will china grow by letting the dollar fall?

[jk]

i just finished reading the extract below, and found myself wondering when china would conclude that the SOLUTION to its growth problem is to let the dollar fall. this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.

as exports to the moribund american consumer continue to decline, there is a diminishing incentive to support the dollar, and a diminishing flow of new dollars with which to do it even if they wished to continue. i want to solicit the thoughts of the community here about what it will take for the chinese leadership to recognize the obvious: their best interests are served by a stronger yuan.

in so saying, i realize the enormity of the adjustment that china would have to make: the re-direction of its economy away from exports and toward domestic consumption. so perhaps their interest is in a controlled revaluation, and perhaps they are already pursuing this route. what, then, will lead them to decide to accelerate this adjustment?

China Optimism: Another Bubble

China faces a major slowdown in the growth of its economy as investment spending loses its momentum and consumer spending fails to offset that, according to a new report from the Monaco-based investment gurus Pivot Capital Management.

Development in China has been driven primarily by capital spending, but relative to the economy that has now reached unprecedented levels – accounting for almost 90 per cent of growth in the first half of this year. The boom cannot be sustained at current rates and the chances of a hard landing are increasing.

Analysis of industrial capacity, urbanization and infrastructure development “shows that China’s industrialization and structural modernization are largely complete” – therefore its future long-term fixed capital formation needs are being grossly over-estimated.

China is “running out of easy ways to boost growth through investment.”

► The manufacturing base is increasingly mature and there are few areas where there’s an obvious need for capacity expansion. Its current steel production is greater than that of the European Union, Japan, the US and Russia combined. Despite idle capacity of 160 million tons of steel a year, additional capacity of 60 million is under construction.

In cement, having doubled its capacity, China now produces and consumes more than the rest of the world combined.

Because of the way electricity is subsidized, heavy industry is notoriously inefficient in use of energy – which has probably led to over-estimation of future power generation needs, an important area of capital spending in recent years.

► The movement of hundreds of millions of people from rural areas to the cities “is perhaps the most quoted fundamental trend that should drive China’s growth for the next few decades,” generating demand for construction, real estate and home equipment.

But, the Pivot researchers argue, the “numbers are not what they seem.” If the same definitions of what are classified as villages, townships and cities were used by statisticians as in other major countries, China is already one of the world’s most urbanized nations.

Potential for future growth in residential property is limited by a very high home ownership level (86 per cent in 2005) and affordability – price-to-income ratios have reached 15 to 20 times in major cities and around ten times in regional cities.

► Infrastructure has been the prime beneficiary of the gigantic stimulus package launched late last year. But the economic justification for many of the projects is increasingly questionable.

China already has a highway system two-thirds to three-quarters the size of America’s, despite a vehicle population less than one-fifth the size. It has roughly the same number of bridges as the US, despite one-fifth as many rivers. The only area of infrastructure where further investment clearly makes sense is the rail network.

A lot of infrastructure projects are now in sparsely-populated inland areas (“bridges to nowhere”), or clearly primarily intended to be prestigious, such as the Qinghai-Tibet railway.

The Pivot study expects infrastructure growth to halve next year and go flat or even negative in 2011.

China bulls suggest that private consumption will overtake fixed capital formation as the engine of economic growth. But private consumption only accounts for about one-third of the economy. Even making optimistic assumptions, private consumption would have to grow three to four times faster than in the past decade to compensate for the imminent fall in fixed investment.

The coming decline in the rate of growth

Such expectations are “unrealistic.” The latest central bank survey of consumer sentiment shows that a record low 8.6 per cent of households consider their income “adequate,” compared to 32 per cent in the first half of 2007. This is “hardly star material” for a consumption boom now in China, say the Pivot researchers.

The labour market is another worry. Urban unemployment is far worse than the politically-manipulated figures suggest – probably more than double the level the government admits to, and perhaps as high as 27 per cent of the work force. Almost a million university graduates who started looking for jobs last year are still unemployed, and about 3½ million of this year’s graduates.

The Pivot study concludes that China’s economic growth is soon going to decline to 5 to 6 per cent a year, “and probably slowing down even more later on.”

