Transcript China Turn Into the Largest Market in the World

The Controversy over the Revaluation and
Exchange Rate Regime of the Chinese Currency
人民币均衡汇率的争议和调整方案的选择
Gene H Chang (张欣)
University of Toledo, U.S.A. (美国托列多大学)
经济学教授、亚洲研究所主任
[email protected]
©
The U.S. Congress
Senate Bill:
by Charles Schumer (D., N.Y.) and Lindsey
Graham (R., S.C.)
Currency manipulation by China.
If no RMB revaluation, imports from China can
be subject to 27.5% tariff.
Vote by July.
Gene Chang, June 2005
The U.S. Congress
House China Currency Act:
by Congressmen Duncan Hunter (R., Calif.) and Tim
Ryan (D., Ohio)
Currency manipulation as a "prohibited export subsidy"
by China, under Article VI of the GATT.
If no RMB revaluation, trigger an antidumping or
countervailing duty. Prohibition of importation of
Chinese defense products
Gene Chang, June 2005
Public
• Job loss
• Close of many American
companies
especially, small
companies
Selected Antidumping Actions Initiated by the
U.S. Against China
Date of
Product
Initiation
Provisional Measure
(Dumping Margin)
Dumped Imports
as % Domestic
Consumption
Basis of
# of Firms
charged
Determination
Antidumping Actions by the U.S.
Car Windshield
Glass
3/27/2001
.05-125%
NA
2 firms
NA
Folding metal Chairs
and Tables
12/3/2001
0-134.77%
NA
2 firms
NA
Foundry Coke
Products
03/18/01
76.19-214.89%
NA
4 firms
NME
08/24/01
NA
NA
7 firms
NME
Freshwater Crawfish
Tail Meat
26/12/01
7.23%
NA
27 firms
NME
Heavy Forged Hand
Tools (3 cases)
11/07/00
0.00-98.77%
NA
5 firma
NME
Honey
08/02/01
22.05-67.44%
NA
3 firms
NME
Hot-rolled Steel Flat
Products
05/01/01
64.20-90.83%
NA
3 firms
NME
Fresh Garlic
cases)
(3
Furniture
2003
28 firms
TV sets
2003
1 firm
Textile products
2005
Gene Chang, June 2005
Top trade partners of the U.S.
(2004)
Trade Deficit
1
Total Trade
Volume
Canada
2
Mexico
Japan
3
China
Canada
4
Japan
Mexico
5
Germany
Germany
Gene Chang, June 2005
China
Discrepancy between
The U.S. and China Statistics
Trade deficit with China (million$)
Calculated
by the U.S.
customs
Calculated by the
Chinese customs
2004
161,977
80,200
2003
123,960
58,613
2002
103,115
42,720
Gene Chang, June 2005
US Trade with China
(million dollars)
250,000
200,000
Total
Deficit
150,000
100,000
50,000
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
0
Gene Chang, June 2005
The Bush administration
-- ambivalence
•2003: US Treasury Secretary John Snow told a House of Representatives panel.
"China has pegged its currency to the dollar for 10 years. This administration
has stressed that China needs to move to float its currency as soon as possible”
•The U.S. Treasury angered Congress by stopping short of issuing a formal finding that
the Chinese government manipulated the exchange value of the yuan. It concluded that
such a policy by itself does not meet the statutory definition of currency manipulation.
•May 26, 2005:
The Bush administration stopped demanding that China let its currency, the yuan, float
freely against other major currencies. "I don't think it is in our interest or in their interest
in going immediately to a full float," Treasury Secretary John Snow told the Senate
Banking Committee on Thursday. " Snow refused to say by how much he wanted China
to revalue the yuan.
Federal Reserve:
--- reservation
•March 2005: Federal Reserve Chairman Alan Greenspan warned if
China were to let its currency float immediately, as many in the US want,
it could weaken that country’s banking system and threaten the world
economy
•May 20, 2005 – Greenspan: “American shoppers will pay higher prices
but the U.S. trade deficit with the rest of the world won't fall if China
revalues its yuan currency as the Bush administration wants”.
