Re: $/Euro dynamics

[Eubulides <paraconsistent@xxxxxxxxxxx>]

----- Original Message -----
From: "Seth Sandronsky" <ssandron@xxxxxxxxxxx>
To: <PEN-L@xxxxxxxxxxxxxxxx>
Sent: Tuesday, November 25, 2003 5:28 PM
Subject: Re: [PEN-L] $/Euro dynamics


> Hi PEN-Lers,
>
> I am looking for current data on what share of the China US trade
surplus
> comes from American firms such as GM China.  Thanks in advance, folks.
>
> Seth Sandronsky


===============================

Trade deficit w/China in 2002 was $103billion
http://www.ita.doc.gov/td/industry/otea/usfth/aggregate/H02T13.html

For info on just how much [as of 2000] was due to US MNC's setting up shop
over there see:

http://www.ustdrc.gov/research/china1.pdf


Some easy stats below:

http://www.morganstanley.com/GEFdata/digests/20030714-mon.html
Jul 14, 2003


Global: The Scapegoating of China
Global: Is the Tide Turning?
United States: Higher Rates Will Accompany -- Not Kill -- Recovery
India: Letting Rupee Appreciate Instead of Cutting Rates
Asia Pacific: Two Stars and a Laggard


Global: The Scapegoating of China

Stephen Roach (New York)



A persistently weak global economy is now moving into a dangerous place --
the blame game. Temptations are rising to point the finger elsewhere
rather than look in the mirror. Such sentiment is nearly unanimous in
singling out a new scapegoat: a rapidly growing Chinese economy. I have
picked this up in my recent travels to Japan, Europe, Australia, and
around the United States. World opinion is becoming increasingly united in
putting pressure on China to defuse this threat by revaluing its currency.
In my view, that would be a serious mistake. The world has got the China
story dead wrong.

The blaming of China goes something like this: With real GDP growth
currently hovering near 1.5% in the industrial world, the ongoing vigor of
the Chinese economy obviously sticks out -- industrial output up an
astonishing 16.9% (y-o-y) in June with exports surging by 32.6%. China is
certainly capturing market share in an otherwise sluggish world. The
problem is China's currency peg, goes the common complaint. Tied to the US
dollar, it has been given a competitive boost by the greenback's recent
depreciation. And if I'm right and the dollar has a good deal further to
go on the downside -- perhaps as much as 20% over the next couple of
years -- then most believe that China's current competitive advantage will
become all the more powerful. In this context, the world is nearly
unanimous in demanding that China revalue the renminbi in order to relieve
a growing source of global tension.

I was back in China last week -- my first post-SARS visit -- and this
issue came up at every meeting. The Chinese are acutely sensitive to
global opinion and are quite concerned at this obvious shift in world
sentiment. Although Chinese officials remain unwavering in their
commitment to the RMB peg, I was asked repeatedly for my thoughts on how
to handle this delicate issue. I urged the Chinese to stay the course --
to leave RMB policy unchanged. I offered three reasons in support of this
conclusion:

First and foremost, there is enormous confusion over the character of the
so-called Chinese export threat. In my opinion, the world has formed an
erroneous impression that newly emerging Chinese companies are capturing
global market share with reckless abandon. In fact, nothing could be
further from the truth. The real export dynamic in China comes far more
from the conscious outsourcing strategies of Western multinationals than
from the rapid growth of indigenous Chinese companies. In fact, China's
increasingly powerful export machine has the stamp of America, Europe, and
Japan all over it. That's been true over most of the past decade. Over the
1994 to mid-2003 interval, China's exports basically tripled from US$121.0
billion to $365.4 billion. It turns out that "foreign-invested
 enterprises" (FIE) -- Chinese subsidiaries of global multinationals and
joint ventures with industrial-world partners -- have accounted for fully
65% of the cumulative increase in total Chinese exports over that period.
(Over the most recent 12-month interval, the FIE contribution to China's
33% export surge was 62%). Not surprisingly, nearly two-thirds of China's
foreign-driven export dynamic since 1994 is traceable to the impact of
multinationals alone.

This is hardly an example of China grabbing market share from the rest of
the world. Instead, it is more a by-product of the struggle for
competitive survival of high-cost producers in the industrial world. Last
year, a record US$52.7 billion of foreign direct investment flowed into
China, making the country the largest recipient of FDI in the world. This
inflow did not occur under coercion -- it was entirely voluntary. A
high-cost industrial world has made a conscious decision that it needs a
Chinese-based outsourcing platform for its own competitive survival. A
revaluation of the RMB would destabilize the very supply chain that has
become so integral to new globalized production models. By putting
pressure on the Chinese to change their currency regime, the industrial
world is working at cross-purposes -- in effect, squandering the fruits of
its own efforts. Fear of the so-called China threat completely misses this
critical point. The power of the Chinese export machine is more traceable
to "us" than it is to "them."