This will have “enormous consequences on what China imports from the rest of the world as it shifts from commodity and capital goods into (most likely locally-produced) consumer goods and services.”

Gloomy stuff for bulls of the Middle Kingdom like myself. It suggests that if we want to invest in China, we need to be particularly selective and concentrate on the best-connected as well as the best-managed companies focused on future domestic demand opportunities.

[cjppjc]

Re: will china grow by letting the dollar fall?

i just finished reading the extract below, and found myself wondering when china would conclude that the SOLUTION to its growth problem is to let the dollar fall. this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.

How does a lower dollar increase purchasing power for the Chinese citizen?

[touchring]

Re: will china grow by letting the dollar fall?

not before it buys up as much resources it wants. you thought money printing is free? no, you're transferring real resources to china.

[jk]

Re: will china grow by letting the dollar fall?

How does a lower dollar increase purchasing power for the Chinese citizen?

food, energy, all globally traded goods and commodities will become cheaper for the chinese with a stronger yuan. first, look at oil at $70/barrel. if the dollar is lower vis a vis the yuan, the yuan buys more oil. if you assume that a weaker dollar leads to more expensive oil, say $100/barrel, and that this would offset the gain in the yuan, then american consumption diminishes at the higher dollar price and more oil is available per yuan than currently. same reasoning for any other global commodity, including agriculturals.

[touchring]

Re: will china grow by letting the dollar fall?

food, energy, all globally traded goods and commodities will become cheaper for the chinese with a stronger yuan. first, look at oil at $70/barrel. if the dollar is lower vis a vis the yuan, the yuan buys more oil. if you assume that a weaker dollar leads to more expensive oil, say $100/barrel, and that this would offset the gain in the yuan, then american consumption diminishes at the higher dollar price and more oil is available per yuan than currently. same reasoning for any other global commodity, including agriculturals.

The communist rulers do not want cheap food. There's no benefit to the regime if food and commodities become cheaper. There's no benefit if the chinese people consume more resources - in fact, they are trying to reduce consumption by curbing population.

The regime want your jobs, they want to transfer whatever industries left in America to China. They want Chinese state industries to become even larger and more powerful, therefore tightening their grip over political power.

Remember, you're not dealing with China, you're dealing with the Chinese Communist Party.

[cjppjc]

Re: will china grow by letting the dollar fall?

food, energy, all globally traded goods and commodities will become cheaper for the chinese with a stronger yuan. first, look at oil at $70/barrel. if the dollar is lower vis a vis the yuan, the yuan buys more oil. if you assume that a weaker dollar leads to more expensive oil, say $100/barrel, and that this would offset the gain in the yuan, then american consumption diminishes at the higher dollar price and more oil is available per yuan than currently. same reasoning for any other global commodity, including agriculturals.

Yes I was thinking a rise in proportion to the decline in the dollar would negate any gain in purchasing power. Also if the decline gets too great the thought seems to be some commodities will not be priced in dollars.

Also I'm not nit picking here but you wrote;

this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.



I don't see how. The yuan would need to increase in strength against those currencies in which China imports from, no?

[touchring]

Re: will china grow by letting the dollar fall?

this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.

This is never the goal, you just have to look at the Singapore example. 60% increase in GDP in the last 10 years, but declining living standards in the average member of the population.

The goal of a regime is to strengthen political power. This is done by strengthening state enterprises and their power over finance and economics.

[jk]

Re: will china grow by letting the dollar fall?

Yes I was thinking a rise in proportion to the decline in the dollar would negate any gain in purchasing power. Also if the decline gets too great the thought seems to be some commodities will not be priced in dollars.

Also I'm not nit picking here but you wrote;

this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.



I don't see how. The yuan would need to increase in strength against those currencies in which China imports from, no?

let's assume, for ease of analysis, that global goods are still quoted in dollars. then if the dollar price is constant, the yuan buys more. if the dollar price rises, american demand is reduced, supply for the rest of the world is increased, and the yuan buys more.

[jk]

Re: will china grow by letting the dollar fall?

The communist rulers do not want cheap food. There's no benefit to the regime if food and commodities become cheaper. There's no benefit if the chinese people consume more resources - in fact, they are trying to reduce consumption by curbing population.

