries in Asia. It is the low-end, low-margin industries, such as the toy industry, that are most price sensitive. Indeed, we fear that countries like Vietnam or the Philippines may engage in competitive devaluation of their currencies should U.S. consumer spending not rebound as we fear.
China, however, is rapidly moving towards what we call the higher end of the value chain. Europe has long ago learned that it can’t compete on price, but has to compete on value-added goods and services. Those in the U.S. calling for a weaker dollar should be reminded that it is unlikely we will export sneakers to Vietnam: it’s simply not possible to depreciate yourself into prosperity.
In the spring of 2008, when import prices in the U.S. rose at a rate of over 20% year over year, it wasn’t only commodity prices that soared: Chinese exporters raised their prices and there was little the U.S. could do about it. Although China and other exporters to the U.S. will always attempt to absorb a higher cost of doing business, such as what a stronger yuan would pose, there comes a point when that is no longer possible. Just as with the experience in the spring of 2008, we believe China has far more pricing power than it recognizes.
Further, a stronger yuan will promote further investment into value added goods and services.
Commodity prices
Needless to say, a stronger yuan would allow China to lower the cost of its imports, particularly commodities. While inflationary pressures may convince China to allow its currency to appreciate, it is access to commodities that will be China’s primary concern over the coming decades. A stronger yuan is in China’s interest to satisfy its appetite for resources.
China is ready
Importantly, China has laid the foundation to allow for a stronger yuan. Its currency watchdog, China’s State Administration of Foreign Exchange (SAFE), has been preparing China. Some of the more recent developments include the use of the yuan in international agreements; also, yuan denominated debt is being issued in Hong Kong.
Role of the U.S.
Policy makers in the U.S. should focus on communicating the benefits of a strong currency to China. The U.S. would be more credible in such a debate, if it pursued a strong dollar policy itself. These days, to qualify for the position of U.S. Treasury Secretary, a key credential is to be able to keep a straight face [haha!] while uttering the words, “a strong U.S. dollar is in the interest of the United States.” It would be helpful if more effort were spent encouraging Congress and the Federal Reserve (Fed) to pursue policies to support a strong dollar.
As for Krugman, we’ve been here before, on 6th January 2010 I wrote:
…he randomly fires a shot which this time land in China’s waters – specifically at China’s monetary policy here and here (again, read the comments – they’re much more interesting and probably more informative). The unfortunate Professor Krugman is beginning to look like another comical political caricature of The Administration with a Nobel Laureate badge pinned to his forehead.
Here is a classic example of why great economists do not necessarily make for great investors/traders/politicians/ambassadors/diplomats/etc (take your pick). Krugman must be a talented economist… and this is just a suggestion, but, perhaps he should stick to economics.
Macro Data to Watch:
BoJ Target Rate
Malaysian CPI
South Korean Jobs
Markets
March is proving to be a great month for the S&P, but what’s this? Another asset class is apparently doing better than equities… a certain hybrid security called a “Convertible Bond” according to a Bloomberg article today. Watch this space people!
Dollar index fell and looks to be rolling over. Could this be the end of the Dollar rally? Perhaps… let’s wait and see.
Source: Bloomberg
Global Stocks to Watch:
Great move by Intel after release of a new line of server chips (how geeky does that sound?) – watch the follow-through in the Tech space.
Citigroup – that’s one volatile stock these days! Up 4% last night.
A group of human rights advocates have urged the United States government to fund a coalition working towards tearing down the great ‘firewall’ of China.
[Michael J. Horowitz, Hudson Institute]:
“We’re here to announce the submission to Secretary Clinton of two letters.”
The director of Hudson Institute’s Project for Civil Justice Reform, Michael J. Horowitz, announced on Tuesday at a press conference in Washington, DC.
The letters, signed by human rights campaigners from around the world, call on Secretary of State, Hillary Clinton to grant funds to the Global Internet Freedom – or GIF – Consortium.
Established in 2006, GIF is a non-profit organization that’s helping Internet users—mainly in China—break through Internet censorship. It’s mostly operated by volunteers who are adherents of Falun Gong—a spiritual movement which has been persecuted by the Chinese communist regime since 1999.
The Technical Director of the GIF Coalition, Dr. David Tian, says GIF has become the largest anti-censorship project in the world.
[Dr. David Tian, GIF Technical Director]:
“Currently GIF is basically responsible for almost 90% of anti-censorship traffic over the world. Most of our users are from China and Iran, and each country, each of them has about half a million to a million users (per day).”
The United States Congress approved 30 million dollars in the budget this year to tackle Internet censorship in China, Iran and other closed countries.
Hudson Institute’s Michael Horowitz says the U.S. government should live up to its promise.
[Michael J. Horowitz, Hudson Institute]:
“We expect to keep the pressure on the State Department to make its actions live up to its words, it’s as simple as that.”
Dr. Tian says the bottleneck to GIF’s efforts is its server capacity. With government funding, the coalition could upgrade its facilities from 1.5 million, up to 50 million users per day.
via Group Seeks U.S. Funds to Break Chinese Regime’s “Firewall” – New Tang Dynasty Television.
Beijing has threatened to retaliate if the United States declares China a currency manipulator and imposes trade sanctions.
THE METROPOLIS
Sleek, stylish, confident—Shanghai certainly makes an impression. Its steel skyscrapers look like rocket ships ready to blast off into the future, taking China along with it. Shanghai is a very young city by Chinese standards, but the Yangtze River delta—known in ancient times as the kingdom of Wu—has always been the most commercial and cosmopolitan part of China. Like the Low Countries at the mouth of the Rhine, it is a flat watery land crisscrossed by busy canals linking a constellation of trading cities. The Back Door may succeed in breaking the rules, but only the Metropolis has the wealth and dynamism to entirely reshape them. Its treasure fleets nearly discovered Europe a century before Columbus sailed, and of the Nine Nations, it is the only one to have displaced the Yellow Land—several times—as China’s political capital.
The Metropolis likes to see itself as China’s bright and beckoning future, but the feelings it stirs in other parts of China are decidedly mixed. While its residents see themselves as adaptable and forward-thinking, to many Chinese they come across as arrogant city-slickers—cliquish, crassly materialistic, and slavishly eager to mimic foreign ways. Shanghai had a pre-war reputation as a neon-lit version of Sodom and Gomorrah, and when China was “Red,” the Metropolis paid dearly for its “Black” capitalist past. Consigned to purgatory for over 40 years, the region bore the brunt of the Cultural Revolution and was starved for development funds—essentially frozen in time—until the early 1990s.
The rebirth of the Metropolis did not take place on its own terms. It was the result of a political decision, made in Beijing, to transform the region into a carefully designed showcase of what China could achieve. The state has poured tremendous resources into industrial parks, infrastructure, and Shanghai’s glittering new financial district, attracting huge amounts of foreign direct investment. But this subsidized, scale-driven growth model—where bigger is always better—makes for an economy dangerously prone to speculation. The best hope for the Metropolis lies not in ever-greater capacity and ever-taller buildings but in smaller, nimbler, entrepreneurial enterprises that draw on the region’s distinctive flair for marketing, design, and fashion.
If Google (GOOG) closes its Google.cn Chinese search portal, it will be tough luck for the American company which looked forward to getting an increasing shares of its revenue from the People’s Republic’s 400 million internet users. It is also tough luck for Google’s partners, most of which use the Google search feature on their sites. 