current issue china. current issues “creating a stable foreign-currency regime that doesn't...
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Current Issue
China
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Current Issues
“Creating a stable foreign-currency regime that doesn't give an edge to one country or another "is the central existential challenge of cooperation internationally,"
--- Treasury Secretary Geithner in remarks to Brookings Institution
Source: WSJ Oct 7, 2010
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Current Issues
China“When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same," . . . . "This sets off a dangerous dynamic" [as nations compete to keep their currencies undervalued.]
---- Treasury Secretary Geithner
Source: WSJ Oct 7, 2010
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Current Issues
China“[Countries employing competitive-currency politics risk] 'causing inflation and asset bubbles in emerging economies or else depressing consumption growth and intensifying short-term distortions in favor of exports.' "
---- Treasury Secretary Geithner
Source: WSJ Oct 7, 2010
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According to AP story Oct 6, 2011:
“President Obama said [at] a news conference Thursday that it was 'indisputable' that the Chinese 'intervene heavily in the currency markets'”
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Current Issues
China“If the yuan is not stable, it will bring disaster to China and the world. If we increase the yuan by 20% or 40% ...many of our factories will shut down and society will be in turmoil."
-- Wen Jiabao, China's prime minister
Source: WSJ Oct 7, 2010
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China
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China: Outstanding Issues
Currency: US dollar vs yuan vs world currency Investments in USG securities China's large bilateral trade surpluses with US Intellectual property rights infringements Military/political issues, China's navy expansion,
6 party talks, trade issues, human rights (Tibet), etc.
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China Before Reforms• Prior to 1979 China was very poor:
• Communist regime under Mao took control of mainland in 1949
• Economy came under control of communist party (and still is)
• Economy was: – state controlled– centrally controlled– command controlled (cement production, eg)
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China Before Reforms
• Farms in 1950s were collectivized into large communes
• Efforts to jump start industrialization failed in 1950s
• By 1960s, central government began massive investments to create centrally controlled state-owned enterprises
• Cultural Revolution (1966-1976) set back development enormously
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China in the 1970s
• By 1978, three fourths of industrial production was produced by SOEs with planned output targets
• Virtually no private enterprises or foreign investment
• Effort to make economy self-reliant was a key goal of central government
• Economy almost stagnant and very inefficient
• No profit incentives, no competition
• Price and production controls widespread
• Deep poverty – annual per capita income less than $300 (?)
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Economic reforms 1980s to present• Mao dies in 1976
• Deng Xiaoping becomes paramount leader by 1979
• Deng began reforms through economic liberalization described by Deng as “Socialism with Chinese characteristics”
• Allowed for price incentives for farmers and small free farm-based markets
• Established diplomatic relations with the US after US dropped ties with Taiwan
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Macro changes to the economy in the 1980s
• Established four special economic zones (SEZs)
• Decentralized some economic planning to province level
• Began rapid opening to the West . . . .
– Joined IMF– Began negotiations to join GATT/WTO– Developed bilateral ties with the US and other
western nations• Joint Economic Committee with US Treasury• Joint Trade Commission with US Commerce
Dept
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Current Conditions in China
• China's economy grew about 10.4 percent in 2010 – about average over the past ten years
• Real GDP in 2011 rose about 9 percent
• $580 billion stimulus package announced in Nov 2008 helped at beginning of international crisis – what US has pushed for
• Boosted domestic spending on infrastructure, etc. Urban fixed asset spending jumped 26% in January and February YOY
• Exports were down 26% - now recovered
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Current Conditions in China (cont.)
• Environmental rules weakened. Review time for new building proposals reduced to two days from five
• Export taxes may be reduced to zero
• No plans for a dramatic revaluation of Yuan against US$
• If economy further weakens, could see devalued to boost exports
• Emphasis on domestic demand
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Issues for China
• Property bubble?
• Inflation?
• Greater intervention of government in economy?
• More charges of currency manipulation
• Escalation of trade/currency war with United States and other trading partners?
• Treasury Secretary Geithner continued pressure on China
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China's Primary Concerns . . .
. . . . not that the US will default,
• Rather, that USG current spending will lead to inflation . . .
• And inflation will cause the US dollar to depreciate . . .
• Leading Chinese assets in the United States, including US Government debt, to be devalued
• Treasury bonds could drop in value as US economy languishes, further hurting Chinese investments
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Foreign Holdings of US Treasuries
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Foreign Ownership of US Debt
Source: “Foreign Ownership of US Debt Continues to Grow” by Veronique de Rugy at the Mercatus Center at George Mason University (http://mercatus.org/publication/foreign-ownership-us-debt-continues-grow)
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Japan Holdings of US Treasuries
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Russia Holdings of US Treasuries
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OPEC Holdings of US Treasuries
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Dollar is Vulnerable because . . .
• USG spending at record amounts in 2009 and beyond . . .
• Fed announced in 2009 it would purchase another $1.1 trillion of US Government and Agency debt – could devalue dollar through inflationary effects
• New plans to purchase $600 billion will do more to dollar
• Treasury secretary remarks in NY in March 2009 led to a dollar decline of about 1.5% in ten minutes. It matters what you say when you are Treasury Secretary
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Dollar is Vulnerable because . . .
• Investors and speculators remain wary of $ future with new administration's spending plans and . . . .
• China's new assertiveness
• Greece has saved the day – for now
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Trade Weighted Value of US$
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Several Key Issues for World Financial System
• Should the yuan be pushed as a new reserve currency alongside the US dollar, yen and Euro
• Should there be a new world currency based on a basket of currencies – a “super-sovereign reserve currency”
• Will China seek other financial markets to invest reserves
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Yuan as a Major Currency
• Yuan not capable of replacing the dollar, the pound, the yen, the Euro or any other industrialized nation's currency
• China's financial markets not mature enough
• Too many controls on currency in its immature banking system
• Yuan has never floated on international markets - rather unsettling for govt
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World Currency?
• China (and Russia) suggesting it is time for a new world reserve currency, based on a basket of existing currency
• China's position in part a shot at Geithner's comments about the Chinese government manipulating the currency in January 2009
• Chinese feeling emboldened about its position as largest holder of international reserves (over $2 trillion) and largest single foreign holder of US government securities (around $800 billion)
• Despite initial confusion, US does not favor a new world currency, but would not object to an enhanced use of the existing SDR
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World Currency (cont.)
• New world currency (however defined) would struggle to gain the trust of the dollar
• SDR has languished since its creation in 1969 as a unit of account for internal IMF bookkeeping
• World currency could prove to be too inflexible for nearly 200 disparate economies
• Likely restrict growth and innovation
• Who would manage it? How? Which money supply?
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SummaryConcerns for Chinese Government• Rules of law still not established enough for
foreign investors
• Future of State owed Enterprises and U rate
• Income inequality
• Asset Bubbles
• Environmental concerns
• International political issues:– Tibet– North Korea/Japan– Taiwan/US Navy/China's Navy
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Yuan/US$ exchange rate
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China Exports
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China Imports
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China Current Account Balance
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Current Account Balance as Percent of GDP
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China Industrial Production
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China's Foreign Exchange Reserves (billions of US$)
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China Holdings of US Treasuries
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China's Domestic Economy
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China's GDP YOY
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China per capita GDPin Yuan
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China Population
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FDI in China
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Foreign Direct Investment in China as percent of GDP
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China Inflation
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China Unemployment Rate