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Opinion:Making Sense of the Dollar and Yuan

Officials from both China and the U.S. have lauded Obama’s recent trip to China as a great success.  While some have criticized the trip for producing little in terms of specifics, one should not casually dismiss the achievements actually made (see U.S.-China Joint Statement). In so many ways, the relationship between U.S. and China has never been closer.

Yet despite the goodwill generated by the trip, there is one sharp difference that festers between the two – and that is the value of the Yuan.  Many in America feel that the Yuan is not only undervalued, but has created a huge trade deficit, setting in motion the current global financial crisis and threatening to prolong the current U.S. recession.

Many in China feel that the U.S. is unfairly sending China out to be a sacrificial lamb. The world recession (of which the U.S. recession is a part) was caused by the financial crisis, which originated in the U.S. as a result of  U.S. mismanagement of its capital market.  Economic prosperity is not a zero-sum game. The U.S. needs to focus on fiscal responsibility and revitalizing its unhealthy financial industry instead of blaming on China for its own problems.

The issue of trade between the U.S. – the biggest economy in the world – and China – soon to be the second largest economy in the world – is very important. The prosperity and stability of the entire world depends on a healthy, sustainable trade relationship between the two economies. So here are some topics for discussion:

  1. What caused the trade imbalance between the U.S. and China?
  2. Did the trade imbalance between U.S. and China cause the financial crisis?
  3. Is the Yuan costing U.S. jobs?
  4. Why doesn’t the Chinese government allow the RMB to float?
  5. Would an upward revaluation of the Yuan be good for the U.S. economy?

1. What caused the trade imbalance between the U.S. and China?

This is a complicated question.  From a macro-economic standpoint, bilateral trade deficit can arise between two economies only when there is a difference in the savings / investment rates between the countries.  The Yuan peg did not create the trade imbalance. The trade deficit between U.S. and China is a natural consequence of the difference in savings and investment rates between the two economies.

But what does this actually mean?

It means that part of the deficit reflects merely the opportunities – both in terms of labor supply and end market – that China presents to U.S. companies. When a company like GE or GM decides to build a factory in China to take advantage of China’s abundant labor supply or to invest in China to develop stake their claims to China’s rapidly wealthy consumers, these companies move capital into China. That capital flow into China will add to China’s balance of account with the U.S. – even though this is still asset under the control of American companies. Every dollar that is converted to Yuans will end up adding one more dollar to China’s holding of the dollar reserve even though every one of these dollars (plus more if these companies make money in China) can be withdrawn to the benefit of American companies in the future.  Part of the deficit therefore simply reflects the rush of American companies to China to finally service those famed 1 billion+ Chinese consumers – with this rush of capital contributing to (on the accounting books anyway) a decrease in savings in America and a increase in investment in China.

Another part of the deficit reflects the difference in aggregate savings rates (household + government) between U.S. and China.  The following charts shows a long but steady decline in U.S. personal savings over the last three decades.

src: http://seekingalpha.com/article/112604-what-will-happen-if-america-returns-to-an-historical-savings-rate

As can be seen, the personal savings rate decreased from over 12% in the mid 1980’s to almost zero in 2008 (in 2009, Americans personal savings rate shot up, but that was mostly offset by the dramatic increase in Federal government deficits).  At the same time, the U.S. Federal government deficit has also steadily increased.

src: http://zfacts.com/p/318.html

The net result is a progressively widening of the U.S. balance of trade with the world over the last three decades.

U.S. Trade Balance with Rest of World since 1960

src: http://www.census.gov/foreign-trade/balance/c5700.html

src: http://www.census.gov/foreign-trade/statistics/historical/gands.txt

It’s amazing to see the close correlation between America’s currency deficit and its drop in aggregate savings rate – though it is not difficult to explain. When Americans spend more than they make, and when others save more than they make, the net result of trade between the U.S. and others will favor others on the whole holding more dollars than before.

Some might say this is all China’s fault.  China artificially depresses its currency and runs up huge foreign reserves to addict the U.S. to cheap products and cheap credit. But the fact is that China did not always have a cheap currency. During the Asian Financial Crisis for example, China was actually lauded for keeping the value of its currency high while the rest of the currencies in Asia went into a nose dive.  Yet throughout that time, the overall U.S. trade deficit continued to grow. China also did not always have a huge dollar reserve to “addict” the U.S. government with cheap loans. The U.S. government deficit has actually grown steadily since the 1980’s, long before China started lending massive amounts of money to the U.S. Even today, China holds only about  6.7% (about $800 billion) of the total U.S. debt of $12 trillion. It is disingenuous to hold China responsible for U.S. government’s spending habits.

Before accusing China too much, we need to understand that the U.S. currency imbalance is a direct symptom of the U.S. living above its means. The U.S. currency imbalance is a global phenomenon it has with the whole world, not just with China.  The following chart shows the % of annual deficit the U.S. has with China versus the the world, starting 1985.

U.S. Annual Trade Deficit with China as Percentage of Deficit of World

As can be seen, the percentage of U.S.’s trade deficit with China has bounced back and forth around 35% of its overall deficit for much of that last two decades. Whatever issues the U.S. has with China, it also seems to have similar problems with the rest of the world.

2. Did the trade imbalance between U.S. and China cause the financial crisis?

I tried to answer this question in a recent post here on Foolsmountain.  I still stand by what I said.  The financial crisis was a recent phenomenon caused by a mixture of questionable U.S. domestic policies on housing throughout the 2000’s, the easy money supply the Fed fomented in the aftermath of September 11, and an under-regulated U.S. financial market that fed on the previous two to create a major housing bubble.  The financial meltdown in the U.S. exported a financial crisis, and then a recession, to the rest of the world.  The current problem in the U.S. financial industry is a separate and distinct issue from the more long-term issue regarding the balance of account (savings / investment) that the U.S. has had with the rest of the world for much of the last three decades.

