IMF infighting over Chinese currency valuation

The last couple of days have seen the gloves come off over the valuation of the renminbi. The US threw the first glove less punch followed by retaliation by the Chinese.

So what do the IMF think? They are busy punching each other at the moment.

This story has a lot further to run. My belief is that the currency is undervalued and will remain so. The Chinese government will not sacrifice jobs on the alter of better US-China relations at least not without much greater pressure from the rest of the world including the IMF.

IMF in discord over renminbi [FT]

The International Monetary Fund is caught in a stand-off between members over whether to label China’s currency as “fundamentally misaligned”, a politically explosive move that could stoke global tension over economic imbalances.

The issue is so controversial the IMF’s executive board has not discussed the Chinese economy since 2006, in spite of rules saying it should regularly assess member economies.

The decision touches directly on one of the most divisive issues among governments worldwide: the extent to which huge current account deficits and surpluses and artificially managed exchange rates have contributed to the financial crisis. Washington has long pressed Beijing to let the renminbi rise.

The present dilemma comes after a decision by the IMF in 2007 to step up surveillance of its member countries’ exchange rates, under heavy pressure from the US. Tim Geithner, President Barack Obama’s designate as Treasury secretary, has said that China was “manipulating” its currency and promised that all diplomatic avenues would be pursued to make Beijing change course. The IMF is almost certainly one such avenue.

Eswar Prasad, professor of trade policy at Cornell University and former head of the IMF’s China division, said IMF economists had concluded China’s exchange rate was “fundamentally misaligned”, defined as creating “a risk of disruptive adjustment”, but that it was not deliberately manipulating it to gain a trade advantage.

But he said the IMF’s management, led by Dominique Strauss-Kahn, the managing director, decided not to bring the issue to the fund’s executive board and start a “special consultation” with China on currencies because of disagreements among member countries.

“The board has now not had a discussion on China since 2006,” Prof Prasad told the FT. “If it can’t even have consultations with its members, this is a very serious issue. To some extent I suspect this is why [Tim] Geithner has decided to draw a line in the sand.”

Fred Bergsten, director of the Peterson Institute think-tank in Washington, said: “The IMF’s idea of starting a special consultation seems to have collapsed. The MD [managing director] has backed off.”

Both the IMF and a spokesman for the Chinese embassy in Washington declined to comment.

The IMF’s decision to focus on exchange rates in 2007 proved deeply controversial. At the IMF’s annual meetings last October Raghuram Rajan, the IMF’s former chief economist, now at the University of Chicago, said the focus on exchange rates from 2007 was “an unmitigated disaster”.

Because China is not borrowing from the IMF and seems unlikely to do so in the near future, the fund has no direct instruments to force Beijing to change policy and allow the renminbi to appreciate. But for the IMF to designate its currency as “fundamentally misaligned” – which it defines as creating “a risk of disruptive adjustment” – would undoubtedly strengthen Washington’s hand in its campaign for a freer-floating renminbi.

China hit back again over the weekend at Mr Geithner’s comments, with the central bank rejecting the accusation that China “manipulates” its currency and warning on the risks of protectionism.

“These comments are not only out of keeping with the facts, even more so they are misleading in analysing the causes of the financial crisis,” Su Ning, a deputy governor of the People’s Bank of China, was quoted as saying by the Xinhua news agency. “The international community. . . must avoid exploiting different excuses for renewing or encouraging trade protectionism, because these are of no help in withstanding the financial crisis.”

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China statistics - to believe or not to believe?

I have stated on numerous occasions that I do not trust the statistics coming out of China and for good reason.

It appears other economists share my skepticism. So is China in recession or not? To get 2 quarters of NEGATIVE growth would be required. This would be pushing it but I suspect we are not far off.

Economists treat statistics from Beijing with caution [FT]

Beijing boasted bright blue skies yesterday, but for the nation's economists the outlook is not quite so clear.

When the Chinese economy was growing at more than 10 per cent a year, few people stopped to question the official numbers. The soaring tower blocks and acres of new factories made the story real. Yet now that analysts are scrambling to work out just how quickly the economy is slowing, the holes in the official statistics are looming larger.

China said yesterday the economy expanded 6.8 per cent in the fourth quarter of 2008 compared with the same period the year before, the lowest rate in seven years. However, the raft of figures out yesterday did little to clarify just how long the slowdown would last and left some economists complaining the official numbers were flawed.

"China is now the third largest economy in the world but we have no reliable data on consumption or housing," says Ben Simpfendorfer, RBS economist. "It is difficult to get an accurate view of two of the main growth drivers over the last decade."

The government, which has set a target of 8 per cent growth this year, admitted the economy had cooled rapidly but said there were already tentative signs the worst might be over.

Industrial production rose by 5.7 per cent in December, a modest improvement on November, and retail sales growth remained high at 19 per cent. The surge in new bank lending at the end of last year has been interpreted by some as a sign the government's fiscal and monetary stimulus plans are beginning to work.

