One argument we have made, which some readers find difficult to accept, is that China’s keeping its currency, the renminbi, at artificially cheap levels is tantamount to an across-the-board export subsidy (the proof that the RMB is artificially cheap comes via the fact that China has had to engage in massive dollar purchases to keep the RMB pegged at its target level. It’s hard to track Chinese purchase directly from monthly Treasury International Capital reports, since the Chinese execute many of their dollar purchases through London. And I would take the latest Goldman assertion on the value of the RMB with a fistful of salt. Goldman was also calling the euro a buy at 1.50).
Now one of the reason that export subsidies and tariffs are considered to be a Bad Thing among Respectable Economists is that they lead to inefficient producers, ones that are dependent on government protection and cannot compete without official support.
That appears to be the case with a fair number of Chinese exporters, per the report of a state news agency. I only have a short Bloomberg report on the release, which came out on Xinhua; I was unable to find it on the English version of the paper.
From Bloomberg (hat tip reader Michael):
The profits of China’s makers of household appliances, automobiles and cell phones may plunge by between 30 percent and 50 percent if the Chinese currency were to strengthen by 3 percent, according to a state media report.
Small and medium-size exporters with low price-negotiating powers will face losses and may even go out of business, according to the Xinhua News Agency’s Economic Information Daily newspaper, citing the results of a “stress test.”
“The ultimate result of a currency that strengthens too quickly and by too much may be the irreversible damage to our economic structure, rather than improving our economic structure,” the report said.
Yves here. A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB. Margins that thin will not support needed reinvestment in the business (nominal depreciation is often too low to cover needed reinvestment) nor allow the business to have much in the way of buffers for any kind of shocks.
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Hi Yves,
You don’t expect China to be able to compete with the likes of the good ol’ USofA, Japan or Germany ‘fairly’ do you?
Honestly– what else can China do? This isn’t about economic ideology, this is the real thing and the Chnese are trying to improve their lot. This is a nation with 20% of the world population!
I think that the subsidy argument needs a little more qualification than it is getting. A subsidy is typically provided by a third party, such as a government to an industry, which is clearly not the case in international trade. It therefore seems to me that the Chinese must be providing an at least equal and opposite subsidy to US borrowing. As I wrote on my blog a couple of years ago http://reservedplace.blogspot.com/2008/04/us-economic-policy-shot-in-foot-2.html , America’s biggest problem with China’s exchange rate policy may well be that the US has failed to manage that debt subsidy to its advantage, probably because it would have entailed more state intervention than Americans are comfortable with.
Rebel,
A currency pegged at an artificially low price results in a lower price of exports. Because China is a fairly large player and has engaged in this practice on an unheard of scale, it has also created significant distortions in the US (which we tolerated, so we cannot treat China as a sole actor here beyond a year or two after the onset of dramatic increases in Chinese dollar asset accumulation. At least initially, some of the reasons may have been security-related, see the New Republic piece in Links for a reminder of the thinking in 2002 in particular).
The reason for stressing the export subsidy aspect is the defeatism I keep seeing here about US manufacturing (which I am told is widespread in the Beltway). We have ceded far more to emerging economies than we needed to, even ex the trade distortions.
Yves,
the insight on China’s lack of competitiveness is the most original, valuable information I’ve found on your blog in many months.
It has huge potential consequences for every national economy, including the non-obvious conclusion that medium-quality tradicional producers (e.g. furniture, shoes, simple electronic appliances, etc.) may happen to return to developed economies, once China’s bubble and energy scarcity unwinds.
Just wanted to congratulate :)
“The reason for stressing the export subsidy aspect is the defeatism I keep seeing here about US manufacturing (which I am told is widespread in the Beltway). We have ceded far more to emerging economies than we needed to, even ex the trade distortions.”
Well, eventually the US will become very protectionist, and those plants will come back, and people will go broke paying ever more money for ever worse quality (and, incidentally, the wealthy industrialists will replace the wealthy bankers as public enemy #1).