3. Is the yuan costing U.S. jobs?

In some ways, I suppose the yuan (or the rupeee, or the peso) does cost U.S. jobs.  Due to the low costs of doing business abroad, the U.S. no longer has a major textile industry; much of the call center business has been outsourced to India; major electronic fabrication facilities now resides in Asia rather than in America.

But on the other hand, the loss in jobs is supplemented by opportunities in other fields. With the advent of the industrial and later information age, many traditional jobs also disappeared. Yet, for society at large, the benefit of the transformation outweighed the bad. Society became more productive; people’s standard of living increased. The same can be true of globalization.

America has the best scientists and most innovative engineers, the hippest designers, the most advanced high-tech industries, and most developed expertise in law, medicine, finances (the financial crisis not withstanding). Outsourcing lower-value work to developing countries while re-deploying its resources to higher value ones is not a bad deal for America.

But doesn’t an artificially weak yuan steal jobs from the U.S.?

I don’t think so. The economies of China and U.S. are surprisingly complementary. Few companies directly compete with each other. When the yuan is weak, China will have to ship more t-shirts, toys, computers, cameras, etc. to the U.S. to buy each Boeing airplane or hire each architecture team to design one of its sky scrapers. China’s cheap labor is an asset, not a liability, to the U.S. Stalwart companies like Boeing and GE become more competitive by procuring parts from all over the world, including components from China, instead of buying only American. American workers benefit when the U.S. imports from China, and their daily cost of living is reduced.  The question forward should not be whether China is an asset or liability to America, or even how to model the American economy to be more like China’s, but how to leverage the unique strengths of America to create a better future for America.

4. Why doesn’t the Chinese government allow the RMB to float?

I believe over the long term, the Chinese government will work to allow the RMB to float. Currently the Chinese financial institutions are still at an infantile state of development. There is still wide-spread resistance against making the RMB freely floating and be subject to currency speculations such as those that brought down so many currencies in the Asian Financial Crisis.

China is also concerned that a sudden increase in the RMB will kill its economic recovery. 7.8% of its economy by GDP is involved in the export business (according to this summary in the wikipedia, exports of goods/services accounts for 39.7% of gdp, imports of goods/services accounts for -31.9% of gdp).  Even if raising the RMB might be good for its overall economy (especially as it scours the world for resources and assets to purchase), China cannot risk placing its export industry in jeopardy.

[NOTE: the 7.8% figure I derived above may not be quite correct. If all of China’s import goes to making exports, then 7.8% would be right (39.7% – 31.9%).  However since China also imports for its own consumption, not all of the 31.9% it imports goes into making export and hence 31.9% is too high a figure to subtract from 39.7%.  I remember reading somewhere that some 20% of China’s GDP is involved in export, but I can’t find the source of the info now.]

As China works to decrease its dependence on exports, it will eventually find it politically unpalatable not to allow the RMB to float.  There are so many benefits – including making the RMB  one of the reserve currencies of the world. But before that is to happen, China will first have to beef up its financial industry.  Perhaps starting as soon as next year, we will see the RMB begin to appreciate steadily and gradually.  Whether that will actually reduce America’s currency imbalance depends however on a number of other factors – including whether the U.S. reduces its aggregate debt and opens up its economy for Chinese companies to invest (allowing for capital to flow back to the U.S.).

5. Would an upward revaluation of the Yuan help to lift the U.S. economy out of the current recession?

I don’t think so. Does the U.S. expect to export more products to China with a stronger Yuan? Does Boeing, for example, expect to sell more planes to China if the RMB appreciates? I haven’t read about reports of China not buying from America because it has run out of money.

Even if a revaluation does stimulate the flow of goods and services from certain sectors of the U.S. economy to China, a revaluation would not necessarily be good for the overall American economy. A wide range of goods and services imported from China on which businesses and consumers depend in the U.S. will all of a sudden become more expensive. Whether these will in the aggregate serve to stimulate or choke off growth for the U.S. economy is hard to tell.

Personally, I don’t think the main impediment to the recovery of U.S. economy is China or the Yuan. The most important intermediate-term issue is to clean up America’s financial health. Too many banks still hold bad assets on their books. Too many houses are still too bloated in value. The result is that banks become too afraid to lend, and consumers become too meek to spend. The government now steps in with a stimulus package, but unless that leads to economic growth, it will only wrack up more debt, which does not portend well for the future. Unless America’s financial system is cleared (it won’t be easy, but it must be done), the U.S. economy can’t truly recover.

In the longer term, the U.S. must re-learn to spend less and save more. The U.S. was able to prosper going into debt for so long because of the incredible faith the world placed in the U.S. economy, the status of the dollar as the world’s reserve currency, and the many innovations the U.S. made in its financial market (the current crisis not withstanding) to allow its economy to more efficiently allocate capital.  However, the massive currency imbalance it incurred with the rest of the world will not be sustainable indefinitely. In the future, the U.S. must again learn to live within means – to balance the government budgets and increase the personal savings rate.

The U.S. is still by far the biggest, and the most dynamic economy in the world. Its creation of and participation in the global market has brought it – and the rest of the world – amazing wealth. Globalization is not dead. There is much work to do, but the future should be – has to be – bright.

4. Why doesn’t the Chinese government allow the RMB to float?
  1. Steve
    November 26th, 2009 at 05:48 | #1

    Allen, it looks like the Chinese government might strengthen the yuan per this article in today’s China Daily. Here are a few excerpts:

    “The vice-foreign minister said the RMB rate’s flexibility may widen, echoing the nation’s central bank a month ago.

    “The announcement by Vice-Foreign Minister Zhang Zhijun comes after the People’s Bank of China, which has the power to oversee the yuan and financial institutions, said it was in the process of reforming the exchange rate system.