Ma Jiantang, head of the National Bureau of Statistics, aimed for a poetic touch to describe the positive signs. It was not yet clear if they were sustainable, he said, but they could be "like sunshine in a cold winter, light at the break of a dark dawn and sparks that can turn into a roaring fire".

Yet there are plenty of indications of a more prolonged slowdown. Imports dropped sharply in November and December, including of machinery which suggests weak investment in manufacturing. And although there have been signs that housing transactions are increasing, the large volume of unsold new properties in many cities could hold back new investment this year.

"Developers will be very cautious about getting new construction going again," says Joan Wang, head of research at the Beijing office of Savills, the property services group.

Economists also caution against reading too much into some of the data. China releases gross domestic product figures on a year-on-year basis, but does not provide data from one quarter to another. After stripping out seasonal adjustments, some economists tentatively estimated the economy barely grew at all from the third to the fourth quarters and could even have declined.

The official figures for house prices are believed by some to understate both past increases and current decreases in prices. Moreover, the retail sales figures, which appear to indicate buoyant consumer demand, are treated with caution, because they include some government purchases and wholesale buying.

"Retail sales number should not be trusted," says Arthur Kroeber, editor of China Economic Quarterly. The headline numbers last year grew much faster than urban incomes, which he says is "implausible", especially given the apparent slowdown in consumer spending on items such as car.

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China Crisis goes Mainstream

Whilst I have been banging on about the unfolding crisis in China only now has the mainstream press sat up and taken notice.

The FT as always leads from the front with quality articles on the subject. In fact, the number of column inches in today's paper shows that they have taken up the challenge with gusto.

Here are some links to the juicy bits. Regular readers will be aware of most of these issues or ready. The trigger for these articles comes from the confirmation of a rapid fall in growth that has been clear from the anecdotal evidence for months.

Asian Financial Crisis Deepens [FT]

Asia’s largest economies showed stark new evidence on Thursday of contagion from the global financial crisis as China reported its slowest growth in seven years and Japan’s central bank admitted it faces two years of contraction and deflation.

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China said its economy expanded by 6.8 per cent in the fourth quarter compared to the same period the year before, confirming the rapid cooling that has seen the rate of growth fall by nearly half over the past 12 months. For the year as a whole, the economy grew 9 per cent, down from the revised 13 per cent growth rate in 2007.

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Fearing social unrest if the economy slows too quickly, China has unveiled a huge fiscal spending plan and has significantly eased monetary policy.

One essential aspect of any recovery is the need for Asian countries to use their large surpluses to lessen the damage. This does appear to be happening but Asia and the West must not reply on Asian consumers to increase spending to save us. In all likelihood saving rates will be flat or even rise in this recession.

Only by spending can Asia save itself [FT]

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China, a country that has become accustomed to double-digit growth, may now be flirting with contraction. Indicators such as electricity usage suggest a sudden, juddering slowdown. Even the imaginative massaging of China’s official state statisticians has not been able to hide a slowdown in their analyses.

These nations cannot simply wait for the crisis to end. As long as they are built to export, they will siphon off whatever demand the deficit countries can whip up. This helps keep their customers in crisis. It is in Asia’s interests that it should correct its imbalances by increasing consumption at home. This should not be a bitter pill for the region to swallow, especially when the alternative is a prolonged world recession.

The key issue I have tried to highlight in previous posts is China's reliance on trade which I believe is far more important than commentators seem to suggest. The domestic market is simply not developed enough to take up the slack. This appears only now to be sinking in (and China's economy with it).

Region pays dear for its dependence on trade flow [FT]

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China appears to be giving the matter due attention. It is also suffering an external shock, compounded by the consequences of overly successful efforts at cooling an economy that was rampaging along at 13 per cent only a year ago. By the fourth quarter of last year, growth had fallen back sharply to an annualised 6.8 per cent.

Beijing has changed tack rapidly. It is now promising to spray $586bn through stimulus measures. In response, bank lending surged in the fourth quarter, raising hopes that public funds are seeping into the real economy. Authorities in both Washington and London must be watching enviously. As Andy Rothman, China strategist at CLSA Asia-Pacific Markets, says, new bank lending has been engineered by "the world's most liquid financial institution, the Chinese Communist party". Even retail sales have held up, rising more than 20 per cent last year.

Amazingly, some policymakers in Beijing are now worried that provincial and municipal leaders may use the stimulus package as cover to pour their own money into pet projects. The concern is that, in six months or so, authorities may have the headache of tackling inflation once again. That may be the most optimistic thing anybody has said in months.

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Property price crash in China

As with the stockmarket, the bubble in property prices was over blown and is now deflating. The stockmarket went first and could still fall further. The property market appeared to be remarkably resilient.

The reason? In my opinion, the Chinese are still getting used to capitalism and saw property as an investment and a relatively safe investment. As with shares, the majority of investors have never seen a falling market. Pressures to sell have not come anywhere near peaking (yet).

It will take longer but a much larger fall in likely. However, as always we must come back to the Chinese government. IF the government wants to support property prices it could probably do so if it throws enough money at the problem.

