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Current Issue. China. Current Issues. “Creating a stable foreign-currency regime that doesn't give an edge to one country or another "is the central existential challenge of cooperation internationally," --- Treasury Secretary Geithner in remarks to Brookings Institution.
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Current Issue China
Current Issues “Creating a stable foreign-currency regime that doesn't give an edge to one country or another "is the central existential challenge of cooperation internationally," --- Treasury Secretary Geithner in remarks to Brookings Institution Source: WSJ Oct 7, 2010
Current Issues China “When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," . . . . "This sets off a dangerous dynamic" [as nations compete to keep their currencies undervalued.] ---- Treasury Secretary Geithner Source: WSJ Oct 7, 2010
Current Issues China “[Countries employing competitive-currency politics risk] 'causing inflation and asset bubbles in emerging economies or else depressing consumption growth and intensifying short-term distortions in favor of exports.' " ---- Treasury Secretary Geithner Source: WSJ Oct 7, 2010
According to AP story Oct 6, 2011: “President Obama said [at] a news conference Thursday that it was 'indisputable' that the Chinese 'intervene heavily in the currency markets'”
Current Issues China “If the yuan is not stable, it will bring disaster to China and the world. If we increase the yuan by 20% or 40% ...many of our factories will shut down and society will be in turmoil." -- Wen Jiabao, China's prime minister Source: WSJ Oct 7, 2010
China: Outstanding Issues • Currency: US dollar vs yuan vs world currency • Investments in USG securities • China's large bilateral trade surpluses with US • Intellectual property rights infringements • Military/political issues, China's navy expansion, 6 party talks, trade issues, human rights (Tibet), etc.
China Before Reforms • Prior to 1979 China was very poor: • Communist regime under Mao took control of mainland in 1949 • Economy came under control of communist party (and still is) • Economy was: • state controlled • centrally controlled • command controlled (cement production, eg)
China Before Reforms • Farms in 1950s were collectivized into large communes • Efforts to jump start industrialization failed in 1950s • By 1960s, central government began massive investments to create centrally controlled state-owned enterprises • Cultural Revolution (1966-1976) set back development enormously
China in the 1970s • By 1978, three fourths of industrial production was produced by SOEs with planned output targets • Virtually no private enterprises or foreign investment • Effort to make economy self-reliant was a key goal of central government • Economy almost stagnant and very inefficient • No profit incentives, no competition • Price and production controls widespread • Deep poverty – annual per capita income less than $300 (?)
Economic reforms 1980s to present • Mao dies in 1976 • Deng Xiaoping becomes paramount leader by 1979 • Deng began reforms through economic liberalization described by Deng as “Socialism with Chinese characteristics” • Allowed for price incentives for farmers and small free farm-based markets • Established diplomatic relations with the US after US dropped ties with Taiwan
Macro changes to the economy in the 1980s • Established four special economic zones (SEZs) • Decentralized some economic planning to province level • Began rapid opening to the West . . . . • Joined IMF • Began negotiations to join GATT/WTO • Developed bilateral ties with the US and other western nations • Joint Economic Committee with US Treasury • Joint Trade Commission with US Commerce Dept
Current Conditions in China • China's economy grew about 10.4 percent in 2010 – about average over the past ten years • Real GDP in 2011 rose about 9 percent • $580 billion stimulus package announced in Nov 2008 helped at beginning of international crisis – what US has pushed for • Boosted domestic spending on infrastructure, etc. Urban fixed asset spending jumped 26% in January and February YOY • Exports were down 26% - now recovered
Current Conditions in China (cont.) • Environmental rules weakened. Review time for new building proposals reduced to two days from five • Export taxes may be reduced to zero • No plans for a dramatic revaluation of Yuan against US$ • If economy further weakens, could see devalued to boost exports • Emphasis on domestic demand
Issues for China • Property bubble? • Inflation? • Greater intervention of government in economy? • More charges of currency manipulation • Escalation of trade/currency war with United States and other trading partners? • Treasury Secretary Geithner continued pressure on China
China's Primary Concerns . . . . . . . not that the US will default, • Rather, that USG current spending will lead to inflation . . . • And inflation will cause the US dollar to depreciate . . . • Leading Chinese assets in the United States, including US Government debt, to be devalued • Treasury bonds could drop in value as US economy languishes, further hurting Chinese investments
Foreign Ownership of US Debt Source: “Foreign Ownership of US Debt Continues to Grow” by Veronique de Rugy at the Mercatus Center at George Mason University (http://mercatus.org/publication/foreign-ownership-us-debt-continues-grow)
Dollar is Vulnerable because . . . • USG spending at record amounts in 2009 and beyond . . . • Fed announced in 2009 it would purchase another $1.1 trillion of US Government and Agency debt – could devalue dollar through inflationary effects • New plans to purchase $600 billion will do more to dollar • Treasury secretary remarks in NY in March 2009 led to a dollar decline of about 1.5% in ten minutes. It matters what you say when you are Treasury Secretary
Dollar is Vulnerable because . . . • Investors and speculators remain wary of $ future with new administration's spending plans and . . . . • China's new assertiveness • Greece has saved the day – for now
Several Key Issues for World Financial System • Should the yuan be pushed as a new reserve currency alongside the US dollar, yen and Euro • Should there be a new world currency based on a basket of currencies – a “super-sovereign reserve currency” • Will China seek other financial markets to invest reserves
Yuan as a Major Currency • Yuan not capable of replacing the dollar, the pound, the yen, the Euro or any other industrialized nation's currency • China's financial markets not mature enough • Too many controls on currency in its immature banking system • Yuan has never floated on international markets - rather unsettling for govt
World Currency? • China (and Russia) suggesting it is time for a new world reserve currency, based on a basket of existing currency • China's position in part a shot at Geithner's comments about the Chinese government manipulating the currency in January 2009 • Chinese feeling emboldened about its position as largest holder of international reserves (over $2 trillion) and largest single foreign holder of US government securities (around $800 billion) • Despite initial confusion, US does not favor a new world currency, but would not object to an enhanced use of the existing SDR
World Currency (cont.) • New world currency (however defined) would struggle to gain the trust of the dollar • SDR has languished since its creation in 1969 as a unit of account for internal IMF bookkeeping • World currency could prove to be too inflexible for nearly 200 disparate economies • Likely restrict growth and innovation • Who would manage it? How? Which money supply?
SummaryConcerns for Chinese Government • Rules of law still not established enough for foreign investors • Future of State owed Enterprises and U rate • Income inequality • Asset Bubbles • Environmental concerns • International political issues: • Tibet • North Korea/Japan • Taiwan/US Navy/China's Navy