    “China will increase the flexibility of the RMB exchange rate at a controllable level in the future,” Zhang said, “based on the market demand and with reference to a basket of currencies.”

    “But he said, China will further work on the exchange rate policy on its own initiative and in a constructive and controllable manner.”

  2. November 26th, 2009 at 06:22 | #2

    @Steve #1,

    We’ll see where this leads. China was obviously not comfortable enough stating anything about the RMB in its joint statement with the U.S. I hope that both sides appreciate the predicament of each other side. Obviously everyone wants to recover from the recession as soon as possible. To the extent that I am wrong and that the Yuan peg is truly advancing China’s economy at the expense of the U.S. economy as some people claims, to the extent that the global economic growth is a zero sum game, it is to the benefit of everyone involved to find an “equitable” distribution of growth that all sides can live with.

  3. November 26th, 2009 at 06:30 | #3

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  4. Steve
    November 26th, 2009 at 06:49 | #4

    @ Allen #2: I don’t think it was a matter of China being uncomfortable, but it was unacceptable to China (and rightfully so) to create the impression that she was capitulating to an American demand during Obama’s visit. In my opinion, this is a good example of the validity of “quiet diplomacy” as practiced by Obama as compared to what many pundits recommended, the “punching the Chinese leaders in the nose” style of diplomacy.

    I believe the Chinese government intended to strengthen the yuan even before Obama’s visit to encourage domestic spending and grow the economy, but wanted to wait until after the meeting so they could better manage expectations and show they are in control of their own currency.

  5. November 26th, 2009 at 07:54 | #5

    @Steve #4,

    Hmmm … you may be right. I definitely believe quiet diplomacy works also. We need a spy in the diplomatic channel (on both sides) to reveal to us in timely fashions juicy bits so we can discuss here … secretly in the open! 😉

  6. Keith Hayes
    November 26th, 2009 at 08:09 | #6

    Can’t anyone realize that china is in an undeclared war with the US? Not many Americans have read Sun Tzu’s “Art of War” but I’m one who has along with most educated Chinese. The book is classic literature over there. The number one strategy, the preferred strategy in the “Art of War” is to destroy your enemies by ruining them economically. In the past this book was required reading by Korean solders, I would not be surprised to find out the book is required reading in all Chinese schools. Another thing the book explains is how to use spies, seven kinds of spies are explained. To actually fight is something that Sun Tzu discouraged. That is until you enemy has been so weakened that you can massacre them easily. The best way to ensure long term peace is to eliminate trade deficits, read the book. If China sought balanced trade then according to the book we would be allies. Ask yourself the question is China a friend or foe? If China seeks balanced trade then they are our allies, if not we are at war. If we are Joe couch potato does not even know it, could somebody answer the question for Joe so he can have an opinion and make him pass the cheese puffs.

  7. November 26th, 2009 at 08:41 | #7

    “Can’t anyone realize that china is in an undeclared war with the US?”

    Errmm . . . . No. No, they don`t, because that is paranoid nonsense. China is not currently at war with any nation, Trade competition is not warfare, nor are Americans forced to trade with China – they do so because Chinese products (within certain areas) are the best buy. Many American products, on the other hand, are, either beyond the economic reach of the average Chinese person, or unsuited to China`s current economic conditions or requirements and so the a bilateral trade-deficit exists. However, America is not China`s biggest trade partner – in fact in many years it has come third in terms of net trade behind the EU and Japan. China is not even the world`s leading exporter – Germany is. Yes, the Chinese government has, in the past, greatly favoured exports and sought to encourage them, but this is on the wane as reliance on foreign markets can create economic instability. Sun Tzu said little or nothing about trade as an instrument of conquest, at least nothing that I have ever seen.

  8. Keith Hayes
    November 26th, 2009 at 11:52 | #8

    I will respond to the accusation of paranoid nonsense. None of what I have written would make any sense if an in-balance of trade were not having severe adverse affects on America. Almost anything not made from paper bought in America seems to come from china. Consequently we are all becoming unemployed, our society is eroding and we are being destroyed. Balanced trade is a recipe for sustainability and peace.

  9. Raj
    November 26th, 2009 at 12:29 | #9


    While some have criticized the trip for producing little in terms of specifics

    Given that Obama gave great face to the Chinese government by visiting China within his first year of taking office and played by the rules they set, rather than insisting more flexibility, it is fair to say that he didn’t get much in way of return.

    one should not casually dismiss the achievements actually made

    I’ve read the statement but can’t actually see real achievements. Without repeating the statement can you tell me what is now going to happen that wasn’t going to happen before and what concrete steps have been established to ensure that it happens? As far as I can see the joint statement is just a flowery document that says the US and China will be nice to each other/work together.

    The world recession (of which the U.S. recession is a part) was caused by the financial crisis, which originated in the U.S. as a result of U.S. mismanagement of its capital market.

    Is this your opinion or just that of some Chinese people?

    I believe over the long term, the Chinese government will work to allow the RMB to float

    It seems that the Chinese government will only ever make concessions over the long-term. How long is “long” – in 50 years’ time? Be honest, Allen, I think you’re saying that China won’t allow its currency to float for the foreseeable future.

    Would an upward revaluation of the Yuan help to lift the U.S. economy out of the current recession?

    That is not the question you should be asking. You should ask:

    Would an upward revaluation of the Yuan help rebalance the global economy and help prevent another economic crisis of the sort we saw recently?

    That is by far the more important question.

  10. Keith Hayes
    November 26th, 2009 at 12:31 | #10

    “The reason wise leaders of old had no opponents was that they used their opponents to oppose opponents. Only the most humane people in the world can use their opponents to oppose opponents: For this reason opponents did not oppose them, and everyone capitulated.”

