The appreciating renminbi
Philippe Bacchetta, Kenza Benhima, Yannick Kalantzis 09 January 2013
China is perennially accused of currency manipulation. Yet, this column argues that a weak currency value doesn’t necessarily reflect currency manipulation. China is a fast growing economy with strong financial frictions and a high saving rate, and such countries naturally have weak currencies. Instead of focussing on accusations of currency manipulation, it might be more helpful for economists to encourage policies that foster Chinese consumption, gradually leading the renminbi to an appreciating path.
In the recent US presidential campaign, China was accused again of currency manipulation. In other words, the Chinese central bank is accused of maintaining the exchange rate at an artificially low level compared to its equilibrium value, including heavy intervention in the foreign exchange market. There has been a fierce debate on this issue in recent years, including on VoxEU.org (e.g., Persaud 2011, Reisen 2011, Reisen et al. 2011, Storesletten et al. 2010).
China, Currency manipulation, Currency wars
Trade liberalisation and embedded institutional reform: Evidence from Chinese exporters
Amit Khandelwal, Peter K. Schott , Shang-Jin Wei 15 January 2013
The institutions that manage trade barriers are subject to corruption, imposing additional distortions. This column shows that in China, the government misallocated quota licenses permitting firms to export. When the US and EU abolished quotas governing textile exports in 2005, China experienced productivity gains not only from the actual elimination of the quota but also from the termination of the misallocation due to inefficient licensing.
Economists traditionally assess the welfare losses of trade barriers without considering the underlying institutions that support them. In fact, these institutions may amplify welfare losses substantially. Corrupt customs agents, bureaucratic red tape and the withholding of goods in bonded warehouses may favour some firms at the expense of others, resulting in a substantial misallocation of resources. Anecdotal evidence along these lines is easy to spot.
Institutions and economics International trade
China, import quota, export licence
China’s pure exporter subsidies: Protectionism by exporting
Fabrice Defever, Alejandro Riaño 04 January 2013
The West perennially complains about China subsidising industry geared towards its domestic market. But what will happen when China enacts its latest Five Year Plan’s emphasis on domestic growth? This column argues that ending ‘pure-exporter subsidies’ – subsidies that boost Chinese exports while simultaneously protecting the least efficient, domestically oriented firms – will benefit Chinese consumers, but will cost the rest of the world.
On 17 September last year, the US requested consultations with China concerning a wide range of export-contingent measures – grants, tax preferences and interest-rate subsidies, totalling at least $1 billion – in apparent violation of the WTO’s Agreement on Subsidies and Countervailing Measures, China’s accession protocol and article XVI of the GATT. The EU joined the consultations shortly after on 28 September.
China, WTO, trade, welfare
Value-added exchange rates
Rudolfs Bems, Robert Johnson 06 December 2012
With the rise of complex, globalised supply chains is the real effective exchange rate (REER), the most commonly used measure of competitiveness, now outdated? If it is, what should replace it? This column presents a ‘Value-Added REER’ and shows that it differs substantially from the conventional REER. Because it is possible to construct a new Value-Added REER from existing data, policymakers interested in improving their understanding of competitiveness might well consider including it in their toolbox.
Real effective exchange rates (REERs) are widely used to gauge competitiveness. Yet conventional REERs, based on gross trade flows and consumer price indexes (CPIs), are not well suited to that role when imports are used to produce exports – i.e., with vertical specialisation in trade.
Competition policy Global economy International trade
competitiveness, Germany, global imbalances, China, globalisation, trade, supply chains, iPhone
The renminbi bloc is here: Asia down, the rest of the world to go?
Arvind Subramanian, Martin Kessler 27 October 2012
As China becomes ever more important in the global economy, will its currency take on an international role? This column argues that in some sense, this is already happening – an increasing number of emerging-market currencies seem to track (co-move with) the renminbi – and the trend is set to continue.
The staggering economic rise of China in the last three decades leads to the question of the potential internationalisation of its currency, the renminbi (RMB). Internationalisation has different dimensions. An international currency is widely used in financial and trade transactions, and crucially it is used as a store of value. Some, like Eichengreen (2011) and Frankel (2011) see a potential global role for the RMB, provided important ancillary reforms to the domestic financial system and to the financial account first take place.
Global economy International trade
China, renminbi, global currency
Global Rebalancing 2.0
Linda Lim, Ronald U Mendoza 24 September 2012
There has been much talk among economists of ‘global rebalancing’, with the focus on China and the US rebalancing their current accounts. But this column argues that the type of rebalancing that will bring real gains to the global economy is one that will be shaped by many countries, both industrial and developing.
The discussion on global rebalancing is at a crossroads, and much of what will shape policy options moving forward will have to be taken up in roundtables that include more countries than the two usual suspects, China and the US.
US, global imbalances, China
Why do Chinese households save so much?
Raman Ahmed, Heleen Mees 28 August 2012
China’s huge savings are met with both awe and suspicion. This column asks what explains the high savings rate. It uses data from 1960 to 2009 – including the periods with the most significant economic reforms.
China’s monumental savings rate is a popular topic of for policy discussion.1 It has been blamed for the global financial crisis, currency wars (Portes 2010), and the ensuing Great Recession (Mees 2012). But what explains the high savings rate?
The growing body of work on this question has put forward many answers, ranging from the one-child policy to the role of marriage and the weak welfare state (see for example Horioka and Wan 2007, Wei and Zhang 2009, Chamon and Prasad 2010, Jin et al. 2010 and Ma and Yi 2010).
global imbalances, China, savings rate
Rising regional inequality in China: Fact or artefact?
John Gibson, Chao Li 09 August 2012
Many an economist will tell you they base their decisions on evidence. But what if the evidence is based on incorrect or irrelevant data? This column asks what this might mean for our view on regional inequality in China.
A growing literature uses sub-national data from China to measure trends in regional inequality and to test models of economic growth and convergence. Most published studies use provincial-level data although finer spatial scales, such as prefectures (Roberts et al. 2012) and counties (Banerjee et al. 2012), are starting to be used. But regardless of scale, most authors ignore that China’s local GDP per capita data cannot be interpreted in the way that economists would expect, of measuring value-added or output per resident.
Development Poverty and income inequality
China, Inequality, Poverty
China’s strong domestic demand has reduced its trade surplus
Françoise Lemoine, Deniz Ünal 19 July 2012
Since 2008 China’s trade surplus has fallen sharply. This column argues that China has since become a major source of international demand, thanks to its strong economic growth. China’s import demand has been aimed at resource-rich countries and at its Asian neighbours, but also at European exporters, especially in high-end consumer goods.
Between 2005 and 2007 China’s accumulated huge trade surpluses and played a major part in the rise of global imbalances. The US and China have repeatedly come in conflict over the imbalance in bilateral trade.
Global economy International trade
global imbalances, China, current account
Deep integration in free trade agreements in China and India
Ganeshan Wignaraja 04 July 2012
With little end in sight for the Doha Round of trade talks, this column argues that China and India are only going to pursue more free trade agreements. It asks what can be done to make sure these agreements lead to deeper integration between these countries and the rest of the world.
Since the 2000s, creeping protectionism and the stalled WTO Doha Round trade talks have prompted China and India to pursue a variety of bilateral and regional free trade agreements (FTAs). Before 2000, the sole FTA involving China and India was the Asia-Pacific Trade Agreement. By February 2012, the Asian giants were among the region’s leaders in trade agreements with 12 FTAs in effect in China and 13 in India. These figures are likely to rise as both giants are presently negotiating increasingly ambitious FTAs.
China, India, free trade agreements