Impacts on the U.S.
Pro
Reducing trade deficit
with China
Preserving more jobs
in the U.S.
Gene Chang, June 2005
Con
Increasing trade deficit in terms
of dollars
Speculative sell of dollars
Pressure on the global dollar
system, dollar and T bonds
U.S. bonds down, interest rate
up
Widening financial resource gap
Inflation
Deterioration of terms of trade
Consumer surplus loss
Academic
Jeffrey Frankel: Yuan 42% undervalued
Lardy and Goldstein: 15%-25%
undervalued
Gene Chang: 19.2% undervalued
Steve Hanke and Michael Connoly: No
undervaluation
Ronald McKinnon
Robert Mundell
Gene Chang, June 2005
Estimation of Equilibrium Value
of Yuan
Determination in the short-run
Determination in the long-run
Purchasing power parity
E = PU.S. / PChina
Relative purchasing power parity
% depreciation in E
= inflation U.S. – inflation China
Problems with using relative PPP to estimate
equilibrium value of yuan
Gene Chang, June 2005
Estimation of Equilibrium Value
of Yuan
Real Exchange Rate (RER)
RER = (E X PChina) / PU.S.
If absolute PPP holds, RER = 1
Gene Chang, June 2005
Fig 1. Relative Pruchasing Power (RPP) of
Currencies of Various Countries
Relative Purchasing Power
10
8
RPP
Fitted line
Linear (Fitted line)
6
4
2
0
0
10000
20000
30000
-2
-4
GDP per capita
Gene Chang, June 2005
40000
50000
Estimation of Equilibrium Value
of Yuan
Why is RER greater than 1 for poor
countries?
The Balassa-Samuelson hypothesis
The Bhagwati-Kravis-Lipsey hypothesis
Gene Chang, June 2005
Estimation of Equilibrium Value
of Yuan
Model with control of the income level:
RER = f (GDP per capita)
Data for RER
Linear or log linear
(ln) RER = a + b X (ln) GDP per capita
Control heteroskedasticity
Gene Chang, June 2005
Estimation of Equilibrium Value
of Yuan
Using the world sample to obtain the
estimates and the prediction equation
Intercept
Coefficients Standard
error
4.28039
0.15922
GDP p.c. -0.13386
Gene Chang, June 2005
0.01320
t -statistics
26.88387
-10.14495
RMB exchange rate
RER actual
Gene Chang, June 2005
20
01
19
99
19
97
19
95
19
93
19
91
19
89
Exchange rate (yuan per $)
19
87
19
85
10
9
8
7
6
5
4
3
2
1
0
RMB Undervaluation Estimation
Year
GDP pc
2001
RER
actual
RER
predicted
Valuation
P-value
1978
703
1.98
4.07
51.3%
0.084
1985
1158
2.68
4.02
33.3%
0.187
1986
1293
3.21
4.00
19.7%
0.299
1987
1509
4.33
3.97
-8.9%
0.406
1991
1757
4.39
3.94
-11.2%
0.384
1994
2484
4.79
3.86
-24.3%
0.263
1995
2788
4.30
3.82
-12.6%
0.372
1996
2987
4.08
3.80
-7.4%
0.424
Gene Chang, June 2005
RMB Undervaluation Estimation
Year
GDP pc
2001
RER
actual
RER
predicted
Valuation
P-value
1997
3145
4.01
3.78
-6.1%
0.437
1998
3308
4.09
3.76
-8.9%
0.409
1999
3522
4.26
3.73
-14.3%
0.357
2000
3829
4.37
3.70
-18.4%
0.319
2001
4020
4.41
3.67
-20.1%
0.304
2002
4309
4.48
3.64
-23.2%
0.278
2003
4618
4.41
3.60
-22.5%
0.286
2004
5024
4.23
3.55
-19.2%
0.315
Gene Chang, June 2005
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Gene Chang, June 2005
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1
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Should RMB be revalued?