But before this happens, someone had better train people how to manufacture again, because the skill sets just aren’t there. And someone had better upgrade the power grid, because it’s fallen by the wayside and there isn’t enough capacity there either (I believe I saw an estimate about how just keeping the same electric grid will cost something like $10-20 trillion over the next 20yrs). And management has to improve significantly. And the US is going to have to find someone to finance all this, because the financial sector already got the trillions. And the US is going to have to find buyers for these products, because there’s little reason for the rest of the world to buy from the US when the US refuses to buy from them.
This is going to take literally decades. Since the election cycle is only four (or two) years and people want solutions NOW, what happens in the meantime?
Now one of the reason that export subsidies and tariffs are considered to be a Bad Thing among Respectable Economists is that they lead to inefficient producers, ones that are dependent on government protection and cannot compete without official support.
Exactly which sector, in China or America, export-oriented or not, doesn’t fall into this inefficient corporatist category?
The fact is, it was never “efficient” from any point of view other than the psychopathic labor-cost one for America to export its jobs and self-reliance overseas to China and elsewhere. America’s globalization derangement, while taking longer and (maybe) not ending with quite as much violent domestic destruction, will still go down as history’s craziest, most suicidal adventure embarked upon by any country, dwarfing the self-destruction incurred by certain German and Japanese adventures.
The economic havoc is already similar, except unlike in 1945, the self-destroyed have no intact outside world to help them rebuild.
Sorry, but I still can never see how China’s doing anything other than playing by the age-old rules. Sure, they’re not sustainable either. It’s “Chimerica”. But the fact that they’re not doing anything to try to find a way out of the mess is mirrored exactly by America’s identical unwillingness to do even the most miniscule constructive thing. Can anyone name a single thing this government has done to jubilate American debt and encourage saving? Of course not, because ALL American policy is predicated completely on reflating the bubble. Which can only mean more borrowing from China.
Somebody tell them about accounting identities. If China’s to buy more, then America has to save more. But didn’t Dudley at the Fed just say Americans need to save less? Of course, and of course that’s what these idiots keep saying in the same breath that they whine about Chinese lending: that Americans need to get back to “consuming”, which of course means borrowing.
Which they can’t, any more than the Chinese will ever be able to do. Consumerism is dead. Globalization is dead. This Tower of Babel’s gone as high as it can go. With the Bailout and the war they’re just making it more top-heavy with fraud on top of looting on top of crime.
History will curse every one of them as the worst criminals ever.
Yves: “A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB. Margins that thin will not support needed reinvestment in the business (nominal depreciation is often too low to cover needed reinvestment) nor allow the business to have much in the way of buffers for any kind of shocks.”
Actually, I don’t see anything exceptional in this. Most countries making their way as entry-level manufactureres (and most all such countries of any size) do so first at the low-value added end of the scale. They compete on labor cost in, essentially, assembly of components. Margins are razor thin, and competition is fierce with other peripheral manufacturers. Vietnam, Bangaladesh, portions of India, Thailand: they’re doing this now, drafting in China’s big wake. Malysia, Taiwan, Mexico, Japan . . . the US, the UK, the Netherlands: all did it in their time. Small rises in domestic currency/fluctuations in exchange rates wipe out the profit. This doesn’t really speak at all to the ‘shape’ of development, only the place in the development curve of the economy under examination.
What is interesting, to me, about the ‘shape’ of development as advocated over the last two generations in the global economy is how much it has been oriented _almost exclusively_ to exports. Time was, many countries worked to develop production for their domestic economies too, or even primarily. Small countries couldn’t get the traction—domestic economy too small and competivie advantage of large foreign producers too great—so they had to specialize in exports and hope to compete, often with limited success. But that was a forced choice. Countries of size previously looked to stimulate internal ‘development,’ if not conceived as ‘consumption’ because it made them industrial (and not coincidentally military) powers. But this has really changed, especially in the last generation. Now, everyone wants to capture export markets/profits to the exclusion of boosting domestic ones. Too few books have been written on this aspect of globalization, but I would advance a thesis as to why: large capital has shifted from maximizing its context to maximizing itself. Or to put it another way, large wealthy enterprises don’t give a damn if their host countries are prosperous or not but rather seek only to aggrandize themselves. Supposing that that thesis is true, it might be so due to the increased corporatization of large wealthy enterprises. When such outfits were owned by individuals, those individuals had personal standing amongst their domestic elite, and personal political positions of considerable weight. When wealthy enterprises are ‘managed’ by transient operators and hands-off rentiers, such conditions do not apply. That’s one hypothesis, which I’ll throw out here if not seek to defend.
