from Follow the Money

Good news (really)

January 18, 2007

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

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I am generally tend to see the glass as half empty, not half full.  But even I think that the Chinese Ministry of Commerce’s willingness to recognize something that some American economists are still (sadly) struggling with – namely that China’s very large and very rapidly growing trade surplus bolsters the case for additional RMB appreciation – is good news. 

Dan Drezner. Until China lets the RMB appreciate on a broad trade-weighted real (i.e. adjusted for inflation differences) basis, I am not going to worry about the possibility that relative prices don’t have any impact on trade flows.   I am just going to applaud any sign that China might be willing to allow a bit of real appreciation. 

In 2007, the dollar is appreciating against both the yen and the euro and the RMB is appreciating against the dollar (so much for the basket peg), which means that there might be a bit of broad based real RMB appreciation for pretty much the first time since China first allowed a bit of "flexibility" into its exchange rate regime.

Remember China now trades as much, if not more, with Europe as with the US – and the RMB decidedly hasn’t appreciated in either nominal or real terms against Europe since mid 2005.   And for that matter, the RMB’s nominal appreciation against the dollar since mid 2005 has barely offset ongoing inflation differences, let alone made up for the difference in US and Chinese productivity growth.   China’s real effective exchange rate remains well below where it was in 2000.   It should be a lot higher. 

Incidentally, my calculations suggest that if China’s q4 export and import growth rates continue through 2007, China’s 2007 trade surplus will be closer to $300b than to $200b.  Stephen Green is more cautious, but he projects a $60b increase (from about $180b in 2006). I am pretty sure the Chinese know this as well.   25-30% export growth and a $1 trillion export base produces big numbers.   Really big numbers.

China’s de facto export subsidy (Oops.  distortion.   Oops.  Subsidy for the global consumption of Chinese goods) is having a big impact on the world economy.    

Blogs often end up criticizing the mainstream news media.   At times, the mainstream media’s inability to fact check (Social security is not going to be exhausted in 2017 by any calculation) and match stories to the available data (Recent stories about Chinese exporters being hurt by a rising RMB even as the data shows an acceleration in Chinese export growth and a rising Chinese trade surplus) does bother me.    But it would be a bit unbalanced to criticize reporting that rubs me the wrong way and not praise reporting that consistently helps me better understand the world.  I certainly have come to rely heavily on Richard McGregor's coverage of internal Chinese policy debate in the Financial Times

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