--- attitudes of
The U.S.
Japan
European Union
Rest of Asia
Developing countries
China itself
Gene Chang, June 2005
Asian countries
China is the largest export destination for
many Asian regions including Korea and
Taiwan
China and Hong Kong imports more goods
from rest of Asia than Japan
Concern over a floating RMB that may
cause regional economic instability.
Gene Chang, June 2005
China
Con
Reduce competitiveness
Adversely affect exports
Adversely affect
employment
Deflation
Gene Chang, June 2005
Pro
Improve terms of trade
Reduces debt service
burden
Reduces the cost of the
huge foreign reserve
Upgrading economic
structure
Choice of exchange rate regime
--- Flexible
Free floating – the absence of regular
intervention in the foreign exchange
market
Managed float – the absence of a specific
target for the exchange rate
Note: according to Frankel, Huang and others
Gene Chang, June 2005
Choice of exchange rate regime
--- Intermediate
Target zone, or band – a margin of fluctuation around
some central rate
Basket peg – fixing not to a single foreign currency but
to a weighted average of other currencies
5. Crawling peg – a preannounced policy of devaluing a
bit each week
Adjustable peg – fixing the exchange rate, but without
any open-ended commitment to resist devaluation or
revaluation in the presence of a large balance of
payments deficit or surplus
Note: according to Frankel, Huang and others
Gene Chang, June 2005
Choice of exchange rate regime
--- Fixed
Truly fixed peg – fixing, committing to buy or sell
however much foreign currency is necessary at a given
exchange rate, with a firm and lasting intention of
maintaining the policy.
Currency board – three defining characteristics: fixing
not just by policy but by law, backing increases in the
monetary base one-for-one with foreign exchange
reserves, and allowing balance of payments deficits to
tighten monetary policy and thereby adjust spending
automatically
Monetary union – the adoption of a foreign currency as
legal tender. This includes the special case of official
dollarization
Gene Chang, June 2005
China: which choice
Free floating
The vulnerable monetary and banking
system cannot stand the fluctuation of ER
Extend the band
Ineffective for a small band and inviting more
speculation.
A large band is equivalent to free floating.
Gene Chang, June 2005
China: which choice
--- target a basket of currencies
Will float with dollar thus resulting a high
transaction cost
Difference between China and Singapore.
Large country with this system: the
instabilities of other currencies.
Gene Chang, June 2005
Why still peg to dollar?
Optimal currency area theory
Transaction costs versus independent
monetary policy
The impossible trinity
China can keep an independent monetary
policy so long it restricts capital accounts
Gene Chang, June 2005
With adjustment options
No permanent peg
Adjustment may need for changes in
macroeconomic conditions
Not dollarization .. Keep an independent
monetary policy and seigniorage income
Gene Chang, June 2005
China: which choice
No perfect policy
The best choice is still a one-time
adjustment, then pegging to dollar again.
Least risk, least cost, and easiest to
operate.
Adjustment of 5-7%
Unannounced in advance
Gene Chang, June 2005
Internationalizing yuan
Internationalization of yuan in the long run
Merits
1. More flexibility for an independent monetary policy
2. Low transaction cost
3. Seigniorage income
Conditions
1. Good macro fundamentals
2. Greater role in the global market
Gene Chang, June 2005
China: when to adjust
Exchange rate adjustment is a net
economic gain for China
Exchange rate adjustment is also a
diplomatic gain for China in the world
Exchange rate adjustment is also a
political gain for China.
Gene Chang, June 2005
Conclusion: when to adjust
Resisting the market force is a sure failure
It is a choice on the ground of economic
rational and gain
It is not a choice on the ground of political
or economic fight – a loss-loss outcome
Take an action, the sooner, the better.
Gene Chang, June 2005