from Follow the Money

I don’t think Stephen Jen can argue that I have been inconsistent.

August 14, 2006

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Wrong, maybe, but not inconsistent.

Stephen Jen notes that China is not the only country with an enormous current account surplus that intervenes massively in the foreign exchange market –

“If China had been ‘manipulating’ the RMB, as many US scholars and politicians believe is the case, then the GCC countries are guilty of worse: their currencies are actually de facto pegged to the dollar, while China’s RMB regime is, at least, a heavily managed float.” 

Jen argues that the massive build-up of foreign assets in the oil states investment funds is effectively a form of currency intervention.  I agree.

And he implicitly argues that folks who complain about China’s peg but not the GCC’s peg’s are guilty of hypocrisy.    On that, I plead not guilty.

Jen adamantly believes that neither the Saudi riyal nor the Chinese RMB is undervalued.  

I, by contrast, believe both the RMB and the riyal are significantly undervalued and should be allowed to appreciate.  I am one of those – criticized by Jen – who thinks that the scale of China’s intervention is a challenge to informal “rules” of the international monetary system.   Big countries generally have not intervened on China’s scale (or for as long) to keep their currency from rising.    China now exports about at many goods as the US.  It is a big player by any standard.

I also think the Gulf Cooperation Council currencies are significantly undervalued. Indeed, unlike Jen, I suspect that with oil above $70 the GCC currencies are even more undervalued than the RMB (link here; RGE subscription required).  

The GCC should be pegging to the Canadian dollar, not the US dollar.  Or to a basket that includes the price of oil

I also have long criticized the G-7 and the IMF for singling out China and ignoring the oil exporters’ dollar pegs.  No country with a large and growing current account surplus should be pegging to the dollar.   Saudi Arabia and the GCC countries are as guilty of impeding global adjustment as China.

Jen disagrees, arguing that these countries current account surpluses have nothing to do with their policy of pegging to the dollar.  They are instead a product of impersonal forces like “globalization”: 

In short, the cause of the large BoP surpluses in Asia and in the oil-exporting countries is the same: globalization availed itself in the form of a significant increase in the volume of net exports (volume) for China but a positive terms of trade shock (price) for the GCC countries … This is also why I have long argued that global imbalances are a natural consequence of globalization  (Emphasis added)

I profoundly disagree.    

Sure, globalization increased demand for Chinese assembly and Saudi oil.  

Both Chinese and Saudi exports have soared since 2002.  Absolutely soared.   Look at Floyd Norris’s graph of Chinese exports as a share of US exports.  Norris sort of misses the story though.  The acceleration in Chinese exports that he notes coincided with the RMB’s depreciation against the euro; China’s exports to Europe have grown faster than China’s exports to the US even though US domestic demand has grown faster than European demand. 

But export success doesn’t naturally lead a country’s currency to depreciate. 

And both China and Saudi Arabia’s currencies have depreciated (in real terms) even as their exports have soared.   

That depreciation doesn’t come from globalization.

It comes from a policy choice.   Pegging to the dollar. 

China and Saudi Arabia could have used their export success to buy more imports.  Instead, they opted to use their export success to buy more reserve assets.

That is their choice (even if hasn’t been a choice ratified by either country’s population through an election).  But it is a choice, not globalization.   

And in my view, it is one of many policy choices that have fueled the current backlash against globalization in some advanced economies. 

US policies have played a role too – the old company-based system of providing health care and pensions is in the process of being dismantled and nothing new is being put up in its place and tax policy has focused on helping the haves and the have-mores, not helping to offset the dislocations associated with globalization.   

But Saudi Arabia, China and all other surplus countries that have chosen to peg to the dollar and build up reserves have also influenced who has won and who has lost from globalization in the US.   Global imbalances don't just stem from globalization; they stem from policy choices.  Private investors -- last I checked -- don't want to finance a US current account deficit of the current size.  

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