Transcript Dan Peck -- Chinese Currency: Manipulation?

Chinese Currency
Manipulation?
Chinese Currency
Yuan (CNY) 元
Renmin Bi (RMB) 人民币
Jin 金
Kuan 款
Tael 两
Qian 钱
Yin Bi 银币
Kuai 块
Da Tour 大头
Da Mao 大毛
US$ = Mei Yuan 美元
Agenda
Brief History
 How Currency Manipulation works
 The Impacts of Manipulation
 The Claims against China
 Virtual Subsidy
 Counter Arguments

International Currency System
History
Collapse of Bretton Woods, 1971-73
 IMF 1977 Decision
 Plaza Accords 1985, G5 devalue USD
 1997, Currency Speculation in Asian
Financial Crisis
 Euro intro’ 1999, G7 intervention 2000
 IMF 2007 Decision

IMF 2007 Agreement
“A. A member shall avoid manipulating
exchange rates or the international
monetary system in order to prevent
effective balance of payments adjustment
or to gain an unfair competitive advantage
over other members.”
China’s Currency System
History
Republican China (Pre-PRC), currency
problems, rampant hyperinflation
 1949-78, Closed Economy
 1979-1994 FEC, dual prices, Foreign Rates
 1994 began peg at 8.28元:1US$
 2005 ‘floated’ peg

July 21, 2005 “floated” the Yuan
Not really.
 Government controlled rate
 Max O.3% daily fluctuation*
 = Managed Float / “Dirty Float”
 Market determines direction, management
retards pace and prevents sudden
instability.

May 15, 2007 updated to 0.5%/day.
How Manipulation* works
Prints new Chinese Yuan to make
purchases of US$ assets
 Chinese Government buys U.S.$
denominated assets
 Excess demand for RMB is eliminated
 Lowered demand = lowered value
 End result: value of RMB suppressed from
“naturally” occurring market price.

* Distinction between management and manipulation is disputed.
Impact of Currency Manipulation
(on U.S.)
Increase U.S. trade deficit
 Negatively affect U.S. businesses

– Chinese imports relatively cheaper
– U.S. exports to China relatively more expensive
Downward pressure on U.S. interest rates
(caused by increased investment in U.S. assets)
 Capital inflows
 Chinese purchased U.S. Treasury bills fund
government deficit spending
 Compositional shift in U.S. economy

Distortion to “Free Market Conditions”
Impact of Currency Manipulation
(on China)





‘Virtual subsidy’
Reduced risk for investors ($ peg)
Increased competitiveness for FDI
Higher cost foreign consumer imports
Higher cost of imported factor inputs (machinery, raw
materials, component parts)
Lower local wages, Higher employment
 Expanded Yuan supply, easy credit, nonperforming loans.

Impedes efficient allocation of resources
Who Benefits?
Foreign/US firms exporting from China
(400 of Fortune 500)
 US consumer
(cheaper goods, higher purchasing power)
 Component importers from China
(resources, machinery, capital inputs, etc.)
 Chinese Economy
(manufacturing base, economic growth)

Who Loses?
US firms who compete with Chinese
imports (US dom. manufacturing)
 US Exporters trying to get into Chinese
market
 Chinese consumer, individual
(wages depressed, low competition)
 *** US firms doing business solely in Asia
– profits reported in US$; Kodak/Dell case

Impact
“Production Platform China”
China runs trade deficit with all other
nations (minus US, China has total deficit
of 55Bil in ‘06)
 Foreign firms own 50% of export
manufacture companies in China
 Capital gains from Chinese exports
therefore go to foreign (U.S.) firms
 U.S. firms lobby to protect this investment

The Claims on China

Intentionally Suppressing RMB value
Fueling economic growth/boom
Suppressing local consumers
Flooding U.S. markets – “dumping”

Undervalued by 10%-40%



What 40% undervalued means

At current ‘Managed’ Exchange Rate
– 1USD = 7.54424 RMB
– 1RMB buys 0.132552 USD

If actual value 40% higher?
– RMB would buy 40% more
– 1RMB = 0.185572 USD
– 1USD = 5.38874 RMB
Counter arguments
Can only impact temporary
slowing of market effects
(=<30 days)
 Guessing actual value “tricky
Business”
 Manipulation only slows effect,
long run the “invisible hand”
balances out.

