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Thread: Effects of a yuan appreciation relative to the dollar

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    Effects of a yuan appreciation relative to the dollar

    Some grist for the mill for all those who complain about the yuan being artificially too low.

    http://cowles.econ.yale.edu/P/cd/d17b/d1755.pdf

    This paper uses a multicountry macroeconometric model to estimate the
    macroeconomic effects of a Chinese yuan appreciation. The estimated effects
    on U.S. output and employment are modest. Positive effects on U.S. output
    from a decrease in imports from China are offset by negative effects on U.S.
    output from increased inflation and from a decrease in U.S. exports to China
    because of a Chinese contraction.
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    Official Thread Jacker Senior Contributor gunnut's Avatar
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    Is there an animated version of this paper?
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    In china, most of people are in support of appreciation of yuan, however.. There have been some people are objection of appreciation. In my opinion, it is necessary to appreciate due to the inflation is too serious in china at present. This is a good opportunite to adjust the economic structure. The negative respect is that will influence the export of china . Yet china is very emphasis on exporting. If that, the GDP must be lower than 2009¡£
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    Quote Originally Posted by gunnut View Post
    Is there an animated version of this paper?
    Yuan undervaluation is a very small part of the trade imbalance actually. Just look at the 20 % appreciation from 2006 to 2008, didn't really do much.

    The bigger issue are the buy-China policies that gov't purchases are adopting + pressure on pseudo-gov't companies do buy domestic + laws forcing 50/50 joint ventures/local production + generally reduced friendliness to foreign investment. Of course, A lot of other Asian countries do these things too. Which explains the huge surplus Asian countries are generally running up against Western countries. Also, excessive support in terms of subsidies, tax rebate and cheap loans also helps. Other countries do that too, but China has a lot more cash, which always helps.

    The other big issue is that Americans don't save money and Chinese people do. You are always going to have trade imbalance when one country lives beyond its means and another that lives beneath its means.

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    Quote Originally Posted by golden_age View Post
    In china, most of people are in support of appreciation of yuan, however.. There have been some people are objection of appreciation. In my opinion, it is necessary to appreciate due to the inflation is too serious in china at present. This is a good opportunite to adjust the economic structure. The negative respect is that will influence the export of china . Yet china is very emphasis on exporting. If that, the GDP must be lower than 2009¡£
    The people that would be in support of appreciation would be the rank-and-file citizenry, like in Japan.

    However, it'd hurt the businesses. A high-up Chinese government official a couple weeks ago in anticipation of the American statement that China was a currency manipulator said that the profit margin for businesses in China was somewhere on the order of 2%, which is shocking if true.

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    Quote Originally Posted by rj1 View Post
    The people that would be in support of appreciation would be the rank-and-file citizenry, like in Japan.

    However, it'd hurt the businesses. A high-up Chinese government official a couple weeks ago in anticipation of the American statement that China was a currency manipulator said that the profit margin for businesses in China was somewhere on the order of 2%, which is shocking if true.
    It seems the US is going to buy off China on 'currency manipulator' label.
    On Saturday, the White House has denied any connection between delaying a report on China's currency policies and seeking Beijing's cooperation on new penalties against Iran for its nuclear program.
    Link

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    Quote Originally Posted by rj1 View Post
    The people that would be in support of appreciation would be the rank-and-file citizenry, like in Japan.

    However, it'd hurt the businesses. A high-up Chinese government official a couple weeks ago in anticipation of the American statement that China was a currency manipulator said that the profit margin for businesses in China was somewhere on the order of 2%, which is shocking if true.
    no, Japan has been supportive of China on the Yuan.


    Japan Noda: U.S. shouldn't punish China over yuan | Reuters

    TOKYO, March 18 (Reuters) - Japan's deputy finance minister Yoshihiko Noda said on Thursday that China needs to understand global calls for a more flexible yuan, but that Washington should not resort to sanctions to make this happen.

    "I don't know if the United States will impose sanctions, but I don't think that would be the right way of dealing with it," Noda told a news conference.

