Transcript Chinese Growth, Exports, and the Exchange Rate"?

What’s Up with the
Exchange Rate?
Andrew K. Rose
UC Berkeley, NBER and CEPR
The Basic Long-Run Issue
 America’s Current Account Deficit
– 2006: $811.5 billion deficit (!)
 6.2% of American GDP
 Implies annual Capital Inflows of $2700 per person
annually (!)
– 2007Q1: deficit of $192.6 billion
– Almost all Goods (Services in surplus but small)
 Small persistent income surplus
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Causes
 Some Dispute among Economists
 Still, Low American Savings chief reason
– Personal Savings very low lately, often negative
– Public Sector also dis-saving (Federal deficits)
 Lack of Investment outside US also possible
issue
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Current Account: Sustainable?
 Size of Deficit unprecedented for America
 Also unprecedented for “Anchor” country
 US now taking over 75% of all global
savings flows
 Capital running “uphill” from poor to rich (!)
 Growing US external debt
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Adjustment must involve Prices
 For current account to close, savings must
rise (or investment fall, or both)
 Symmetrically, exports must rise
dramatically, while import growth slows
 Exchange Rate one of the key adjustment
mechanisms
 So long-run depreciation of Dollar is likely
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How Much?
 Many Different Estimates, Little Consensus
 Most expect at least another 15-25%,
sometimes more
 Exchange Rates often overshoot
 Timing: almost impossible
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Where will Effects be Felt?
 Three Big Currency Zones in World:
– Dollar, Asian-zone, Europeans
– But exchange rate policy varies across world
 Dollar floats freely against Many Currencies
– Europeans (including UK, Norway)
– Also Canada, NZ, Australia, etc
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But Asia is Different
 Asians take Exchange Rate Policy Seriously
 Almost all East Asians manage currencies,
will continue to do so
 Part a Legacy of Asian Crisis of ’97-’98
 Part a Development Strategy …
– Which Leads us to China
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How to Think about the Yuan?
 Chinese Communist Party Needs Growth to
Survive Politically
– Growth is Required to Absorb Massive
Unemployment in Chinese Countryside
 Agricultural Peasants Must Be Transformed
Into Manufacturing Workers
– Exports Provide Only Possible Outlet
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Asian Paradigm for Development
 Competitive (Cheap) Unemployed Labor
Absorbed into Manufactured Sector
– Example of key theory of W.A.Lewis (Nobel
Laureate)
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Implications for West
 China has every incentive to maintain
under-valued exchange rate
– Under-valuation the key to rapid export growth
– Right in theory
– Effective in practice (past twenty years!)
– Hence rapid accumulation of US$ reserves, as
China maintains under-valued peg to US
– Reserves act as “collateral”, encourage FDI
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Special Role of USA
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US is issuer of $, global reserve currency
East Asians fixes against US$
US is largest, most open economy
US willing to handle large, persistent current
account deficits
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Special Role of USA, contd
 American FDI high in Asia
– High Returns on Asian Investments help protect
against American Protectionism
– China Importing Financial Services, since
Domestic Financial Sector Weak
– US also premier provider of collateral service
(hence Asian pegs against $)
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Where Does Europe Fit In?
 No Direct Role
 Still, Large Indirect Role
– Euro floats against $
– Europe has powerful central bank with
independent monetary policy
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Dollar Depreciation Likely to be
Mostly against Euro
 Some Already Occurred
 Dollar depreciated from .8$/euro to
1.4$/euro already
 Worse for pound!
 More likely to come!
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Asia and the Euro
 Crisis in Confidence Possible
– American Current Account Deficits large
 >6% GDP, highly persistent
 Dollar Depreciation Resisted by Asians
– But Euro Floats Freely!
 Euro Likely to Continue to Appreciate
Against Dollar over long Term
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It isn’t Only China!
 Other Asian Economies Waiting in Line
behind China
– India
– Indonesia
– Vietnam …
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Historical Precedent
 European Development in 1950s and 1960s
 Export-Lead Growth to transfer underemployed Europeans from countryside to
manufacturing
 Revival of “Bretton Woods” regime,
prevailed before 1971
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Conclusion
 Dollar Decline likely to continue
 Probably Most Dramatically Against Euro
 Good argument for foreign diversification!
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