re: dichotomy of a revalued renminbi
This is another perspective on the yuan story. Jake is a bit of a contrarian and feels free to express his opinions.
The bottom line in this column is that chinese wages are catching up real quick.
"We gave him [US Treasury Secretary Henry Paulson] a clear message that we have been very disappointed in the lack of progress China has made and if we didn't see progress between now and September 30, we would move on our legislation."
US Senator Charles Schumer
How interesting. Only a few months ago, Mr Schumer said that a visit to China had opened his eyes to the nature of the Chinese economy. Now he's back to beating the war drum.
Odds are, of course, that it's bluster again and all he wants is a face-saver to stop him from moving on a bill that would slap a 27.5 per cent tariff on Chinese imports unless Beijing drastically revalues the yuan. He does appear to have the votes in the US Senate, however, and so it is still a threat.
But his trip does not appear to have taught him much about the dynamics of China's export economy. His case is that the US has a huge trade imbalance with China because China cheats. It will not accept free trade although it professes to do so.
The test of free trade is a floating exchange rate determined by market conditions, he says. If the yuan were really floated this way, it would appreciate enormously, but the revaluation orchestrated by Beijing so far is only a piffling one.
He is right on two counts. It truly is only a piffling revaluation with the yuan a bare 1.5 per cent stronger against the US dollar than it was a year ago. US politicians have in mind at least a 20 per cent revaluation and they are not minded to wait 14 years to get it at the present rate of creep.
Mr Schumer is also right about the size of China's trade surplus with his country. It amounts to more than US$200 billion a year and, as the first chart shows, is considerably more than the mainland's overall trade surplus, which means that China has a trade deficit with the rest of world.
But let us examine his argument more closely. Is it really true that an undervalued yuan is the culprit?
I doubt it. The difficulty with his argument is Mr Schumer's assumption that China thinks in terms of yuan when it thinks of foreign trade. It does not. It thinks in terms of US dollars, so much so that it publishes its trade statistics only in US dollars. Yuan equivalents are published only as an afterthought.
There is good reason for this. Most of the required imports of raw materials, components and capital goods carry US dollar price tags. The financing, shipping and other service costs are priced in US dollars. Even the infrastructure inputs are heavily dependent on US dollars. It is so around the world. The US dollar is the currency of international trade.
The only input that is really yuan-dependent is wages and this happens to be one of the lesser inputs. I do not have precise statistics for this but I routinely hear figures as low as 10 per cent of retail price in the US. So, let us look at the difference in wages between China and the US. It is still wide but, as the second chart shows, the gap is dwindling fast. In 1994, the average production worker's wage in the US was 50 times higher in US dollar terms than China's average national wage. It is now only 12.5 times higher.
This may still be high but, for an even higher figure, try 27 times for the multiple of the US wage over a textile worker's wage in Mumbai, India.
The fact is that wage growth in China over the last five years has averaged 14 per cent a year while the equivalent figure in the US has been less than 3 per cent. American politicians will just have to be happy with that. It is a pipe dream for them to think they will ever get wage parity with developing countries.
And this introduces the question to Mr Schumer. Why make so much noise about the yuan exchange rate when the wage growth differential between China and the US will within two years give you all that you want from a yuan revaluation?
Forget the other inputs of goods and services. They are priced in US dollar from the start and a yuan revaluation will make no difference to them.
It is only in wages that you can get a realignment of competitive advantage through revaluation, Mr Schumer, and it is coming your way already.