    "Basically, such an action is not desirable. But I want China to understand there are expectations for a more flexible yuan, not only from the United States," he said. (Reporting by Tetsushi Kajimoto)
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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    China March Trade Deficit May Complicate Yuan Issue

    China March Trade Deficit May Complicate Yuan Issue - WSJ.com

    By J.R. WU

    BEIJING—China ran its first monthly trade deficit in six years in March, which could fuel fears the country's export recovery remains wobbly and complicate any decision by Beijing to let the yuan appreciate.

    China's trade deficit in March was $7.24 billion, the state-run Xinhua News Agency reported Saturday, citing data from the General Administration of Customs. It isn't unusual for Xinhua, China's state media, to release the trade figures first. Data from Customs had been expected Saturday.

    The deficit was much bigger than the median forecast of $280 million in a Dow Jones Newswires survey of 13 economists.

    China's exports last month grew 24.3% from a year earlier, slower than February's 45.7% on-year gain, while at the same time imports rose 66%, sharply up from the 44.7% on-year growth in February.

    The deficit, the first since April 2004, came after Chinese government officials hinted in recent weeks that China likely imported more than it sold abroad in March.

    Despite the March deficit, China's trade surplus in the first quarter totaled $14.49 billion, but shrinking 76.7% from the same time a year earlier, the report said. Running surpluses remains the broader trend for China this year, economists have said.

    China's domestic economy has been on the mend and China is due to issue its first quarter gross domestic product data on April 15. Chinese policymakers have been sounding warnings about the dangers of asset price bubbles and inflationary pressures intensifying in the domestic economy amid the return of trade and capital inflows.

    In a short, public statement released by the U.S. and China after Thursday's meeting between U.S. Treasury Secretary Timothy Geithner and China Vice Premier Wang Qishan in Beijing, the two sides said they had exchanged views on bilateral and global issues. The last-minute meeting, which was announced only on Wednesday, was the latest in conciliatory gestures in recent weeks by Beijing and Washington to mend strained ties and that has given Chinese policymakers room to come to a consensus on the yuan exchange rate mechanism.

    The Chinese currency has been effectively pegged against the dollar since mid-2008, following three years of gradual appreciation, due to the global financial crisis. In early March, People's Bank of China Gov. Zhou Xiaochuan indicated that the de facto peg to the dollar was a response to the global financial crisis that would be exited at some point.
    —Liu Li contributed to this article.

    Write to J.R. Wu at jr.wu@dowjones.com
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    an OpEd from todays WSJ
    * APRIL 2, 2010

    China Trade and American Jobs
    Studies suggest that one-half to two-thirds of the value of 'Chinese' imports is added in other countries, including the U.S.
    Daniel Ikenson: China Trade and American Jobs - WSJ.com

    By DANIEL IKENSON

    President Obama's goal of creating American jobs has thrust the Chinese currency onto center stage in Washington, where an undervalued renminbi is blamed for the trade deficit with China, and the deficit is blamed for U.S. job losses.

    Growing acceptance of that sequence of fallacies threatens our economy, as Congress considers restrictions on imports from China to compel the Chinese government to appreciate its currency. In true Washington fashion, these policies will reduce Americans' real incomes and destroy U.S. jobs in the name of economic growth and job creation.

    Although the Chinese currency appears to be undervalued, the evidence suggests that appreciation will not reduce the bilateral trade deficit. Between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the trade deficit, according to the trade statistics compiled by the U.S. Census Bureau, nevertheless increased to $268 billion from $202 billion over that period.

    Textbooks say that the Chinese should increase purchases of American products when the renminbi's value increases against the dollar—and indeed they did by $28.4 billion. But exports to China were already increasing rapidly before the currency began to appreciate, rising by $19 billion between 2002 and 2005, according to the Census Bureau.

    Textbooks also predict that Americans will reduce their purchases of Chinese products in response to an appreciating renminbi. But U.S. imports from China between 2005 and 2008 actually increased by a whopping $94.3 billion, or 39%.

    Import value is measured officially as price times quantity. If price rises by a larger percentage than the quantity demanded decreases, then import value is going to rise—adding to the deficit. And Americans did not reduce their consumption of Chinese goods at all in response to the stronger renminbi. That suggests a high degree of price-inelasticity. Consumers will endure higher prices with respect to products for which there are perceived to be few substitutes.