    Sun Tzu

  11. hohhot
    November 26th, 2009 at 14:43 | #11

    good article!
    @Keith Hayes quote SunTzu is a bit too far, to call imbalance trade a war, as if there is some chinese master mind who has planned this trade war with the states. Who can he/she be? isn’t that too complicated to be planned and implemented for Chinese leadership?

  12. Keith Hayes
    November 26th, 2009 at 22:28 | #12

    Who said a master mind is behind it, not me. What matters is the effect not the cause. I simply say cultural values need to be examined. The Chinese men I know read Chinese classic literature, its normal for them. Paranoia will annoy ya but the unemployment rate is real.

  13. hohhot
    November 27th, 2009 at 13:02 | #13

    as I understand, Sun Tzu is all about war as some deliberate and planned undertaking, while how much of the sino-us trade imbalance is the result of deliberate intentions of a single person or a group of persons?

  14. Steve
    November 27th, 2009 at 15:25 | #14

    @ Keith Hayes #6: Keith, I’m not sure where you’re going with this. The Art of War is on every military academy and war college curriculum and Sun Tzu is one of the two most studied “classic” authors, along with von Clausewitz. Any businessman worth his salt that is doing business in China has read it, along with Romance of the Three Kingdoms and Water Margin. There are also non-fiction accounts of Zhuge Liang’s tactics that are worth reading.

    In Japan, it’s also a good idea to read Musashi’s Book of Five Rings and Frederick Lanchester’s Powers Laws, both commonly used in business there. Personally, I’m a big fan of Lanchester’s Power Laws (originally derived in WW1 from studies of aerial combat) as they apply to market share. I’ve found them to be very accurate in my own experience and would suggest them to anyone doing business anywhere in the world. I’m not as impressed with Musashi but it helped me get a better understanding of the Japanese business mindset back in the ’80s.

    When Sean Connery is quoting passages in a Hollywood movie by the same name and amazon.com has four pages of available book versions listed, it isn’t exactly a secret anymore.

  15. November 27th, 2009 at 17:49 | #15

    Actually Keith, It’s not about China’s secret war with the U.S., but the U.S.’s secret war with China! Ok – it’s not really war but some sort of aggressive love making – which may seem like a type of war – at least according to this Saturday Night Live skit! (it’s a joke people, don’t take it too seriously)

  16. Keith Hayes
    November 28th, 2009 at 01:47 | #16

    I would like to make a correction to the skit. We do NOT owe China 800 billion dollars; they ONLY own 798.9 billion dollars of our nation debt (http://en.wikipedia.org/wiki/United_States_public_debt.)

    One point one billion dollars is a lot of money and it’s important to point out this discrepancy. But really any number, no matter how big is nothing to worry about. Ceding large tracks of American farmland to China would easily settle the debt; perhaps we can start with Kansas. Tax revenues from 20% unemployed (the real number) will be missing from our tax rolls for a while and we have to think of something to save face as we don’t have the money.

    Normally war would be the reason land transfers from one country to another disenfranchising a local population. However it has been pointed out to me that since we are NOT at war with China this would be an exception to that rule. Some of the manufacturing jobs lost to China could return and allow us to pay the debt that way but I’m thinking China might prefer buying America to settle the debt.

    I found Musashi’s Book of Five Rings to be rather shallow myself.

  17. Josef
    November 28th, 2009 at 02:34 | #17

    Hi Keith,
    if you call that a war, then what was happening 20 years ago when the U.S.S.R collapsed, as it could not keep the economic pace dictated by the U.S.
    O.k., it was war and the U.S. won. But now you see the U.S. loosing and you cry foul? I mean, at some point U.S. citizens should reflect on their own situation,- example, they should learn that you can not finance house-buying without money by just buying another house and hope that the increase of value will do the job.

    Allen wrote only in one line “subject to currency speculation” – that is not a by-effect. International financial institutions made huge gains before the Euro was introduced, and the RMB is not (yet) as powerful as the U.S. dollar or the Euro. Why should China support this no-added value business?

    I believe with Steve #4 that there might be some processes started, probably not as much as Obama wanted (“G2” – China has also some local interests and will not abandon them to favor U.S.) but hopefully enough to avoid another next crisis.

  18. Josef
    November 28th, 2009 at 02:53 | #18

    resent, it seems the first post went into a WOM.
    Allen, I have to add one more on this sentence of yours:
    >>America has the best scientists and most innovative engineers, the hippest designers, the most advanced high-tech industries<<
    You can find probably the original source in English at Thomson Reuters, here from Daily China "Research Super-Power China"
    "Im Bereich der Materialwissenschaften, Chemie und Physik stammt bereits die Hälfte aller Publikationen aus China;"
    On Material Science, Chemistry and Physics already 50% of the Publications comes from China…
    The article ends with a statement saying "good perspectives for researches with knowledge in Chinese".
    I would add Bob Dylan's "the times they are a changing".

  19. November 29th, 2009 at 12:07 | #19

    This is a shockingly good post, Allen. The questions you raise are the ones being talked about by lots of interesting economists, and some of the data you’ve put up is very apposite – though I think some of it actually undermines your general argument a bit, particularly that last graph.
    Most of your conclusions seem well within the bounds of economic reality, too. I’m completely unqualified to comment any further than that, but well done for illustrating some of the issues so well.

  20. Keith Hayes
    November 30th, 2009 at 06:35 | #20

    I’m always amazed when an argument defends outsourcing jobs by the claim that a loss in one job category is balanced by gains in other job categories as this article has.

    “Outsourcing lower-value work to developing countries while re-deploying its resources to higher value ones is not a bad deal for America.”

