from Follow the Money

Definitive evidence the RMB is undervalued?

October 21, 2007

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Chinese exports to India grew by 67.5% in the first three quarters of 2007.  Bloomberg, last week:

"Exports to the U.S. rose 15.8 percent in the first nine months from a year earlier and those to Europe jumped 30.8 percent. Shipments to India soared 67.5 percent, the customs bureau said. " 

It is kind of hard to argue that China will be running a trade surplus with India no matter what, because Chinese wages are so much lower than Indian wages.  Or for that matter to argue that India -- Indian households at least -- run a big deficit because they won't save, no matter what.   Louis Kuijs found that Indian households actually have more than Chinese households. 

The impact of the RMB’s depreciation (yes, depreciation – the RMB hasn’t appreciated enough v the dollar to offset the dollar’s depreciation against many other currencies) on a host of other emerging economies has been an under-reported story.  

Chinese growth has been a boon to resource exporters.   But Chinese manufactured goods are undercutting South African and Brazilian and Indian goods, not just US goods ….

The work of Li Cui -- often working together with Murtaza Syed -- of the IMF shows that it is time to change another well-established narrative about China, namely that China is “just” an assembler of imported parts. 

That used to be true.   But it isn’t anymore.   Cui:

Rapidly growing foreign trade has been key to China's remarkable economic performance of the past three decades, yet the conventional view is that China's growth has been largely domestically driven. According to this view, China uses its abundant labor to assemble imported inputs into low-tech consumer goods and capital goods exports, making it the world's workshop.  Such processing trade typically adds little value to the domestic economy because the import content of exports is high. As a result, the argument goes, changes in global demand or in the exchange rate will have little direct impact on the economy's trade balance or growth—any change in exports will be largely offset by changes in imports.

But such a reading of China's economy does not reflect current realities. Although it may have described the Chinese economy in the early stages of reform, when China lacked domestic technological know-how and had to rely on imported intermediate products and capital goods for its production and exports (see Lemoine and Ünal-Kesenci, 2002), a recent IMF study suggests that it may have become less accurate in recent years (Cui and Syed, 2007). The domestic content of China's exports has increased and its products have become more sophisticated, in part because of substantial investments and technological upgrades that have expanded the economy's production capacity.

... the conventional view of China's main role in international trade as an assembly center is not as good a fit as it once was ...    [Emphasis added]

Cui estimates that the "domestic" value-added of China's exports is now close to 40%. 

He also argues that China increasingly is producing capital-intensive goods that compete with the goods produced in the US and Europe, not labor-intensive goods that compete with the goods produced in other low-wage Asian economies.   Li Cui:

Exports of capital goods and parts and components have increased markedly, accounting for more than 40 percent of total exports, compared with 10–15 percent a decade ago ..... Such a shift points to the changing trade and production structure in China toward more capital-intensive and technologically advanced products.

Call it a consequence of China's savings glut, and the resulting low cost of capital.   Also call it strange.  China still has a huge resevoir of low-wage labor in its countryside.  

One last point.  There is strong evidence that Chinese parts started to displace imported components in early 2005.    That is when Chinese imports stopped growing in line with Chinese exports.   It is also when China’s trade surplus really started to get big.

That is why I am deeply skeptical of studies that draw strong conclusions about how China’s rise has affected the rest of the world based on data sets that end in 2005.   In 2004, China exported $590b worth of goods and imported $560b.   By the end of 2007, China will export about $1220b worth of goods, and import maybe $950b.   Data sets that end in 2004 miss this change.  Data sets that end in 2005 only pick up the beginning of this shift.     And it literally is a huge shift. 

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