    This means that forcing China to appreciate its currency through sanctions will impose higher prices on American consumers, thereby reducing Americans' real incomes. Higher prices at Wal-Mart and Target—two of the biggest retailers that bring Chinese goods to U.S. customers—will be felt especially hard by lower-income Americans. Trade sanctions would in effect amount to a regressive tax.

    There is another explanation for Americans' continued purchases of Chinese goods despite their weaker dollars. A stronger renminbi increases the purchasing power of Chinese producers, who rely heavily on imported raw materials, capital equipment and components for their production. Because the inputs are now cheaper, Chinese producers can lower their export prices to preserve market share abroad.

    The relationship between currency and the trade deficit is weaker than policy makers presume. Weaker still is the relationship between the trade deficit and U.S. job loss.

    Sen. Charles Schumer (D., N.Y.) and others on Capitol Hill attribute 2.4 million American job losses between 2001 and 2008 to the bilateral trade deficit. This figure comes from the union-backed Economic Policy Institute. EPI's methodology is not taken seriously by most economists because it approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the figures. And it pretends that imports do not create or support U.S. jobs.

    But U.S. producers—purchasing raw materials, components and capital equipment—account for more than half of the value of U.S. imports annually, according to the U.S. Bureau of Economic Analysis. Those imports support U.S. jobs in a wide range of industries.

    Furthermore, according to the results from a growing field of research, only a fraction of the value of U.S. imports from China represents the cost of Chinese labor, materials and overhead. Most of the value of those imports comes from components and raw materials produced in other countries, including the U.S.

    In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese value-added accounted for about 37% of the total value of U.S. imports from China. In 2008, using a different methodology, U.S. International Trade Commission economist Robert Koopman, along with economists Zhi Wang and Shang-jin Wei, found the figure to be closer to 50%. In other words, despite all the hand-wringing about the value of imports from China, one-half to nearly two thirds of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100% to 200%, the official U.S. import statistics are a poor proxy for job loss.

    Seldom noted in the union-controlled discussion of trade on Capitol Hill is that the jobs of large numbers of American workers depend on imports from China. The proliferation of transnational production and supply chains has joined higher-value-added U.S. manufacturing, design, and R&D activities with lower-value manufacturing and assembly operations in China.

    According to a widely cited 2007 study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick of the University of California, Irvine, each Apple iPod costs $150 to produce. But only about $4 of that cost is Chinese value-added. Most of the value comes from components made in other countries, including the U.S. Yet when those iPods are imported from China, where they are snapped together, the full $150 is counted as an import from China, adding to the trade deficit and inflating EPI's job-loss figures.

    In reality, those imported iPods support thousands of U.S. jobs up the value chain—in engineering, design, finance, manufacturing, marketing, distribution, retail and elsewhere. A 25% tariff on imports from China would penalize the non-Chinese companies and workers who create most of the iPod's value.

    Consider how many fewer iPods Apple would sell; how many fewer jobs iPod production, distribution and sales would support; how much lower Apple's profits and research and development expenditures would be; how much smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be; and how many fewer jobs those industries would support. Multiply that by the hundreds of other devices and gadgets, computers and Blu-Rays, and other products designed in the U.S. and assembled in China from components made in the U.S. and elsewhere.

    Those are the economic costs that Congress and the president would inflict by imposing trade sanctions on imports from China.

    Mr. Ikenson is associate director of the Cato Institute's Center for Trade Policy Studies.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

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    What's with the Cato institute? I just read a "pro-China", or I say, pro-reality article on the Time Magazine, written by Joshua Cooper Ramo from the Cato Institute as well.

    Hu's Visit: Finding a Way Forward on U.S.-China Relations - TIME

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    Apologies, Joshua Cooper Ramo is from the Kissinger Associates. It's another article coming from the Cato institute that is for a better Sino-US relationship. But I cannot find it now.

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    Ha, now I find it... It's actually a debate between the author of Xinhui's article DANIEL IKENSON and a union guy. I first read it on huff-post. Interesting debate:

    Dave Johnson: Is China Trading Fair? CAF v. CATO On CNBC

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