The FT reports on this topic today:

Chinese office market has all but dried up [FT]

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Still, most pundits say the biggest unknown remains how far China and other Asian governments will go to revive the property market.

A month ago, Beijing announced that it would cut taxes, make it easier for property developers to obtain credit and reduce the lock-up period for home sales, during which owners are unable to sell without paying stiff taxes.

The measures come after repeated interest rate cuts and the launch of a broader Rmb4,000bn economic stimulus package.

Meanwhile, labour and raw material shortages are also disappearing. Ng Ooi Hooi, an executive overseeing the construction of Tianjin Eco-City, a new town that will be home to 350,000 residents, says that building costs there have dropped 40 per cent from a year ago.

“There will probably be adjustments to our project but nothing fundamental,” he says. “Costs are really down and hopefully the [market] situation will have turned around by the time we are finished.”

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How China can hit 8% according to "All Roads"

The big "8%" question and how China can reach it if it tries hard enough is covered in a two part post over at "all roads lead to China".

There Are Many Ways China Can Hit 8% Growth - Part 1 [All roads lead to China]

Last Monday I was invited back onto CNBC to discuss the current economic atmosphere, and China’s prospects for 2009.

It was another large topic to cover in 6 minutes, and as always, I felt like I left a few things untied at the end and wanted to take a minute to further explain some of my thoughts.

Will China hit 8% growth?

With my initial comment being correct “There are many ways to hit it (8%), the question is whether or not they will hit it in the right way”. It is a question I wished more time on as I think was perhaps the most important question of the interview.

There Are Many Ways China Can Hit 8% Growth - Part 2 [All roads lead to China]

The story continues.

These two posts are worth reading in full.

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China kicks Germany in the economic rankings

CNN reports on China moving past Germany in the economic rankings.

China passes Germany in economic rankings [CNN]

China has become the world's third-largest economy, surpassing Germany and closing rapidly on Japan, according to government and World Bank figures.

The Chinese government revised its growth figures for 2007 from 11.9 percent to 13 percent this week, bringing its estimated gross domestic product to $3.4 trillion -- about 3 percent larger than Germany's $3.3 trillion for the same year, based on World Bank estimates. Beijing is expected to release its 2008 GDP figures next week.

Although the world's top economies, the United States and Japan, are in recession, the most pessimistic estimates for China's growth in upcoming years runs about 5 percent. That could allow China's GDP to overtake Japan's, currently $4.3 trillion, within a few years.

The U.S. economy, the world's largest, was about $13.8 trillion in 2007.

The World Bank's estimate of China's economic growth is about 7.5 percent. But China has seen a sharp decline in exports in November and December as other major economies struggle, and the bank's analysts say rates below 6 percent could worsen the rest of the world's slump. Video Watch how China was able to overtake Germany

And Michael Santoro, author of the 2008 book "China 2020," said China will have other problems to overcome if it is to maintain its rapid expansion.
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"It's no longer sufficient for China to become a manufacturer of sneakers or toys and the like," Santoro said. "Now they're looking to become players in the area of pharmaceuticals and foods and other high value-added products, where safety and quality are important characteristics for improving in the global economy."

China recently announced a $600 billion economic stimulus package, and its State Council on Wednesday laid out a new plan to boost its steel and auto industries -- including about $1.5 billion to develop alternative-fuel vehicles.

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China as a Christmas tree?

Sometimes the title of a paper is enough to generate a blog post. This one is particularly eye catching. I suspect a translation malfunction.

The content of this unpublished paper concerns an important topic - China does need to be fully engaged in the global fight against climate change. Whilst China is the largest emitter of CO2 it will also suffer some of the largest negative impacts so it has every incentive to work with the West to come up with a solution.

Is it fair to treat China as a Christmas tree to hang everybody’s complaints? putting its own energy saving into perspective

Zhang, ZhongXiang (2008)

Abstract

China has been the world’s second largest carbon emitter for years. Recent studies show that China had overtaken the U.S. as the world’s largest emitter in 2007. This has put China on the spotlight, just at a time when the world community starts negotiating a post-Kyoto climate regime under the Bali Roadmap. China seems to become such a Christmas tree on which everybody can hang his/her complaints. This paper will first discuss whether such a critics is fair by examining China’s own efforts towards energy saving, the widespread use of renewable energy and participation in clean development mechanism. Next, the paper puts carbon reductions of China’s unilateral actions into perspective by examining whether the estimated greenhouse gas emission reduction from meeting the country’s national energy saving goal is achieved from China’s unilateral actions or mainly with support from the clean development mechanism projects. Then the paper discusses how far developing country commitments can go in an immediate post-2012 climate regime, thus pointing out the direction and focus of future international climate negotiations. Finally, emphasizing that China needs to act as a large and responsible developing country and take due responsibilities and to set a good example to the majority of developing countries, the paper articulates what can be expected from China to illustrate that China can be a good partner in combating global climate change.

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