Monday, July 14, 2003

The diversity of opinions concerning China's role in globalization's current impasse find interesting expression in a pair of commentaries by Stephen Roach of Morgan Stanley and the latest issue of The Economist.

The Chinese economy is booming. Industrial production is soaring, exports are into the stratosphere, and as a result China is running an increasingly large current account surplus with the center of the world economy, the United States. Because the Chinese currency, the yuan, is tied to the US dollar, the dollar's tumble over 2002 are early 2003 has made this powerhouse even more powerful, undercutting not only other industrialized countries but more importantly other Southern countries in East Asia and Latin America. If the dollar continues to fall, this advantage will become even more acute.

Roach's thoughts on China are summed up in his title: "The Scapegoating of China". According to Roach, China's export success is due mainly to Western TNCs, not domestic Chinese firms. An appreciation of the yuan vis-a-vis the dollar will "destabilize the very supply chain that has become so integral to new globalized production models." That is, a rising yuan will interrupt the flow of ultra-cheap goods from China to the West that the West has created to serve itself. Roach also thinks China is not ready to float; it is "entirely premature and risky". A revaluation would provoke deflation in the country, blow up a property bubble, and encourage global speculation against the currency.

Roach shrugs off the corrosive effects of China's near-slave labor force on labor markets in the Global North, basically appealing to the palliative 'Wal-Mart effect' (loathsome low-paying jobs compensated by access to low-cost plastic crap equals happiness) and demanding structural reform in Japan and Europe first and foremost (i.e. the 'Texasification' of the rest of the industrialized world).

Over at The Economist, the pernicious effects of the peg of not only the yuan but also the Hong Kong dollar, as well as active management of the South Korean won and the Taiwan dollar (and the yen), on the global economy are discussed. As a result of this pegging and dirty floating,
Asia's foreign-exchange reserves have swollen from less than $800 billion at the start of 1999 to over $1.5 trillion now, almost two-thirds of the global total. Japan bought over $30 billion-worth in May alone; it now has almost $550 billion in its coffers. The world's seven biggest holders of foreign-exchange reserves are all in Asia.
The Economist comes out boldly to state that in their view the Chinese yuan is "the most undervalued currency in the world," estimating an undervalue of nearly 20% against the US dollar; China's massive increase in foreign currency reserves, massive current account surpluses, and huge FDI inflows are presented as evidence.

So why doesn't China revalue (floating is right out and thus Roach's plea against it is a red herring)? Because the illnesses of globalization are hitting China as well: unemployment and deflation. As Charles Kindleberger points out in his excellent book The World in Depression, relative currency appreciation in a world poised on the edge of deflation is deflationary for the country appreciating. Plus, a rising yuan would cut into China's export engine and thus shake the most profitable sector of the economy at a time when unemployment, particulary in rural areas, is accute.

What makes the US complaint against the value of the yuan ironic is that Asians stuffing US dollars under their central bank mattresses helps finance the US current account deficit. If the Chinese, Taiwanese and Koreans didn't sit on all these dollars, they would send them out into circulation, drive the dollar down very sharply, and shake the US economy up like it hasn't been shaken since the late 1970s. If Asia dumps dollars, get ready for the end of Greenspan & Co.'s deflation strategy, too; interest rates will suddenly and unpleasantly shoot up. Thus the US needs Asians to hold dollars, but it also needs them to not hold dollars (i.e. let their currencies appreciate).

The euro zone countries are particularly hard hit by this predicament. Pressure on the US dollar to sink cannot be dissipated in East Asia due to these policies, so the full force of dollar devaluation gets felt in Europe, and the euro zooms upward. For a region poised on the brink of recession, an appreciating currency is not only unwelcome, but more importantly a sign of an amazingly disfunctional global economy.

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