Despite that, I’m not sure that China’s export _led_ developmental strategy fits the description just given. It’s certainly been argued that boosting employment has been a major policy goal of those shaping China’s industrial policy; thus profits, in so far as the Party are concerned, are secondary. Again, the latter dynamic would go some way to put in context just why China’s deciders see it in their interest to support marginal assembly manufacturing on such a scale. ‘Imbalances’ may (or may not) be an issue in the long run, but in the short run they’re still Red. So to speak. Technology transfer has been another primary goal of China’s industrial policy, but one has to have a manufacturing base going to have the medium and trained labor force for technology to transfer _in to_. So supporting a heap of low profit manufacturing is to a degree a way of getting global supply networks tied onshore in China. This has been very successfully achieved, one might add.
The real problem in the organization of China’s industrial development, to me, is that low-investment exporters and those who profit from them have established themselves as a major consitutency in the contest for control of China’s industrial policy so that there is a very active internal tussle there between those with their eyes on the prize—mid- to high-value added manufacturing, increasingly in the interior of the country with different local power bases and patrons at the top—and those with their fingers in the pot—existing sweat factories on the coast sucking partial vacuum in the down draft of global demand for low-value added Walmartiana. The latter scream, “Yuan no go, we CAN’T raise,” meaning they are personally unprofitable if the currency goes up. It’s worth noting that the core of this consitutency was financed by off-shore Chinese money and contracts from Hong Kong, Taiwan, and the Chinese diaspora, though of course much of their wealth-base is domestic now. The former hope to compete on a different basis, not least because they are going to be geared to a larger degree to the old 19th century ideal, that of producing for domestic demand. I don’t have the details to get a clear view (what with all the volume regarding China’s currency, with is secondary tot he larger devleopmental process/strategy) but I have the impression that the constituency for this policy is wholly domestic. Now, who does one suppose will win this argument in the end?
—Not that it matters at all for US manufacturing whether the renminbi notches up or not. Because wealth enterprises in the US don’t really give a damn about their host country. Low-value added assembly will simply flow to Vietnam, Bangaladesh, back to Mexico, or the like. An industrial policy presupposes a political policy. And the malefactors of great wealth have complete control of US governmental policy, as we see, and not the least interest in investing in their host country. Great wealth here is parasitical, in a word. Fuddling about with currency rates won’t change the political equation at all. THAT takes a reform. And since we aren’t getting reform, it’ll take a revolution. And not by any Tea Potters, who could’t revolve a door without a guide dog and somebody eles’s money.
The renminbi will rise, marginally, when it is in China’s interest to do so, and China will be the principal beneficiary of that change. I wonder what we’ll have to blame them for then? . . . Something will be found I feel sure . . . .
“Not that it matters at all for US manufacturing whether the renminbi notches up or not. Because wealth enterprises in the US don’t really give a damn about their host country. Low-value added assembly will simply flow to Vietnam, Bangaladesh, back to Mexico, or the like.”
China is not just about low-value added assembly. If it was then they wouldn’t need to force the renminbi to such a low value – it would be there without intervention. China has moved up to more sophisticated, higher value added value manufacturing very quickly, but without a sufficient increase in the renminbi.
Wish I could develop that further. Answer me this. Why have they bought into industrialization, for an economy that never needed to be industrialized, and have insisted on keeping the industrialized out?
“Time was, many countries worked to develop production for their domestic economies too….”