The regime want your jobs, they want to transfer whatever industries left in America to China. They want Chinese state industries to become even larger and more powerful, therefore tightening their grip over political power.

Remember, you're not dealing with China, you're dealing with the Chinese Communist Party.

regime legitimacy would be bolstered by the population's ability to eat on a regular basis. employment would be increased in those enterprises serving the domestic market, reducing unemployment, and also bolstering political support. the only real issue that it wouldn't deal with is the relative superabundance of young males. for that you need a war.

[c1ue]

Re: will china grow by letting the dollar fall?

JK,

It is an interesting idea, but it is not clear to me how much a stronger RMB actually translates to the average citizen.

Doesn't China already heavily subsidize energy and gasoline? If so, how would a higher RMB translate into lower energy and transport costs?

A higher RMB would also encourage more imports. As the infantilization of Eastern Europe shows, the deindustrialization that can occur with strong national currencies isn't exactly a recipe for future prosperity either.

[touchring]

Re: will china grow by letting the dollar fall?

JK,

It is an interesting idea, but it is not clear to me how much a stronger RMB actually translates to the average citizen.

Doesn't China already heavily subsidize energy and gasoline? If so, how would a higher RMB translate into lower energy and transport costs?

A higher RMB would also encourage more imports. As the infantilization of Eastern Europe shows, the deindustrialization that can occur with strong national currencies isn't exactly a recipe for future prosperity either.

China has a long way to go.

New announcement:

http://www.google.com/hostednews/afp...9F9986kogf4M4Q

SINGAPORE — The Monetary Authority of Singapore (MAS) said Monday it would maintain its policy of "zero percent appreciation" for the city's dollar, despite data pointing to a modest recovery from recession.

[GRG55]

Re: will china grow by letting the dollar fall?

Yes I was thinking a rise in proportion to the decline in the dollar would negate any gain in purchasing power. Also if the decline gets too great the thought seems to be some commodities will not be priced in dollars.

Also I'm not nit picking here but you wrote;

this would produce an immediate increase in purchasing power for almost every member of its population, immediately raise living standards and create an enormous boost for domestic consumption and domestic economic activity.



I don't see how. The yuan would need to increase in strength against those currencies in which China imports from, no?

It doesn't matter from where they purchase the goods...it matters in which currency the goods are priced. And for now the goods that count are all priced in US Dollars. Even the oil that Iran sells for Euros and Yen is actually priced in US Dollars.

[touchring]

Re: will china grow by letting the dollar fall?

It doesn't matter from where they purchase the goods...it matters in which currency the goods are priced. And for now the goods that count are all priced in US Dollars. Even the oil that Iran sells for Euros and Yen is actually priced in US Dollars.

Even my small business out of the EU is using the Euro. It won't be for long before everyone uses the Euro - except probably the commodity markets.

[GRG55]

Re: will china grow by letting the dollar fall?

Even my small business out of the EU is using the Euro. It won't be for long before everyone uses the Euro - except probably the commodity markets.

Go to any market in any third-world country [thre's plenty of them all round the planet] and try to buy something with Euro cash. Then pull out some American Dollars.

I realize that what happens in village markets and city bazaars in developing countries can't compete with the importance of Goldman's prop desk or the halls of commerce in Europe, but until I see a repudiation of the US Dollar by the grass roots, imo stories of its imminent total demise are overblown...

[touchring]

Re: will china grow by letting the dollar fall?

Go to any market in any third-world country [thre's plenty of them all round the planet] and try to buy something with Euro cash. Then pull out some American Dollars.

I realize that what happens in village markets and city bazaars in developing countries can't compete with the importance of Goldman's prop desk or the halls of commerce in Europe, but until I see a repudiation of the US Dollar by the grass roots, imo stories of its imminent total demise are overblown...

The dollar demise will depend on policy makers.

If China pulls out support for the dollar, it will not be a reserve currency in 6 months. I've no doubt about it.

Of course, China will have a lot to lose, so they will try to swap as much of their dollar assets for hard currency and commodities as they can. Hundreds of billions or even trillions and tens of thousands of people maimed by wars for resources, in the distant past, this goes into millions, and today China gets resources without fighting. So it's still a good deal in my opinion.