    In any society not all people can only do every kind of work. Take away manufacturing jobs and people who can only do manufacturing jobs become unemployed. It will not matter if new jobs appear from thin air or not. If the displaced don’t have skills for replacement jobs the newly unemployed can’t fill the new jobs. People with “higher value” skills will be needed from abroad if any magical ‘high value’ jobs actually do appear from thin air or the jobs will go unfilled. Workers displaced by outsourcing remain displaced. There is no mechanism to balance the scales to create jobs which replaces those lost to outsourcing. A job outsourced is a job outsourced and that’s all that happens.

    Wishful thinking and a horrible deal for America.

  21. November 30th, 2009 at 07:38 | #21

    @Raj #9,

    You wrote:

    The world recession (of which the U.S. recession is a part) was caused by the financial crisis, which originated in the U.S. as a result of U.S. mismanagement of its capital market.

    Is this your opinion or just that of some Chinese people?

    I can’t believe you are asking this question. It’s the opinion of many people around the world. A casual search on google for cause of global recession will give you the following:





    You also wrote:

    Would an upward revaluation of the Yuan help to lift the U.S. economy out of the current recession?

    That is not the question you should be asking. You should ask:

    Would an upward revaluation of the Yuan help rebalance the global economy and help prevent another economic crisis of the sort we saw recently?

    I challenge anyone here (that means you too Raj) to give a succinct and well-articulated reason how the Chinese have caused the current global crisis of the sort we have seen recently.

    Note: this is not aggressive posturing on my part, but an invitation to everyone to speak frankly (but objectively – at least as objectively as possible) on what everyone thinks is really going on in the world.

  22. Raj
    November 30th, 2009 at 11:56 | #22

    Allen (21)

    You need to calm down. I never said it was a minority view, I asked whether it was YOUR view as well or if you were just reiterating the views of others. You started the paragraph with “many in China feel”, without using the word “I”.

    Furthermore I never accused the Chinese people of causing any crisis. They do not decide China’s exchange rate – that’s controlled by the government. And I didn’t even accuse the government of causing the global crisis. I suggested that a better question is to ask whether an upward revaluation of the yuan would help rebalance the global economy and in doing so help stave off more economic trouble.

  23. wk
    November 30th, 2009 at 12:27 | #23

    What China wants from the west, the west doesn’t sell. Don’t forget the economic sanction the west put on China 20 years ago, it isn’t over yet. The sanction was intended to make China collapse, but thanks to the efforts by both the government and the people, China instead grows stronger and stronger. I think during the next ten twenty years, we will see an explosive growth of indigenous high-tech and high added-valued products coming from China. These products may not be as good as those from the west, but some definitely will be used as substitutes for western products, which will inevitably cause further trade unbalance. This trend will not reverse unless Yuan gets reevaluated.

  24. wuming
    November 30th, 2009 at 14:32 | #24

    “This trend will not reverse unless Yuan gets reevaluated.”

    I assume if Yuan is raised sufficiently (say 1-1 vs. USD) China will not be export anything anywhere, but I can’t see mere raise of, let’s say 20% vs USD will result in anything but a global economic shock that plunges it back into deep recession. It has been argued over and over again that the exchange rate can’t be the only or even the main contributor to the trade imbalance and the crisis. For example the willingness of Chinese to work more for less, American to consume more than they have and the distortion of the western financial service industry are probably more fundamental causes of the imbalance and crisis.

    RMB will appreciate again, gradually as in 2005-2008. While the other structural problems remain. Just look at the financial industry, it now profits from “high-frequency trading”, can anybody tell me what is the benefit of that to the real economy?

  25. colin
    November 30th, 2009 at 18:22 | #25

    “Many in China feel that the U.S. is unfairly sending China out to be a sacrificial lamb.”

    Many are right. The US is only concerned about it’s interests, those of China or any other country be damned. Everything else is just theatrics.

    “Actually Keith, It’s not about China’s secret war with the U.S., but the U.S.’s secret war with China!”

    Correct. The US has nothing to gain by sharing superpower status with, or even getting eclipsed by, another nation. It will do everything it CAN to stifle China’s rise.

  26. tanjin
    November 30th, 2009 at 18:49 | #26

    A recent essay by Daniel Gross on Newsweek is an interesting read.

    “Karl Who?

    China is a Communist country, but I have yet to meet an actual Communist.

    On several occasions during my 10 days in China, I’ve been told that there are 70 million members of the Chinese Communist Party. And yet it’s nearly impossible to find an orthodox Marxist in Beijing. When you stand in Tiananmen Square and look toward the Forbidden City, you see a huge portrait of Mao flanked by slogans. The slogans used to say things like “Long Live Marxism-Leninism.” Today, they’re simply nationalistic: “Long Live the People’s Republic of China!” (Click here to follow Daniel Gross).

    While class struggle and common ownership of property may have motivated the revolution, Mao’s heirs are more interested in outcomes than process. At least a dozen times, officials and businesspeople have quoted Deng Xiaoping’s line about not caring whether a cat is black and white, as long as it catches the mouse. Chinese structures—whether socioeconomic theories or apartment buildings—don’t have to be elegant; they just have to stand up. And so far, 30 years into the great China experiment, the elites are confident that the grafting of capitalism onto a state-controlled economy, overseen by a government controlled by a Communist Party, is standing up.

    The headquarters building of the China Academy of Engineering is a testament to the nation’s growing ability to create elegant structures. Light spilled in through a large glass wall. The green building was paved with recycled marble tiles and boasts a sophisticated heating and cooling system that relies on recirculating water from deep in the ground. In a large reception area, whose centerpiece was a glass case filled with trains and planes, we met Xu Kuangdi, a veteran apparatchik, engineer, manager, and leader. Xu, an academic who served as mayor of Shanghai from 1995 through 2001, is vice chairman of the National Committee of the Chinese People’s Political Consultative Conference and president of the Chinese Academy of Engineering Sciences. And while the format of the meeting was old-school—we sat in large, comfortable chairs in a setting more like an audience than interview—there were several times during the meeting when I felt as if I were on the set of CNBC’s Kudlow & Co. For the only class struggle this veteran Communist discussed was the struggle of the newly rich to hold onto their gains.