Time was when developing countries felt themselves on a treadmill where they had to borrow in US$ to invest in export sectors to produce goods to be sold in US$ markets where US$ returns could be earned to buy US$ commodities and pay US$ debt and purchase US$ assets to defend their own currencies. There never was the margin to move enough of that wealth into domestic infrastructure – schools, hospitals, etc. And when they did – currency crisis. A Brazilian President made that case very eloquently in a few years ago front of the UN. I won’t be able to find a link. Somebody in China must have heard that too.
“Now, everyone wants to capture export markets/profits to the exclusion of boosting domestic ones.” China yes. Everybody else (save Germany who manufacturers goods for developing markets like China) is probably just responding to that race to the bottom competition.
“…large wealthy enterprises don’t give a damn if their host countries are prosperous or not but rather seek only to aggrandize themselves.” Meaning, as you indicate, that they have fully imported the American capitalist model to that extreme degree. I don’t buy it. Maybe you don’t either.
But the employment policy goal doesn’t work either. No intelligent person can believe that an industrial economy can be built for 1400 million people on the back of US (western) already saturated demand and cheap energy. So, we must agree that they either aren’t so intelligent – perhaps something to be considered more fully in light of the unintelligent things we have done to ourselves and also in context of this being the bunch who for about 40 years never read more than 1 little red book.
More likely it must reflect more short-term considerations.
Technology transfer? If they had even tried to maintain some illusion of not being so entirely mercantilist (not just currency manipulation, but more importantly the closed market) they could have licensed it. What westerner wouldn’t license technology if he thought he had a shot at that, from our saturated market perspective, unlimited demand? What is it they feel they have to lose? I don’t know. Too much has been written about The Party’s tenuous grip on power. I don’t buy that either. So, what? Are we back to self aggrandizement? Or, could it be an altogether defensive measure? What is your strategy if your entire rasion d’etre is to be a counterweight to Washington Consensus gone wild?
why?
If globilization, or Chinese merchantilism, is such a problem, why does it continue? It began under Clinton? apparently continued under Bush? And still goes on?
So it appeas bipartisan.
Is it because most political and economic beliefs are simply religious beliefs? We are indoctrinated that free trade is good, and we will practice regardless of whether it is free, or whether it is good.
Your assertion: “the proof that the RMB is artificially cheap comes via the fact that China has had to engage in massive dollar purchases”. I’d be interested to know the supporting data and source for this. Also, purchased with what? RMB?
I thought the massive accumulation of dollars and dollar-backed asset was due to the trade imbalance.
Please explain.
“I thought the massive accumulation of dollars and dollar-backed asset was due to the trade imbalance.”
The trade imbalance is the source of the dollars, but the accumulation is due to the fact the China buys dollar based assets (e.g. treasuries) rather than converting the dollars into their own currency. Hence China “soaks up” dollars, even though they can’t use them in China, and artificially raises the demand and hence the price of the dollar.
You raise a good point, Ian. The fact that the Chinese state is buying dollar-denominated financial assets does not prove that the renminbi is artificially cheap. The Chinese government has exchange controls so that currency exchange has to go through the official channel on the terms set by the state. At the present exchange rate Chinese producers are clearly more competitive in goods and services, hence their trade surplus. However, because the Chinese state also operates capital controls, it is impossible to know whether China would run a capital account deficit (ie a net import of financial assets) without state intervention. It is not inconceivable that, in the absence of exchange and capital controls, the Chinese private sector might choose to import so many financial assets from abroad that China would end up with a cheaper renminbi and a larger current account surplus. The Chinese state effectively pays for the dollars it buys from exporters with renminbi bonds, and the fact that these bonds can be sold at fairly low interest rates does suggest that the Chinese people would save a lot anyway. In my opinion, the key question should be not whether the present exchange rate needs intervention to sustain it, but whether the government is somehow forcing Chinese people to save. People who know China well like Michael Pettis argue that it does, but that is a more difficult judgement to make than whether or not the Chinese authorities are intervening.
