A month later than the optimists hoped for but a quarter ahead of what pessimists feared in December China’s exports recorded their first year-to-year increase in 14 months. The 17.7% growth in exports from December 2008 puts China on track to allowing its currency to gradually appreciate against the U.S. dollar by mid-2010. China re-pegged the renminbi to the dollar in July 2008 in an effort to revive falling exports.
A resumption in export growth is just one item in a three-item checklist for a return to gradual renminbi appreciation.
The list also includes evidence of a strong economic recovery in China and stability in the U.S and European economies.
The resumption of export growth had been widely expected by economists who differed over the “when” and not the “if.”
But few had projected that Chinese imports would surge at the same time—or at least not to the degree that they did in December. Imports in that month climbed by almost 56% from December 2008. The big beneficiaries were China’s Asian trading partners Korea and Taiwan. Surprisingly strong domestic demand from Chinese consumers is driving the surge in imports.
What’s not surprising is that the news on exports pushed up the price of commodities—copper is up almost 3% in London this morning-and commodity stocks—BHP Billiton (BHP) is up 1.2% in London.
It will take a few more months of solid export growth before Beijing removes the renminbi-dollar peg and returns to a policy of controlled currency appreciation. A return to gradual appreciation is likely to mean appreciation of about 3% for the renminbi against the U.S. dollar by the end of 2010.
I’m with Jim, and apparently Nukeage too, on this. The problem of excess Chinese production capacity can be solved by creating an internal economy. A stronger national currency will do just that as labor costs go up, but are offset by shrinking input costs. The laborer is paid more while the price of goods shrinks (oil, copper, coal, potash, etc.).
The current global imbalances caused by China’s current policy will come to an end no matter what we may say otherwise. The world economy will balance sooner or later, and that requires either 1) less American debt and more Chinese consumption, or 2) less American consumption and falling Chinese exports. Which scenario do you think China will pick?
Higher Yuan benefits US exports, which would help US unemployment, and which helps balance the US trade deficit, which increases US gov. revenue, which would help alleviate the US-China mutual reliance on US debt, which would balance the world economy.
It will happen gradually or a crash will force a clean out. Economic balance will be restored either way.
andante,
Good question. It depends on a lot of different factors, but I will say that I don’t see people in country A, whose currency is being inflated, buying country B’s hard currency just as an investment. While a few people in country A might, gold is traditionally the better investment against an inflating currency (although admittedly not perfect).
So even if a currency is not being inflated, that should not effect the price of gold within other countries where the currencies ARE being inflated. In fact, if the inflation gets bad enough, gold should do even better.
It would be difficult to maintain complete totalitarianism in an environment of rapidly improving economic, health and educational status in the general population, where technology permits easy access to the information of the world and where world economies are becoming progressively more integrated. Somewhere around the time of the Tiananmen Square demonstrations the government and the country appeared to engage in an unwritten and perhaps unspoken agreement in which the “communist” government was allowed to maintain its unchallenged control with the understanding that they would rapidly advance the economic welfare of the general population. China scholars can correct me on this but I believe this is the unwritten social contract that Jim is refering to.
But I have a separate question. What happens to the market for gold when all these currencies that Jim has been talking about for the past several weeks start moving in different directions?
I’m beginning to wonder how complicit we are when investing in companies or countries with unsavory or outright destructive policies…
I agree the goods are being delivered, I just don’t believe that not delivering will make the government significantly more vulnerable to collapse or rebellion – there just isn’t a viable alternative leadership in China since dissent has been quickly and utterly suppressed (I’ve seen nothing to believe that THAT policy has changed).
salmoned, I thnk you’re a step behind on China. The latest moves to increase health care spending for example are an attempt to deliver the goods. That’s not to say that China doesn’t ruthlessly clamp down on dissent. But using force to compel people to do what you want is incredibly expensive. Political scientists use some measure of legitimacy to examine how much uncoerced behavior a government can get from its citizens. And how it achieves that obediance. Ever since the change to “It’s all right to get rich” the promise to more material goods has been important in China.
“The legitimacy of the Bejing government largely rests on its ability to deliver the goods.” Huh? When did that sea-change occur? I thought it has always largely rested on its ability to suppress dissent and enforce its policies without regard for ‘delivering the goods’. It is true that recently the Chinese leadership has seen the utility of economic development, but I seriously doubt their legitimacy is likely to be questioned should they ‘fail to deliver’.
Thank you, Jim.
I’ve stopped screaming.
3% curency appreciation wouldn’t be much but it would signal a return to the pre-2008 period when China let its currency gradually appreciate. That trend reversal would be huge good news for China’s export competitors, especially Japan. China would turn to letting its currency appreciate out of the goodness of its heart or to make nice but out of self interest. There costs to the renminbi peg. First, keeping the currency fixed to a falling doollar while the rest of the world’s currencies appreciate is a tax on the Chinese consumer and industry. By making the price of imported goods and raw materials more expensive, it lowers Chinese living standards. That’s a big deal since the legitimacy of the Beijing government largely rests on its ability to deliver the goods. Second, the renminbi peg is inflationary. To soak up the currency flows coming in in order to keep the peg, the People’s Bank has to buy dollars with renminbi. That puts more currency into circulation. The central bank tries to sterlize that flow by various methods but nothing ever works perfectly. Beijing is worried about inflatin becasuse it too is a tax on the Chinese consumer.
Viwi,
While that is true, it doesn’t look like it will stop until China is officially a “developed” nation. Can you foresee anything else stopping China’s growth?
I do not believe that China will let its currency appreciate. Why? Because the rest of the world wants it? Do Chinese rulers really care about it?
Anyway, this exponential growth of Chinese export can’t continue forever, just because the rest of the world has a limited capacity to buy Chinese goods.
“Don’t count your chicken until it flies”.
I have to agree with tostoryteller. IF China lets the RMB appreciate, don’t expect it to be a significant appreciation.
I don’t buy it. China won’t allow its currency to appreciate against the dollar. They have no reason to back off their fundamental strategy of keeping their manufacturing advantage in place. Remember they have an of abundance of unskilled labor in western China earning less than $360 per year. As affluence builds in the east, the difference between the haves and have-nots widens, social unrest builds (and is never reported) and China needs at least 8% GDP growth(and we truly don’t know what the real GDP numbers are in China) to keep the lid on everything.
What I’d look for is continued pressure around SE Asia, Korea and Japan for currency devaluation relative to the RMB (and therefore, the dollar). They are struggling against China to maintain their share of the global manufacturing demand. Vietnam is a case in point.
Investing in China might be a little less confusing if we got rid of “renminbi.” Literally “people’s currency,” the term probably had propaganda value during the revolution, but it’s useless now. Let’s stick with yuan.
Jim,
I think you just answered the question in your last post: China is where growth will come from.
US Market are expected to go higher due to China export news. What about the labour market news on Friday ?? Why market did not go for correction ??