[
Cross-posted at Liberals Against Terrorism]
Praktike points us to some China-related comments from Chairman Greenspan today. The China remarks appear in a column by Greg Ip (WSJ) --
see prak's post -- who reported on comments that weren't in the Greenspan statement (which was all budget process), Ip characterizes Greenspan as "the latest U.S. official to turn up the volume on China."
Ip is far more experienced at Greenspan-ology that I, but I have a decidedly different take on today's comments. Seems to me Greenspan's telling folks to cool their jets. That a revaluation of the yuan is going to happen when it's in China's interest and they're not going to be pressured into it. Pressure is, if anything, counter-productive because it produces cross-the-board tensions that are really quite unncessary.
Greenspan indicated, and I agree, that the Chinese know full well that it's -- sooner or later (and increasingly sooner) -- going to be necessary to revalue. They've been openly trying to prepare for it for some time -- especially in their financial system (which as we all know isn't the strongest, to put it politely). In fact, as Greenspan seems to have noted according to Ip, one of the main pressures for revaluing is increasingly the strains on their financial system from the hot money they can't sterilize and the asset bubbles and over-investment in some regions and sectors. All that is undermining many of the benefits they're trying to extract from the current exchange rate as well as their ability to manage macro policy.
I'd expect that Greenspan's real audience for the comment about the revaluation sooner rather than later is the markets -- there are a lot of concerns about too rapid a readjustment, the impact on global growth, and a hard landing. For the masochists among us, Brad DeLong has been keeping a running inventory of "hard landing" fretting and commentary over the past few days (from
David Altig,
Bruce Barlett, and
Krugman & Setser).
I read Greenspan's China remark as similar to his comment about oil prices a couple of weeks ago -- that they'll work their way through the global economy in a fairly orderly adjustment of supply and demand. So Greenspan's trying to keep everybody calm.
I think he's also signaling to Congress that their impatience is both unnecessary and not doing the markets any good. American business is concerned about all the trade war noises. A big tariff increase may make "good politics" domestically, and it
may seem to some not materially different from an exchange rate adjustment in macroeconomic theory. But in practical terms, it sure doesn't make American businesses who actually have to produce and sell stuff happy to hear about big unilateral tariffs against a key trading partner, and it shouldn't make their employees happy either.
As
The Economist notes today in a piece on Congress' new-found love-affair with protectionist noisemaking, even the National Association of Manufacturers isn't keen on the tariff games.
Nobody in Congress, alas, seems to care about breaking WTO rules. The aim is to be seen to be bashing China loudly. Mr Bayh is holding up the confirmation of Rob Portman, the new trade representative, until his bill is voted on. Meanwhile, in the House of Representatives, Duncan Hunter, a conservative Republican, and Tim Ryan, a Democrat, have cooked up a law that allows American companies to use “exchange-rate manipulation” as a reason for demanding protection under America's trade laws. And the Congressional China Currency Action Coalition has filed a Section 301 petition asking the Bush administration to file a formal case to the WTO complaining about the yuan.
In the 1980s, a rising trade deficit—at that time with Japan—fueled protectionist pressure in Congress. Ronald Reagan introduced the notorious “voluntary export restraints” on Japanese steel and cars. The Reagan team also abandoned its laisser-faire attitude to currency markets and, through the Plaza Agreement, engineered a sharp drop in the dollar.
The current bout of China-bashing is not a replay of the 1980s. Back then, large American firms, particularly the Detroit car giants, led the clamour for protection. Now big business, which relies heavily on Chinese inputs, is quieter. The shouting comes from smaller American suppliers. And even the noisier business groups, such as the National Association of Manufacturers, are relatively nuanced. Though the NAM wants Beijing to revalue the yuan, it does not support the Schumer bill.
I just love how every time the chickens start coming home to roost from the pursuit of bad (or non-existent) US policy, the US politicians (of both parties I might add) all run to blame somebody else. Doesn't strike me that Greenspan is falling into that old bad habit. But it's pretty disgusting when it comes from the profligates who have been at least titularly in charge of conducting US economic policy like Snow, and I don't have much more patience for grandstanding from folks who should know better like Schumer and Bayh.
If Democrats want to turn up the volume, let's start with making noise about the ridiculous energy bill that's actually being voted on in the House but that could, if enough Senators got behind some of the more sensible proposals out there, be changed in the Senate with, I might add, some White House support. (The House bill's so bad
even Bush bashed it this week.) Hey, and where was the volume on the estate tax or bankruptcy bills that really mean something directly to people? Nah, it's easier to blame somebody else for the consequences of the consumer-spending and debt binge we've enjoyed for years. Sheesh!
BTW -- Just to respond to Roubini's remark that prak quotes in his
post on Greenspan. I disagree with the emphasis by Roubini and many others on the loss of value of foreign reserves as one of the major pressures on the Chinese to revalue early. Hey, it's only money. The Chinese have humongous problems they're trying to grow their way out of -- e.g. SOEs, banking system, labor mobility, development in inland regions. 16% of one year's GDP doesn't look like all that outrageous a price tag when you look at things from their perspective.
UPDATE re the reserves losses discussion: For more on the impact of losses on reserves held by the PBoC (Peoples Bank of China), see this post from
Brad Setser yesterday. He concludes:
The PBoC may still have a positive cash flow, but it is sitting on a large expected valuation loss on both its dollar and its euro reserves. Diversifying out of dollars does not help much; the best way for the PBoC to reduce its prospective loss is to stop adding to their reserves. And in any case, it might want to start provisioning against that future loss now ...
The real debate here is not whether the losses are "just paper" losses or not -- the losses from a revaluation would be very real, though they could be partially offset by the PBoC's ongoing profits from issuing renminbi cash. The real question is whether these mounting losses are a worthwhile price to pay to sustain China's rapid export growth for a while longer.
And as I suggested, at least until recently when some of the downside of an overvalued currency started undermining the gains, the answer from the Chinese has clearly been "It's worth it." I see them in quite a different position from other Asian central banks who are being forced to digest a lot more dollars than they'd like.
In the comment thread Brad also helps sort out some of the confusions that are common in discussions of the risks of revaluation to China's banking system. Worth a read.