Rebel:
You do not define this:
“more competitive in goods and services”
well enough. It certainly is not about the amount of actual labor in the production of the product or the service. And therein is the problem
I mean either cheaper for an equivalent product, or a higher quality product for the same price. I am not sure what your point about labour input is though – is more labour good or bad?
touche: likewise you don not accurately define “actual labor”…
what do you believe actual labor means?
This makes no sense – I agree there may be “some” Chinese manufacturers where a small change in FX would reduce profits by some huge multiple, but the entire Chinese economy cannot be running on those kind of thin margins.
I think we need a bit more info as to what percentage of the Chinese industry we are talking about. It sounds like a scare news story (a state media report) that doesn’t hold up to basic analysis.
And please, lets all stop talking about the Chinese not being able “to use” the dollars. Treasuries are a secure source of collateral for loans/investment – I am sure investing in Rio Tinto was helped by having those “worthless” dollars sitting around.
You obviously have not been to China. There are exactly two economies in the coastal cities: exports and building. The exports are entirely low margin. Nobody, and I mean nobody goes to china for anything but price.
Rebel Economist, if Country A is running a current account surplus, as a matter of the Balance of Payments accounting idenity, it must be running a capital account deficit equal to a surplus. BOP=current acount – capital account (+ or – Balancing item). A deficit country can move to surplus either through devaluation or deflation or a combination of the two. http://en.wikipedia.org/wiki/Balance_of_payments
One argument for using devaluation as the means for a currency adjustment of a current acoount defiit is that all members of the society share an equal burden in the devaluation, rich and poor, since all who own assets priced in dollars or earn income at dollars, become equally poorer). Given that the U.S. has run chronic current account deficits since 1980, and very large ones since the late nineties, one can safely say that the dollar has been overvalued by some amount through this whole period).
The alternative method to devaluation is deflation (or at least relative disinflation), which does favor the asset holders in a society (usually the rich (I think of this every time I hear Larry Kudlow singing the praises of King Dollar) who own the assets, particularly the readily liquid assets) and takes much longer, and makes the wage earners bear the burden of stagnating and/or declining wages and high unemployment during the transition. This solves the mystery of why there have been no private sector jobs created in the U.S. the last 10 years.
I have always found it mysterious that the same folks who react with horror of any U.S. move to protect the standard of living of wage earners as “protectionist” have not the slightest problem with manipulation of Chinese (and before them the Japanese) to undervalue the Reminbi (and before that the Yen) to the dollar. Even on pure efficiency grounds this creates a distortion in that Chinese are pursuing industries for which no true comparative advantage exists (I think of furniture, which is bulky and expensive to ship long distances and the low (labor) cost areas where it was produced in the U.S. (Appalachia and Piedmont of South Carolina, North Carolina, and Southwest Virginia with lot of lumber). Now major multinationals and large banks and investment banks, who earn middlemen fees for the movement of investments and capital overseas and then for financing imports back into the U.S., they do have a strong short term incentive. And apparently have captured a large school of economists who promote their interests.
sherparick, I am not disputing that, if China fixed its exchange rate at an appreciated level AND maintained its lock on the private sector capital account, its current account surplus would fall (in the BoP equation you give, China’s overall capital account deficit would fall because the public sector component – ie reserves accumulation – would fall). I do doubt though whether this would provide a better adjustment than relative disinflation in the US. Whatever the definition of currency “manipulation”, the fact is that the renminbi has never significantly depreciated. This means that China’s trade surplus reflects success in productive efficiency. To me, it seems appropriate that the benefits of this success should go in the first instance to those Chinese producers who have become more competitive, and inappropriate to make all American consumers pay more for imports in an attempt to sustain relatively uncompetitive American producers. Sadly for the existing industrial countries, a decline in real wages is probably an inevitable consequence of the rapid entry into world markets of 1.3 billion newly effective competitors for the limited supply of natural resources.
Rebel:
I am going to disagree again with this statement:
“This means that China’s trade surplus reflects success in productive efficiency.”