    Xu boasted China’s engineering triumphs: the 88-story building in Shanghai, designed by an American architectural firm but built by Chinese engineers; the 67 bridges over the Yangtze River; the Olympic structures; high-speed rail; supercomputers. And when we asked how we would square the experience of modern China—parts of Beijing are a luxury retailer’s paradise—with Communist Party doctrine, he had a ready response. Karl who? “We’re not a bookish party,” he said. Besides, the Communist Party has always been flexible when it comes to dealing with national priorities. It cooperated with the Kuomintang to fight the Japanese. “Mr. Marx is still widely respected by the party and the party members. He’s a great mind in the people’s history.” Just because many of his ideas are outdated—they were devised in a period without today’s developments in science and technology—it doesn’t means he’s forgotten. “I want to compare it to God in your mind. Maybe you don’t go to church every week. But that doesn’t follow that God is not in your heart.” Marxism, like religion, is “still a power that controls the morality of the people.”

    Of course, in China, Marxist morality shifts over time. And today, the most moral thing that Chinese policies and people can do is promote economic growth and development, regardless of the distributional outcomes. In our time in China, we heard several reasons why the massive country simply couldn’t adopt Western-style democracy. The population is too large and too diverse. Democracy promotes the sort of arguing that hinders growth. The performance of other Asian countries seemed to have suffered when fractious democracies emerged from authoritarian or military rule. Xu added a new one: It would promote unhealthy class warfare. If elections were to be held in a large geographical area where gaps between the rich and poor are wide, and in which people have different educational backgrounds, “it might cause turbulences to society,” he said. “If somebody just went out in the street and shouted, ‘I will divide the property of rich people into poor people,’ I think he would be elected. But it is useless, as parity will not solve the problem of economic development.” Yes, the creation of wealth in China has been wildly uneven. But this, too, is consistent with the party’s goals, doctrine, and history, according to Xu. “Sometimes when we have the faith we have to take different approaches to realize our beliefs. The ultimate goal is the common prosperity, but we have to let a group of people to get rich first.”


  27. YinYang
    November 30th, 2009 at 22:46 | #27

    This is a really excellent post, Allen. There are only few people who can wrap their brains around this issue, and I am glad you did and for articulating it for us.

  28. Josef
    December 1st, 2009 at 03:24 | #28

    @24 wuming,
    I absolutely agree with you.
    Concerning the financial industry I would even see it worse: Since one decade investment companies cannibalize healthy firms by just removing their long term research etc. investments. There is not only no benefit to real economy but rather a severe damage. In parallel we observe the rise of top manager salaries, which could be read as successful bribing. Both effects swapped over the Atlantic to Europe, and I can only hope that at some time, European governments stop that “locust-swarm” development as well as remove the tax-limitation for high salaries.
    Now, if China goes a different way by keeping control over the financial industry, – the exchange range is one part of it, I would read that as self protection.

  29. Charles Liu
    December 1st, 2009 at 05:53 | #29

    Keith @ 26, “a horrible deal for America”

    K-dog, you actually have a fan here. As a fellow American I absolutely agree with you that there’s a war. But it is not the Chinese – it is our own WASP homeboy CEOs, decision makers, political leaders who are shipping our jobs overseas (if they don’t go to China they’ll go somewhere else), creating conflict and sending the unemployed people to fight it, wrecking the foundation of our wealth for greed and self-enrichment.

    Make no mistake about it Keith you are on the mark about China – exactely like you are supposed to. America’s elite has been declaring war against it’s poor, but we Americans are so brainwashed by our military-industrial-media-complex we are led to believe all this is somehow the fault of our “enemies” – enemies manufactured for the sole purpose of maintaining class structure and perpetuate the ruling class dominace over America’s permanent underclass.

  30. December 1st, 2009 at 06:32 | #30

    @Keith #20,

    I actually do respect this sentiment. It is perfectly sensible if some Americans feel that globalization is a bad deal for them. It’s also perfectly sensible if some Americans feel that America would be stronger and more prosperous with less trade – and more protectionism.

    However, even with this, I’d still argue that the value of China’s yuan is a boon to America. If China’s yuan is truly that much undervalued, consider it a free gift to the world. Imagine someone you were willing to hire to $10 / hour all of a suddenly tell you unilaterally that he is willing to work for just $8.

    OK – maybe countries are different from people. When China’s yuan is valued too low, it is actually sucking away industries from developed worlds, making the developed world weaker and China stronger.

    I don’t know if I quite buy this because I believe the currency deficit reflects a combination of America’s spending habits and capital flow to China as that economy develops – not the Yuan’s value. Changing China’s yuan would not change the currency deficit per se. It may affect the volume of trade or shift trade to other low cost centers in the world, but not the currency imbalance.

    Shifting trade volumes would economically isolate China – or it would slow global trade in general. But in general China does not want to withdraw from global trade because it is dependent on continuous exchange with the developed world to buy much needed technology and expertise in developing its own economy.

    I think globalization is a good deal to everyone. The West should enjoy’s China’s labor surplus as long as it exists. After that, hopefully other parts of the world would take China’s place. Even if no one else takes China’s place, then the West would still have benefited. Eventually, low tier manufacturing may make its way back to the developed world, but citizens of the developed world would have had plenty of time to adjust for that if that’s the way it going to happen.

    For the time being, enjoy the interdependence: even as the West grows increasingly dependent on China, so is China on the West. This is an expected result of globalization. Interdependence should be leveraged as an asset. The West’s current economic problem does not lie in China (or interdependence on China), but in how it has allocated its resources (borrowing to build asset bubbles) in the past – and how it’s going to clean that up going forward.

