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Weekend extra-credit -

December 16, 2007

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Weekend reading for all those waiting for the US current account and TIC data on Monday.

Time for a strong rupee policy?  This weeks’ Economics focus column intelligently discusses the policy dilemmas facing India in general and the Reserve bank in particular.  India is on track to “spend” close to $100b keeping the rupee from rising this year (reserves, counting gold, are up $96b through the first week of December, a bit less if adjustments are made for valuation gains).    Affeciondanos of this blog though know that the “cost’ of borrowing rupee to buy dollars, euros and pounds reserves (India has a VERY diversified portfolio, currency wise) that India doesn’t need is the gap between domestic interest rates (high, in India’s case) and the return on its reserve portfolio, together with the expected appreciation or depreciation of the rupee against its currency basket. 

If Abu Dhabi can backstop Citi, why shouldn’t it also backstop Dubai?   Chip Cummins of the Wall Street Journal picks up on an under-reported story – the role of debt in financing Dubai’s boom and its large foreign acquisitions.   Dubai is going through the biggest boom in the Middle East, and it actually doesn’t have much oil … If Dubai were a separate country, not an emirate bundled together with the richest oil exporter of them all (neighboring Abu Dhabi) it would be running a large current account deficit.    Several state-owned Dubai companies are quite leveraged.   No worries though – Abu Dhabi has way more cash than the IMF and it may only lend to US companies, not its neighbor, at a penalty rate  …

New York: global discount mall.    It sure seems like a weak dollar is encouraging Europeans to come to the US to buy (Asian-made?) goods.     Floyd Norris’ charts also show that the US export growth took off after the dollar depreciated in 2003.   

Charles Wolf isn’t convinced that the absence of more dollar depreciation against the RMB makes difference, largely because he doesn’t see any link between changes in the exchange rate and changes in the savings and investment balance.  I personally see two links for China  – profit margins on exports contribute to high business savings, and China’s government has reigned domestic spending/ investment to keep the Chinese economy from overheating during the export boom.   

Europe, like the US, but with a lag.   At least when it comes to the debate on China.  The rise in political heat is generating pushback from “liberal” (in the European sense) economists.  Patrick Messerlin – who supervised my Sciences-Po dissertation --and Razeen Sally argue in the FT that the cheap Chinese goods are good for Europe (or at least European consumers) and that the RMB’s depreciation against the euro isn’t the reason for China’s soaring surplus, as it simply reflects a sight in the final location of Asian production. 

"The EU imports more from China, but correspondingly less from other east Asian countries: the EU’s trade deficits have simply shifted from the latter to China. That is because China has become the final-assembly hub for goods exported to the rest of the world. Its corollary is increasing Chinese imports of parts and components from the west and east Asia."

That sounds familiar.  I am not convinced by argument for either the US or Europe.  Recent work from the IMF (and others) suggests that China is importing, relatively, speaking, fewer components.   European data suggests Europe’s deficit with Asia as a whole is growing, so the rise in the deficit with China hasn't been offset by a fall in Europe's deficit with rest of Asia.    The eurozone's deficit will all of Asia rose from roughly 80b euros in 2004 to around 140b euros in 2006 -- and looks on track to be around 160b euros in 2007 (eurozone data here, on p. 13; I am confident the EU-27 data would show something similar)

China and the Gulf today are not quite Japan in the 80s. Floyd Norris notes something that the Street – which now seems convinced that sovereign wealth funds will provide permanent support for equities --- has opted to downplay:  selling stakes in private US companies to foreign governments isn’t quite the same as selling stakes in private US companies to private firms.     Capital outflows from China are overwhelmingly from the government; most private companies and individuals don’t want to take the risk that the dollar (or euro) will depreciate against the RMB. 

Back to preparing my rebuttal to Richard Iley!

Update: The FT -- like the big banks -- has warmed up to sovereign wealth funds.  An FT leader argues that the biggest risk now is too little investment from sovereign wealth funds, not too much.  Who would have expected a leading financial newspaper to call for more state-ownership a few years back?  

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