Movement This Year
Virtual Subsidy – Case Study
(US Automakers Claim)
2007 Toyota FJ Cruiser
v.
2007 Jeep (Chrysler) Wrangler JKU
Virtual Subsidy – Case Study

April 2007, Automotive Trade Policy Council
(Daimler Chrysler, Ford, GM) calls on G7 Finance
Ministers to address imbalance in Yen Exchange
Rates

Claim
– should be trading at 100¥:1USD
– U.S. automakers in effect face a $4,000 subsidy on
Japanese made cars

How does this work?
Toyota FJ Cruiser
US market MSRP $22,545.00
 Manufactured entirely in Hamura, Tokyo,
Japan.
 All factors of production in Japan so MSRP
is based on production inputs in ¥
 So that MSRP is actually ¥2,682,855

divided by April 2007 exchange rate of ¥119:1US$ to
get the MSRP of $22,545 in the U.S. market.
Jeep Wrangler JKU
US market MSRP $21,190.00
 Manufactured entirely in Toledo Ohio, USA.
 All factors of production in USA so MSRP is
based on production inputs in US$
 So that MSRP is actually $21,190.00

MSRP for the US market is completely unaffected by
foreign exchange rates with any currency.
Virtual Subsidy?
At ¥100:1US$
MSRP ¥2,682,855
$26,828.55 in US$
MSRP $21,190.00
Virtual Subsidy?
At ¥100:1US$
MSRP ¥2,682,855
$26,828.55 in US$
MSRP $21,190.00
At ¥119:1US$
MSRP ¥2,682,855
$22,545.00 in US$
$4,283.55 in US$
MSRP $21,190.00
Virtual Subsidy – Case Study 2
(Anti-China Lobby Claim)
Chinese Manufacturing Advantage
Thomas the Tank Engine
(Lead-based paint optional)
MSRP $9.89ea.
 Manufactured entirely in China, therefore
MSRP based on factors of input in RMB


Current Exchange rate 1US$:7.54RMB

So actual MSRP = 74.61RMB expressed in
US$ is $9.89ea.
Thomas the Tank Engine

If overvalued at 40% (“The Big if”)

Exchange rate would be: 1US$:5.39RMB

The same MSRP = 74.61RMB expressed in
US$ would be: $13.84ea.
So What?
Your cost goes up from $9.89 to $13.84ea.
 You pay 39% increase?

OR, according to US manufacturing lobby
A US firm can make Thomas locally for
less than $13.84ea.
 Thus manufacturing and the related jobs
return to the U.S.

Loss of Manufacturing to China?
Are we losing manufacturing jobs
to China?
 Has currency manipulation caused,
or exacerbated that loss?

A drop in US Manufacturing Employment?
Long Term Trends in Manufacturing
Due to Competition, or Productivity?
Chinese Argument






Our developing economy is unstable
Currency management necessary to prevent
crisis that would impact world economy
Must wait until further market reforms (SOE
conversions, etc.) are complete
Chinese banking system underdeveloped
Vulnerable to currency speculation (Thai Baht
1997)
Political risk: currency up? > income down >
employment down > worker unrest > domestic
political challenge/crisis = Internal Affairs
Chinese Argument




Whaaaaa, Boo-hoo
We’re a Third World Nation
Stop Beating us up
American Bully!
U.S. Policy Implications

Legislative Action
– Require reporting
– Require negotiations
– Institute tariffs to counter ‘virtual subsidies’
 H.R. 1002 (Spratt), S. 1586: 27.5% tariff on Chinese goods
– Prohibit US DoD purchases from China
– Ban federal procurement from the country



Report to IMF
Clarify definitions, remove intent,
Manipulation vs. misaligned
Questions?