It is not productive efficiency that China exceeds the US in manufacturing. It is other costs non-existant in China and existing in the US that create the inefficiency. This is not manufacturing efficiency and is lower burden to the labor producing the product. I believe the US still has the lead in production efficiency per labor?
This statement is striking:
“inappropriate to make all American consumers pay more for imports in an attempt to sustain relatively uncompetitive American producers.”
What would you be prepred to give up that exists in the US, does not exist in China, and causes the US producer to be less productive as a result of being burden? Would it be Child Labor Laws, EPA Laws, OSHA Laws, OT Laws, Healthcare, etc? The plants I have worked in, in China provide a urse or doctor on staff, transportation back and forth to work, breakfast and lunch, and a snack if there is OT. There is nothing there that smacks of a competitve edge in producing a product and much can be said of lower cost and less burden to produce not only in China but much of ASia.
Should the people of the US pay a little more to buy product? If they knew what they were giving up domestically to have WalMart pricing on everything, their jobs, their standards of living, etc.; I think they might be singing a different tune.
Good point: one reason for China’s lower costs is its poorer environmental and labour protection. I suppose that where such things affect the Chinese only (ie not air pollution) then that is their loss, and I dare say too that some consumers discount Chinese products for such reasons(eg I mostly avoid Chinese food like apples). But where such concerns exist and do not deter consumers, I think that it is better to tackle them directly (eg if necessary via an environmental tariff) rather than through macroeconomic policy.
rebel:
Somewhat related to the additional costs in the US. You may enjoy this by an Electrical Engineer friend on Environmental Quality in the US as compared to China, Taiwan and how it is coming back to bite them in the ass. http://fray.slate.com/discuss/forums/thread/3799765.aspx “Jobs”
“A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB.”
Unless my understanding is off, this means that the renminbi is in fact overvalued. Floating it would reduce its value until China’s manufacturers can become profitable again.
Maybe I’m wrong here?
That is probably how the Chinese will try to argue it, but there is other evidence to support the idea notion that the RMB is too cheap, the biggest being the continued purchases of dollar assets to maintain the peg, and the fact that when trade volumes collapsed globally in 2008, China’s trade surplus hit a record level, but that of all other major exporters collapses. What you would have expected to see is all major exporting countries sharing the pain.
OK, I understand this part. But now if China floats and the renmimbi rises, all the marginal produces in China go under, correct (or they get subsidized by the government’s trillions in US dollars, and go under after those subsides end)? Doesn’t all those plant closures once again force the renminbi lower (and the dollar higher, since Euroland is also in bad shape)?
I’m not trying to be argumentative here–I’m just trying to get some kind of idea as to what is a sustainable long-term exchange rate (band) between the dollar and the renminbi?
The practice of currency manipulation that acts as an export subsidy by China was a formula copied from the Japanese. The Japanese were very successful at de-industrializing the US with cheaper imports, and protecting this by hoarding US dollars as insurance that the US debtor couldn’t change the rules.
Since the multi-nationals corporations profit from the eviscerating of the US industrial infrastructure, the hemorrhaging of US capital, and the impoverishing of the US worker with debt – This with the help of treasonous US politicians – Will ensure that currency manipulation will continue until the last drop of value can be extracted from this present system.
Our creditors will decide when that time is – not the US.
It’s a bad article.
First, it’s very shallow. Chinese economic policy addresses long-term interests of the country whereas increase in exchange rate would address the short-term goals only.
It’s pretty complicated and broad topic so I don’t want to educate anyone here.
Second, I think Yves should better address flaws in American economic policy than promote American imperialist interests here.
‘Chinese economic policy addresses long-term interests of the country whereas increase in exchange rate would address the short-term goals only’
ak, did you read the piece? the stress test was conducted by chinese authorities and reported by the state-controlled mouthpiece. to put this 3pct appreciation into perspective, the dxy appreciated nearly 10pct since dec 09.
further, to downplay currency as a ‘short-term goal only’ is utter nonsense — this currency sterilization has been going on for over a decade – at least since the asian crisis.
if this article is ‘bad’ as you state, your comment was a monumental disaster.
uh, are you Yves?
