Friday, May 21, 2010

China and Reevaluating the Yuan...中国与人民币 中国と人民元

This is another post from my 'Year of China' theme which is my blog theme for 2010, as mentioned earlier in the year, when i did the Nostalgic Chinese Cinema post series.

There has been much talk of late about China and the artificial rate that the RMB (China's official currency, called the Renminbi in full) has been controlled by the Chinese govt. The US govt especially has criticised China and accused it of currency manipulation.

I think its laughable really, for the US to point its finger at China and demand that it raise the RMB. I mean the Chinese govt is ultimately responsible to the Chinese people and if it were not for the current artificially low rate at which the RMB is, China and its export-driven economy would not have been able to grow at such a rapid rate and millions of Chinese would not have been able to pull themselves out of poverty. I mean, US and foreign companies are also responsible for the low rate of the RMB. The thousands of US and foreign investor companies in China go there precisely because of the low RMB value so that they can earn massive profits when exporting back to their own countries and the consumers in these rich countries ultimately benefit with being able to save and buy cheap consumer products. Furthermore, if the yuan were to be revalued upwards too swiftly, it'd lead to thousands of factories in China shutting down which would lead to massive unemployment and societal unrest as Chinese factories are already operating on extremely minor profit margins due to the pressure of US and foreign buyers/companies who refuse to raise buying costs by much and thus the Chinese govt cannot be expected to please and help the US and Western economies by raising the rmb value whilst at the same time jeopardising the Chinese economy by doing so. This is an unreasonable demand.

However, the most unreasonable and ridiculous statement coming out of some US politician's mouth is that the current World Economic Crisis is somehow China's fault due to it's low rmb. RUBBISH. Typical behaviour of some countries unwilling to take responsibility for the deformed financial and banking sectors of the US and Europe and trying to scapegoat China for their economic problems. What nonsense really.

And all the talk of 'imbalance in the world economy' as the cause of the current world economic crisis is similar bullshit. What imbalance? When the US and European economies and their people were spending more than they could afford and their banks were fudging the figures, who else could they blame? Their consumers wanted the cheap products and their businesses went overseas to get them. Blaming China and other Asian economies for not spending enough thus causing the 'so-called' imbalance of trade is like a person whom borrows irresponsibly from another person and then buys and buys from that exact same person and when he or she becomes bankrupt then goes on to chastise the other person for producing such cheap and useful products and not spending enough money themselves. Huh?

Typical of some to want to feel better about themselves in the mess that they've made themselves by blaming others, namely China. I never heard Asian economies complaining about the imbalance of trade and Western countries' faults back during the 1997 Asian Financial Crisis.
The US and Western world will just have to learn to accept their responsibility for creating the current financial crisis which they're just coming to recover from, quit complaining and pushing the blame to other countries and their currencies, and start reforming and restructuring their messed-up financial and banking sector as well as dodgy companies, such as Goldman Sachs, for one, just like Asian economies had to do back in 1997.

As a final note, it's ironic how some Western commentators and talking heads were talking about the impending 'collapse' of China's economy and their criticism of Chinese economic practices and corporate practices back before the 2008 Financial Collapse in the Western world when it was them whom fell with their face down..and fast. China has hardly been affected, and speeding ahead straight pass them and Western Companies such as Freddie Mae and Goldman Sachs have been found to have shoddy and unethical corporate practices.

There is the realisation now that it is the Western banking and financial sector which needed the reforms which the West was previously criticising China as needing all along.

Look who's Laughing now.


aimlesswanderer said...

I wonder where all the economists who read your blog have gone?

Basically both sides are playing to and looking after their most important audiences - their fellow countrymen. Nothing like naked self interest.

I don't think the Chinese economy can continue to grow forever at 10%pa. All good things come to an end, it is just a matter of when and how badly.

The Chinese banking system isn't exactly the healthiest in the world - after all, the government told them to lend to anyone who asked for money, and so, like before (they were bailed out by the government previously) they have massive amounts loaned with no chance of being repaid. This is an enormous drag on their balance sheets, though the government is currently able to bail them out.

hcpen said...

aimlesswanderer: Yes, all good things come to an end. And the Chinese economy cannot possibly continue to grow at the rate it is currently. But it is way too early to be talking about the collapse of China's economy given its development stage and size. The Chinese banking system may not be the healthiest but the GFC showed it was far more capable than its Western counterparts.

aimlesswanderer said...

You can talk about a collapse, and you can point to signs, but it probably won't happen in the short term. But it is possible, and it is important to get yourself on the record early on, so if it does happen you can claim to have been "the first" to recognise the "obvious" signs and predict what happened. "Predicting" something like that is a great way to boost a career. Happens every time something big happens.