  31. k-dog
    December 2nd, 2009 at 20:13 | #31

    YO, C-Liu, I’m so glad you feel me dawg.

    I remember watching a TV show about happiness once. In the show Denmark was revealed to be a very happy country. An explanations was that no matter what you do for a living you get paid about the same there. Turns out the people are all in it together and do work they like.

    Life is never fair, there is no free lunch, but wild west policies which disenfranchise parts of society to enrich other parts is not a society where people are all in it together.

    @Allen #30, I take issue with “globalization is a good deal to everyone”.

    Its a slippery slope to claim unemployed people created by global outsourcing and in-sourcing (by uncontrolled immigration and immigration policies meant to keep down American wages to enrich WASP homeboy CEOs (H1-B programs and policies like it) can possibly be a good thing.

    All the spreadsheets in the world can’t justify policies which pull people apart instead of bringing them together. Globalization is good for the bottom line of corporations as it rapes the planet of our resources and changes the climate, but individual people have their own bottom line. A single person is more alive and valuable than all the corporations put together.

    If globalization is good for everyone, please let me know exactly how. I will visit the people living in tents and under our freeway overpasses. I’m sure the news will cheer them up.

  32. December 2nd, 2009 at 20:21 | #32

    @k-dog #31,

    Thanks for taking issue with me about “globalization is a good deal to everyone”. I may have typed too fast. By “everyone” in #30 I meant every country, not every individual. In fact in #30, I specifically wrote regarding globalization that “It is perfectly sensible if some Americans feel that globalization is a bad deal for them.”

    The human cost of industrialization, economic development, globalization (in both China and U.S.) is very real – and I don’t mean to overlook them – but at the same time that also doesn’t mean industrialization, economic development, and globalization is per se bad for society. You’ve raised deep issues that I didn’t mean to get into!

  33. k-dog
    December 2nd, 2009 at 20:46 | #33

    @Allen #32

    I hear you Allen and accept the clarification.

  34. hzzz
    December 8th, 2009 at 09:36 | #34

    The idea of offshoring or outsourcing itself are either good or bad unless the net jobs replaced by the outsourcing are not offset by additional jobs created by the additional income. I am pretty sure that is the case for America.

    Looking at the current situation with globalization, I think it just means that the spirit of Capitalism is alive and well. Sure, we can blame China for manipulating its currency all we want but by printing its own currency America is manipulating its own currency. If anything, the Western democracies should be very happy that the evil of Communism is finally conquered by Capitalism in the world’s biggest nation. This is the goal which conservatives from Western nations have been envisioning for decades ever since the cold war.

    As for the real human cost of Globalization, there are two sides to this as well. There are certainly engineers and factory workers whose lives are severely affected by losing jobs in the US, but at the same time there are a lot more engineers and factory workers whose lives have changed for the better in China.

    Americans in general have been taught not to rely on others (especially the government) and have always been preaching so to other nations as well. Competition creates opportunities and drives innovation. Socialistic policies result in inefficiencies and stifle innovation. Heck America doesn’t even have universal healthcare because many think that socialistic policies would dampen the capitalistic spirit in the US. Unless America as a whole changes its attitude, I think the current pace of decline will just continue until global wages equalize. At the end of the day, if the average Chinese can live on less than $200 USD a month and still save over 20% of their income, I am sure Americans can manage the same.

  35. March 6th, 2010 at 00:40 | #36


    I just came across this article: “What’s behind US pressure on renminbi exchange rate?” It looks like both the IMF and the World Bank chief economists both agree with you – appreciation of the RMB won’t help the U.S. much. There was a section on an Japanese article explaining the recently embarked China bashing by the Obama administration.

  36. January 25th, 2011 at 23:23 | #37

    Another economist steps forward to say pretty much what I argued here.


  37. December 28th, 2011 at 00:43 | #38

    This is a good op-ed from xinhua.


    by Xia Wenhui, Wu Liming

    BEIJING, Dec. 28 (Xinhua) — In its latest report, the U.S. Treasury Department on Tuesday declined to name China as a currency manipulator, sending out a clear and positive signal that would soothe the market and benefit bilateral and world trade.

    The RMB exchange rate has been a major source of dispute between China and the United States over recent years.

    Though a trade problem in nature, the RMB exchange rate issue has been politicized over and over again in Washington and targeted by political candidates in various election campaigns from time to time.

    However, the politicizing of the RMB issue proved to be both energy consuming and uneconomical. Moreover, it hurts the economic and trade cooperation which is one of the cornerstones of Sino-U.S. relations.

    Over the years, the two nations have made huge progress in trade ties, and now they are each other’s second-largest trade partner. There is even bigger potential to explore in decades to come.

    From a global perspective, as emerging economies including China are playing an increasingly important role in world trade and finance, the shift of power balance sometimes led to frictions and readjustments.

    What is needed in such a process is active negotiation and coordination instead of negative response such as clash and containment.

    On the issue of the RMB exchange rate, China’s policies, measures and orientation are crystal clear, and the outcome is obvious as well.

    Compared to six years ago when China started its currency rate reform, the RMB has appreciated against the U.S. dollar by over 22 percent.

    Figures from the U.S. side showed that the RMB went up 40 percent in value against the U.S. currency on a real basis in the past five years if inflation is not factored in.

    They also point to the fact that appreciation of the Chinese currency is not a solution to Washington’s chronical woes such as trade deficits.

    Just like the process of China’s economic development, the RMB exchange rate reform and the internationalization of the RMB will be a gradual and long-term process. Pushing for a sharp rise or decline in exchange rate or seeking an once-for-all solution would be both unrealistic and harmful.

    Therefore, it is time to move beyond the useless, meaningless quarrel over the exchange rate and look to the broader picture and new areas for both bilateral and global trade cooperation.