A second argument in support of China's currency peg is the nature of the
nation's competitive prowess. Contrary to widespread perception, China
does not compete on the basis of an undervalued currency. It competes
mainly in terms of labor costs, technology, quality control,
infrastructure, the improved human capital of its work force, and a
passion for and commitment to reform. I honestly believe that if China
were to revalue the RMB upward by 10% -- a change I do not expect nor
advise -- its exports would suffer minimal loss of market share.

Third, it is important to stress that there is really no doubt over the
endgame. China has consistently reiterated its long-term commitment to
opening its capital account and making its currency fully convertible. At
the same time, China knows full well that a good deal of heavy lifting on
the reform front has to occur before these objectives can be accomplished.
That's true of capital-markets reforms and of the need to clean up its
banking problems. China is making progress on both fronts, in my view, but
a lot more needs to be done. Until there is greater progress on the road
to financial reforms, it would be entirely premature and risky for China
to float its currency, in my view. That is a critical lesson of the Asian
financial crisis of 1997-98 that an impatient world should not lose sight
of when putting pressure on China.

These are not the only reasons for China to hold the line on its currency
policy, but they are the most compelling, in my view. Several other
considerations that also argue against an RMB revaluation: an
intensification of imported deflationary pressures for a Chinese economy
that is just now climbing back out of deflation; a possible outbreak of
bubbles in other asset markets, especially property; and a signal to
market speculators that the RMB is now "in play." My colleague Andy Xie,
head of our Greater China economics team, has also made the important
point that poor countries like China will never close the development gap
with rich countries if they are repeatedly forced to revalue their
currencies (see his June 11, 2003, dispatch, "Revaluation Fallacies").

I fear there's a deeper meaning to the pressures now being put on China:
Unwilling to accept responsibility for their own shortcomings, the wealthy
economies of the industrial world are making China a scapegoat for their
weak recoveries. That's especially true in Japan, which has led the way in
China bashing over the past year. Senior Japanese officials have
repeatedly blamed China for exporting deflation and for the "hollowing
 out" of the Japanese labor market. Nothing could be further from the
truth, in my view. Low-cost, high-quality Chinese imports provide a
windfall to the purchasing power of beleaguered Japanese consumers --
precisely the same type of benefits that Japan's export machine provided
the world in the 1970s and 1980s. If you want an example of an undervalued
currency, study the path of the yen during Japan's own spectacular
emergence; it averaged close to 300 versus the dollar in the 1970s and
about 220 in the 1980s -- dramatically cheaper than its current reading in
the 115 to 120 range. It is hypocritical for Japan to criticize China for
emulating a strategy that was central to its own development model.
Putting pressure on China to revalue its currency is a poor excuse for
Japan's own inability or unwillingness to reform.

Moreover, as I travel through the newly industrialized "special economic
incentive zones" in China, I am repeatedly struck by widespread presence
of Chinese subsidiaries of Japan's most successful companies. In fact, I
am hard-pressed to identify any major Japanese producer that does not have
a significant presence in China. Corporate Japan is not being forced to
shift its production to China. This is the rational response of
uncompetitive, high-cost Japanese producers attempting to maintain their
share in an increasingly open global economy.

I am also concerned about the China bashing that I am hearing in the
United States these days. Many have noted that America's largest trade
deficit is now with China -- a $103 billion shortfall in 2002 and on track
to exceed that amount in 2003. Like it or not, trade deficits should not
come as a surprise for a saving-short US economy. As I have stressed
repeatedly, they are part and parcel of America's increasing need to
import surplus foreign saving in order to finance economic growth; the
only way to get that capital is for the US to run massive current-account
and trade deficits. If America wasn't trading with China, those deficits
would have to occur with other nations -- Canada, Mexico, other Latin
economies, Japan, or possibly even Europe. That the United States is
experiencing the fastest incremental growth in its seemingly runaway trade
deficit with China is a good thing: As is the case in Japan, it is
providing American consumers with the cheapest of high-quality goods that
world producers can offer today. If America wants to reduce its trade
deficit, it must come to grips with more fundamental problems of its own,
namely a rapidly vanishing national saving rate (see my July 7 dispatch,
"Flashpoint?"). Until it does so, trade deficits are the rule, not the
exception -- and the low-cost, high-quality Chinese option is in America's
best interest.

I have spent a lot of time in China over the past five years. And I
continue to be astonished at the progress this vast nation is making on
the road to reform and prosperity. But China has a long way to go, and it
is far from perfect. Its people and leaders will be the first to admit
that. It is only now beginning to recover from the devastating blow of
SARS. But I continue to believe that China is the world's greatest
development story of the 21st century. Its emergence will not only benefit
the 20% of the world that lives in its most populous nation but it will
also benefit the 80% of us who do not. Periods of economic distress often
produce scapegoats. China is at risk of becoming a scapegoat in today's
increasingly dysfunctional global economy. It's high time for an
increasingly inward-looking world to look in the mirror and put this
dangerous blame game to an end.