The GFC just showed that the Chinese banks have a limited range of financial products on offer, and their business is basically to loan out money (deposits) to stimulate the economy when the government tells them to. They weren't involved in any meaningful way with the weird and wonderful financial instruments which no one actually understood. I don't think that shows that they are more "capable". Insurance products are still a new concept over there, so they certainly haven't gotten to the weird and wonderful products that helped cause the problem in the US.

And the low yuan also helped cause part of the GFC. The massive trade surplus meant that oceans of Chinese money was looking for something to invest in, so they bid the prices and yields of assets down, not to mention providing lots of the loans. I remember hearing the Chinese government had truckloads of dubious financial instruments (after all, wanted to make money too!), but we haven't heard anything about that. I suspect some people were highly embarrassed when things went bad.

But the Chinese banks now have a massive bad debt problem (once again), since much of the money loaned to stimulate the economy was spent and will not be repaid (per previous form there), not to mention the truly amazing property bubble. Check out the price rises, 100+% per year! Sounds unsustainable to me. Pesky ordinary young people who want to buy shoeboxes within sight of a city are having serious trouble. We think our real estate prices rise fast! Bursting the real estate bubble would be huge hit to the economy.

Be interesting to see what the CCP does about it.

hcpen said...

aimlesswanderer: It doesn't matter regardless whether chinese banks are 'advanced' enough or not, the result is still the same, they pulled through. Chinese banks have problems just like banks in any other country. Furthermore, Western banks are certainly in far worse position than the Chinese banks. Anyways, the GFC is the responsibility of the Western economies so stop blaming the yuan. Its really ridiculous.

aimlesswanderer said...

I am not entirely sure how the Chinese banks were proved to be "more capable" since they were not affected in the same way as other western banks. They were basically not dealing in any exotic financial instruments, but that is not to say that they thought they were a bad idea, and therefore had superior judgement.

You seem to be so eager to absolve China of any responsibility or connection to anything bad that you fail to remember that China's economy is so large now that whatever it does, whether intended or not, has an effect on the world's financial system. Just like how the Chinese government thought that iron ore prices were skyrocketing because Evil Foreigners were colluding to raise prices. The voracious appetite of Chinese steel mills (ie massive demand and limited supply) had absolutely nothing to do with it, despite what basic economics suggests.

While China may not have direct responsibility for causing the GFC (there are many causes), they certainly helped, if indirectly - the massive trade surpluses, the low yuan - they all have an impact on the world's economy. To deny that is to deny reality. After all, the CCP love to remind everyone how important and powerful they are now.

You seem to be so eager to blame the Evil West and to laud the Benevolent CCP that perhaps you should move there instead of staying in a country full of of Evil Imperialists.

hcpen said...

aimlesswanderer: I do not think and have never said the west are 'evil imperialists'. Those are your words not mine. I do not think the West in general or Australia specifically is 'evil' or 'imperialist' so i have no intention of moving to China or disliking Australia.

The problem i think is that you seem so eager to link everything negative to the CCP that indeed everything that goes wrong seems to have something to do with the CCP. Saying that the GFC is indirectly caused by China is a moot point and totally insignificant given that in a global economy, India, Malaysia, Singapore,Mexico, Australia, Japan,Korea, South Africa, etc can then all be blamed for the GFC, indeed China's internal problems, poverty gaps, civil unrest can i'm sure be linked in one way or another to Western govts and Asian becomes pointless, get my point? Blaming China for the GFC is simply shifting the attention and finding an easy scapegoat for what is ultimately the Westerner's own doing. And China's financial sector is stronger than the West based on the results after the GFC. You can come up with 101 reasons on why it wasn't affected as badly, but the bottom line is that it pulled through and is stronger than Western banks are. It is pointless to argue about the reasons, i believe the result is more important.

Also, i think you seem to have a biased view of China and the CCP government, no doubt due to your education and environment, cos you seem to dislike or blame the Chinese govt for almost everything that happens and make a mountain out of a molehill on many issues.

hcpen said...

aimlesswanderer: Also, please do not always make comments such as 'where have readers gone?' for some blog posts as you have done so in ur first comment here and previous posts as well, it's so silly, how would i know? if you want to comment just do so, if you don't feel like it, that's fine too but don't make silly comments like's like a customer going into a shop and the first thing they ask the owner is 'where have all the other customers gone?'..maybe some ppl don't like to leave comments but still visit or maybe they're not interested in the issue, it shouldn't be relevant to you anyhow..