Yves:
I don’t know what you do in your life, but being a China basher in an intellectual world will not help you that much.
If Chinese exporters lack competitiveness (as you pointed out so many times), an unbiased observer would immediately ask if the RMB Yuan is Over-valued, not under-valued.
You will be more worthy to your country and your readership if you look at problems with American policy/politics.
‘being a China basher in an intellectual world will not help you that much.’
what in god’s holy name does that mean!? ‘august’s’ nonsensical jabber makes me think we have a ccp shill on our hands. sorry august, can’t shut down nc!
Is McCarthy II back? All you can do is to threat your opponents? what about trying to discuss my argument:
“If Chinese exporters lack competitiveness (as you pointed out so many times), an unbiased observer would immediately ask if the RMB Yuan is Over-valued, not under-valued.”
What verification about China’s status and intention could be gleaned from the report in re Morgan Stanley pulling out of the Revel casino partnership in Atlantic City. Aside from the laughable demand for $300 million in tax breaks for one of Wall Street’s finest to make money from slot parlors, the replacement deep pocket investor seems to China Eximbank. At least another billion USD is deemed necessary to complete the half built resort.
See link:
http://www.philly.com/philly/business/20100402_Morgan_Stanley_to_end_ownership_in_Revel_Casino.html?posted=y&viewAll=y#comments
Yves,
The numbers you quote suggest that chinese firms are reasonably profitable. Firms are highly leveraged. Even large firms only have small profit margins.
Assume prices are given in USD terms (i.e., a competitive market setting), and assume that the rise in RMB does not lower the costs of these Chinese manufacturers. So, if a 3% rise in the RMP reduces profits by 30%, it means profit margins must have been 9.1% of revenues prior to the rise of the RMB. To reduce profits by 50%, these firms would have had profit margins of 5.65% of revenues. These are not bad profit margins.
If you look at the largest us industrial corporations, they show profit margins that are lower than 10%. GE, for example, in 2Q09 had net earnings that were about 6.8% of revenues. European and Japanese corporations had much lower margins. Large German corporations, a few years back, had profit margins of just 1-1.5% of revenues.
That said, I also believe that western firms are competing against the RMB, not against Chinese firms. The RMB is the elephant in the room.
Your comparison is faulty. German and US exports weren’t growing at a 15% yearly growth rate, nor did profit margins disappear with much more significant currency fluctuations than a mere 3% rise in your currency.
It’s not that you can’t survive with a 5% profit margin. The problems are:
1) You can’t be growing at 15% yearly if your profit margin is 5%.
2) You can’t be growing healthily at all if your (small) profit margin is exclusively derived from currency manipulation.
Exports are a small percentage of China’s GDP.
Exports are 40% of China’s GDP (twice what it should be for a similar-sized economy). Net exports are 8% of China’s GDP, which is one of the largest percentage figures in the world. China is the largest world exporter.
Moreover, almost all growth in the last 2 decades were related to exports. Investment, a massive 40% of China’s GDP, has two sources: public investment in oversized infrastructure (wasting money to build unneeded, unpayable high-speed rail networks, etc.), which is artificial growth, and private investment in export industries.
So, since there is almost no domestic-production private investment, no intelligent public investment, no consumption growth, the only real source of China’s growth is exports and export-related investment.
Instead, the numbers I present above show how crucial the RMB exchange rate is to maintaining a (relatively high) profitability of huge swats of the Chinese industry. That’s how China ensures its incipient industries thrive in the world market.
I’ve heard that approximately 60% of the factories in China, which export goods to the US, are owned by American corporations, not by Chinese corporations. And because the Chinese work force is so much cheaper than ours, the last thing that American corporations based in China want to do is to have their goods made in the US — the very thing that’ll do the most to reduce our trade deficit with China!
cynthia…you heard wrong. there is no “export” if the ownership of the good goes from one US owned entity to another.
uh… Cynthia is right. An export from China into the US is an export from China into the US, no matter who owns it.