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Monday, September 22, 2003

Knock, Knock , Guess Who's There

Knocking China seems to be all the rage these days, in some quarters at least. Conrad the Gweilo for eg:

China's Growth Illusion

Weijian Shan, of Newbridge Capital, penned an extraordinary and compelling pair of opinion pieces in Wednesday and Thursday's Asian Wall Street Journal. in which he details China's illusory growth, misallocation of capital and sets forth how China can yet reform and avoid an economic collapse.

The pieces are extraordinary because, despite the fact that Newbridge has substantial mainland investments, Shen's analysis is devoid of the usual cant and brown-nosing characteristic of the public views of foreign investors in China. Indeed, Shan's honesty and bluntness are so unusual that it's caused something of a stir within the investment community.

Now since Conrad is no economist, and since to boot he seems to spend most of his weekends looking at photos of attractive young Asian girls, perhaps he can be forgiven for having left most of his critical faculties in another place, but then there's this piece (thanks to Joerg) from Hugo Restall of the Asian Wall Street Journal to contend with:

"So China is using the hard-earned savings of its people, which could have been devoted to building globally competitive companies, and is instead throwing them down 100,000 state-owned ratholes so that Chinese workers can produce artificially cheap products for American consumers to enjoy. The government is even taking away the dollars earned by selling these products and loaning them back to the U.S. at low rates so that those American consumers can keep on buying. There's still time for China to get wise. But the point here is that Americans should be sanguine about China's development model. Thanks to Beijing's own policies, China is giving them cheap capital, cheap manufactured goods sold below their true cost and a market for sophisticated, high value-added goods. At the end of the day, China will be left with uncompetitive companies, depleted savings and a balance-sheet recession. It will have to sell off the distressed assets of its failed banking system, at which point Western companies can buy up even more of the economy at fire-sale prices..."

To this concoction let's add a little quote from Arnold Kling back in June (which Joerg sent me this morning):

"Why do foreign investors invest so heavily in dollar-denominated assets and bear the risk of a decline in the dollar? Personally, I think it is because they are stupid.........The beauty of having dollar-denominated debts in a world of currency fluctuations is that the United States is fairly insulated. If the foreign currency crashes, foreign borrowers take the hit. If the dollar crashes, foreign lenders take the hit. Foreigners are screwed either way."

and it seems we have something less than an objective view of things floating around. In fact I have the feeling that there is a US wins come what may paradigm in the air. (One which may, or may not, be as cynical as the George Bush Iraq one, but certainly is just as much of a self delusion). As I said in my triple deficit post earlier this morning, this isn't how I read things. If anything the US may be the economy with the biggest problem if they don't find a fix, even if some non-US citizens who have their money in New York get their fingers burnt in the process. To dub China's growth process an illusion seems to be streching the fact that there are problems, and that they need to fix them, to really incredible limits. This isn't even schadenfreude, but maybe it is schadenfreude displacement, since it involves projecting your own misfortunes onto others in order then to take pleasure in them. As if to show not everyone in the US is so perverse, and uncharitable about China, Walter Hutchens has what seems to be a 'fair and balanced' account of the state of things:

Is there any Value to the RMB Re-valuation Discourse?

With a high level US official in Beijing and the US election heating up, noise is being made on both sides of the Pacific about the RMB valuation issue. I find it is beside the point.

Let's assume China "caved in" on this one and revalued the yuan as some US interest groups want it to do. Even if China dramatically increased the RMB's exchange rate (or even allowed it to liberally float), would this really change the fundamental reason the US is shedding manufacturing jobs and has a substantial trade deficit with China? I doubt it. The difference in PRC and US wages would still be dramatic, even if the yuan were revalued. Even allowing for the cost of transportation and some other inputs, how can a US union worker (or even a non-union one in say my home state of Alabama) compete with a Chinese worker in terms of the cost of labor? I don't see it.

Plus, I imagine computer technology and other efficiency gains have trimmed more manufacturing jobs than overseas competition in the aggregate, much less China's contribution alone, much less the part of China's contribution that is attributable to the falsely valued RMB.

Cheap labor is simply China's competitive advantage. If the RMB were traded 1:1 to the U.S. dollar, the cost of labor in China would still be much lower than the cost of labor in the US. So is this an economic or only a political issue?

And though I realize there can be enormous pain for the individuals directly affected, how would freezing in place these vaunted US manufacturing jobs be good for the US standard of living in general in the long run? Should we all agree to pay more for everything so we can say it was made in the US, or should we let the creative destruction of capitalism work its magic? Trying to give every worker an iron rice bowl is what China tried, and they didn't like the results and have been moving away from that approach for 20-plus years.

We certainly need to press China on lots of issues--and I, too, hope the RMB becomes fully convertible (so that creative destruction could come to China's stock markets), but pressing them to revalue the RMB for the purpose of keeping US factories running seems to me like a mistake. I doubt it will really help those factories much, and I doubt helping those factories, if we could, would really help the U.S. much.

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