Richard McGregor of the Financial Times:
“The fastest growing export sectors in 2006 were aircraft parts, shipbuilding, integrated circuits, cars and car parts, electrical machinery and telecommunications equipment.”
Hmmm. I guess China no longer just imports parts (like "integrated circuits") from abroad for final assembly. It increasingly is making parts for export – and increasingly is moving beyond the final assembly of electronics. That shouldn’t be a shock. Its 2006 trade surplus ($180b) is only a bit smaller than its total exports in 2001 – the pace of change over the past few years has been breathtaking.
McGregor quotes Jun Ma of Deutsche Bank:
“China’s export sector is experiencing a rapid structural upgrading in areas including technology, product mix and marketing,” said Deutsche Bank economist Jun Ma. “Most visibly, many textile, machinery and auto parts companies have dramatically expanded their product categories, enhancing their pricing power and profit margins.”
China increasingly has the export and industrial production profile of a middle income country – but it still has the wages of a low-income country. And with an export base of now nearly a trillion dollars seemingly expanding at 25-30% on a y/y basis, it casts a very long shadow over the world economy. One reason Brazil is intervening so heavily to limit the real's appreciation right now is that it worries about Chinese competition. There are parts of Brazil that produce goods, not commodities.
The case for RMB appreciation isn’t that it will it will immediately get rid of China’s trade surplus. It won’t. The case for RMB appreciation is that it is necessary to keep China’s trade surplus from continuing to expand.
It also is necessary to create the conditions that will eventually allow China’s government to avoid adding an ever-rising sum -- a sum that is likely to be around $400b in 2007 -- to its foreign assets.
Finally, RMB appreication is necessary to create the conditions that allow China to take the brakes off domestic demand – remember, right now, net exports are contributing so much to Chinese growth that China has had to hold down other parts of the economy to avoid overheating. The best example is the curbs the government has placed on bank lending.
Larry Summers is right. China should change for its own sake, and should do so now.
“This suggests that if China is to sustain rapid growth and not run into the kinds of problems that Japan encountered, now, when the sun is shining, is the time to fix the policy roof. Allowing the inevitable currency appreciation and spurring domestic demand by encouraging consumption is much easier now, when the economy is at the edge of overheating, than it is likely to be in the future when it cools off.”
Personally, I think China should have started to allow a meaningful real appreciation three years ago, if not even earlier. Following the dollar down in 2002, 2003 and 2004 was a mistake. Back in 2004, China's government started talking about rebalancing, but it consistently adopted policies that were too cautious and small to achieve its stated goal, so external and internal imbalances ended up getting bigger. Back in 2004, China had half as many reserves as it does now, a far smaller trade surplus and a less export-based economy. China’s growth momentum was so strong that it could have done as well as it has, but with less dependence on exports and less of a need for the government to constantly put a break on domestic demand.
Changing courses hasn’t gotten any less necessary – but the risks and costs have gone up.