from Follow the Money

A RMB that isn’t appreciating cannot be killing you …

April 6, 2008

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The premise of Joe Nocera’s New York Times story “Two factories, two firms” is logical enough: an appreciating RMB should hurt a low-end, cost-conscious textile exporter and help a higher-end manufacturer that doesn’t compete on cost and benefits from lower prices on imported capital goods.

The problem? The two firms in question seem to trade more with Europe than the US. And the RMB isn’t appreciating against the euro.

Aspiring textile magnate Jin Jue complains that “the RMB is killing me.” But it is hard to see how. His factory turns out “inexpensive clothing aimed at the European market.” The RMB has depreciated against the euro – both over time and this year. Jue’s difficulties aren’t coming from an appreciating currency, but rather appreciating costs – rising domestic wages (“thanks to inflation in China – up 8.7% in February alone – his workers wanted more than the several hundred dollars or so a month he says he pays them”) and the end of export tax rebates (a policy that was adopted in lieu of allowing currency appreciation).

It is equally hard to see how Li Xian Shou – who produces silicon wafers for solar panels – benefits from a stronger RMB. At least not in the way the article argues. Nocera writes:

“As we toured his plant, I couldn’t help noticing that much of the machinery RenSola uses to make wafers comes from Germany. A rising yuan helps there too.”

Well, it might if the yuan wasn’t falling against the euro.

The reporting here is good – the color around Jin Jue’s plan to shift toward China’s domestic market is great. But there is an assumption that since the RMB is rising against the dollar it is rising globally. And that simply isn’t true. The RMB is down – in nominal terms – against both the euro and yen this year. It is basically flat against a trade-weighted currency basket.

Don’t get me wrong – the RMB is appreciating in real terms. But that appreciation has come primarily from the increase in inflation, not from an appreciation against a broad basket of currencies.

The reporting of Denis McMahon of the Wall Street Journal lacked Nocera’s color.  However, McMahon quite correctly argued in late March that looking at the RMB dollar without looking at the RMB euro is misleading.

much of the yuan’s recent gains have been brought about by the dollar’s own misfortunes. The U.S. currency has lost almost 8% against the euro and 11% against the yen so far this year, driven down by a slumping U.S. economy and deep rate cuts by a Federal Reserve determined to fight a ballooning credit crisis.

"A moderate appreciation against a depreciating currency is not an appreciation -- it is a depreciation," Standard Chartered economist Stephen Green said in a note to investors last week.

Tellingly, the yuan has depreciated against the euro by about 4% since the beginning of the year.

With the European Union now the largest export destination for Chinese goods, topping the U.S., the currency’s moves will do little to rebalance China’s trade surplus or slow the tide of foreign money pouring into an economy already swamped with excess liquidity.

I should also note that the Wall Street Journal’s reporting on the recent US export boom also noted that their growth is linked to the dollar’s fall. If only the oped pages would take note, and balance all the articles they have published arguing that currency moves don’t affect trade balances with a few arguing that they do. After all Dr. Mankiw – keying off work by Dr. Chinn – called the fall in the trade deficit that has followed the dollar’s fall “textbook” economics.

Sometimes the textbooks are right. Exchange rates do matter. The RMB-euro as much as the RMB-dollar and the dollar-euro.

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