China, Artificial Boom and Artificial Currency

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Global Trade

How much longer can China continue creating growth by throwing money at fixed investments? From a reserves point of view the answer is several years but from the point of view of creating serious imbalances the country is already on dangerous ground. An FT article explains that investment made up 7.3% of a 7.7% annual growth in the first 9 months of this year, but net exports were down 3.6%. The country has splurged billions on roads, railways, power stations and industrial production capacity. Even China’s own National Bureau of Statistics admits they are at risk of piling up assets as banks keep lending. September’s total was 25% bigger than August and M2 a measure of money supply grew at a record 29%. If exports are not returning and domestic consumption cannot fill the gap, the country will have to continue to build infrastructure in order to maintain growth.

The solution to boost consumption has been consistently avoided by the government for the last 12 months. The RMB has effectively been pegged since the middle of last year against the falling US dollar but as the dollar has weakened, the RMB has also weakened – against the Euro by 17% and about the same amount against the Yen. This makes the prospects of suppliers in Europe, Japan or especially Brazil which is down 30% being able to sell into China and still make a profit even less likely. Global recovery is, for many raw material producers, pinned on hopes of China buying imported goods, with the Brazilian Real and the Australian dollar so much stronger against the RMB now than a year ago producers either have to cut margins or lose sales. Not surprisingly, the calls for China to allow its currency to float or at least be adjusted to a more realistic level are rising, and not just in the US. Paul Krugman, Nobel Memorial prize winning economist and Professor at Princeton University, called China’s currency position outrageous in a recent NY Times article. We suspect there are many who would agree with him.

–Stuart Burns

Comments (4)

  1. HJG says:

    In fact, China can keep growing for a LOT longer by throwing money at fixed investment. Do you know just how much more roads, rails, water projects, canals, wind farms, conservation zones, reforestation projects, schools, hospitals, etc etc China needs? Never mind the aircraft carrier, the space station, and the moon base projects. Seriously, China needs to build infrastructure and invest in environmental sustainability, and why should she care whether you Americans think it’s outrageous or not?

  2. stuart says:

    Dear HJG, I am pretty sure Paul Krugman was not saying the investment in infrastructure was outrageous, if that was all the momey was being spent on that would be money well spent. But we both know its not, much is going into speculative production capacity the country doesn’t need or worse forthy bubbles like the housing sector , metals stockpiling and the stock market. Krugman’s ire was raised by the manipulation of the currency, that’s the beggar thy neighbour issue that is hurting others.

  3. Andy says:

    So… are you saying that China should let its currency appreciate, and let the 400million people earning less than £700 PER YEAR (or who are unemployed) stay in that position – say for an extra year or two?

  4. Andy says:

    As for the 4trillion RMB government stimulus package, it all looks like standard works that is desperately needed by China, but alas there is some “leakage”. Still, at least all of these long delayed projects will get completed soon (NB. If you can’t deliver a project on time or to budget, you’re fired or moved very quickly)

    38% – Public infrastructure eg. railway, road, irrigation, and airport construction
    25% – Reconstruction works following the Sichuan earthquake
    9% – Rural development (eg. building public amenities, resettling nomads, supporting agriculture works, and providing safe drinking water)
    9% – Technology R&D
    5% – Energy and Environmental projects
    4% – Educational, cultural and family planning purposes
    10% – Other

    As Krugman says, there is leakage,

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