    In that sense, the U.S. Treasury report sent out a positive signal.

  38. jxie
    December 31st, 2011 at 14:12 | #39

    The US runs a large trade deficit every year. A lot of observers, e.g. Michael Pettis, believe that it’s the other side of the coin of USD being an international reserve and trading currency, which BTW is one of Pettis’ major intellectual pillars. However, this is hardly right. Except 2 years in the 1930s, the US had run trade surplus each year from 1900 to the mid-1970s, yet it didn’t stop USD becoming the dominant international currency during the timeframe. The other nations collectively didn’t acquire USD through running trade surpluses with the US – they simply couldn’t because the US was such a competitive producing nation, but rather through:

    * US aids, e.g. the Marshall Plan.
    * US acquiring foreign assets in exchange for USD.
    * Foreign nations/companies issuing debts in debt markets with US participation.

    Then USD was quite dear to foreign nations.

    Today the US’s fiscal deficit and trade ficit picture is worse than most PIIGS nations, yet it is sitting pretty compared to the suffering Eurozone nations. The key is the Asian producing nations led by China. Today for every $1 import, the US produces $3 extra economic activity, ranging from retail valued add, services rendered with imported products, to final assembly. Because USD is such a special currency worldwide, unlike everybody else except the UK (which is another story), it can run a sustained trade deficit year after year. The US economy has been molded in a way that relies on large quantity and cheap import, to produce secondary economic activities. If China is let go of supporting USD, the currency values of all Asian producing nations, against USD, will likely go up simultaneously. The US economy structurally is set up in a way that even with a severely depreciated USD, it won’t be able to turn around the trade balance easily. In my mind it may suffer a fate worse than Argentine Peso in 2002, which had lost 75% of the value within a year. At a personal level to safeguard your assets against that scenario, watch the Chinese central bankers closely.

  39. December 31st, 2011 at 16:23 | #40

    I agree with some of your reasoning but to say that the fiscal and trade deficit of the US is worse PIIGS is not quite true. The US has the bulk of Fortune 500 companies who kept a portion of profit outside the countries (the fact is most US MNC now make a large portion of their profit overseas). The situation you apply on the US is even worse in the PIIGS. Germany, France, UK and Italy depends on the US (and China market) to stay afloat. The MAJOR reason the PIIGS and now the Euro zone is in such shit is because of US subprime fiasco of 2008.

    The US also have the ability to print US$ freely (ie raking up debt or deflating its currency as it pleases). The Euro zone is not able to do that because they don’t have a federal government and each countries have different priorities. On top of that the US has the largest gold reserve in the world. Another thing most economist did not count is that the US also has vast reserve of natural resources such as cooper, coal, gas, oil etc. An advantage few EU countries have.

    So if there is another financial collapse it would be from Europe. I am not saying that things are all great in the US but they would be the last to fall. To equate the US with Argentina is unwise. The biggest problem is US government addiction to the deficit. If they have the will to balance it, they will be ok. Also the US$ has the backing of the no.2 and no.3 economy of the world and I don’t see it changes any time soon. At most, what China will do is reduce its US$ holding. Currently, the US is the lender that gets to set its interest rate. (Imagine you can borrow from the bank and set you own interest rate) I personally felt that China’s central bank should keep it US$ reserve closer to $500 billion than $1000 billion now.

  40. January 1st, 2012 at 12:50 | #41

    @jxie and @Ray ,

    Please note how the trade deficit (currency deficit more precisely) is calculated.

    When Intel invests $100 million in China, that $100 million is counted as a deficit because the U.S. dollar is transferred to China (held by Chinese banks). Since 1970’s, U.S. was able to run a deficit against the world because the savings rate of U.S. citizen has been going down. The net money that goes to other countries goes in the form of U.S. corporations investing in other nations – from Middle East to Africa to Latin America to the Asian Tigers to most recently Mainland China. Globalization is effectively about this pattern, of U.S. exporting capital and then importing goods and services imported from its global investments. If we count the exporting capital as part of the currency deficit, its deficit will be balanced on the global scale.

    If there are no U.S. multinational companies – I doubt the U.S. savings rate will go down that much as indicated in the chart above in the post. No nations (China included) work for free. It only seems so (from U.S. eyes) because it is counting U.S. corporate profits from outside the U.S. (when HP sells product back to the U.S., for example) as foreign!

    While under globalization (U.S. multinationals investing and producing across the world), the U.S. as a nation reaped tremendous benefits, the corporations also did get a lot richer while U.S. citizens got poorer. That plus the biased accounting of what is foreign and what is not has resulted in anti-globalization movements such as the Occupy Wall Street movement.

    But the problem is not trade per se, and definitely not China, but accounting, the transfer of wealth from citizen to corporations, and then consumer behavior (U.S. consumers can’t keep on spending beyond their means).

    That’s the global picture. In the bilateral scenario, high Chinese savings rate (in face of decreasing aggregate U.S. savings rate(while private savings rate has somewhat stabilized, the public savings has gone berserk, with Gov’t going into heavy debt for years to come)) also does not help the bilateral currency deficit between U.S. and China. One way to decrease this is to decrease Chinese savings rate, by encouraging Chinese companies to invest in the U.S. (Congress has put up barriers after barriers whenever Chinese companies want to invest in U.S. thought); another is to sell China more of what it wants (high tech products).

    Increasing the value of the Yuan will not really help. Instead of spending $100 yuan to buy something, China will spend less, maybe $80 yuan to buy the same thing. China is not going to buy more simply because it can; its import is not constrained by how much money it has, but by what others will offer it. So an increasing yuan will simply perpetuate China’s savings rate longer…

    I will try to put together a post tying some of these ideas later…

  41. jxie
    January 1st, 2012 at 21:27 | #42


    If the US-based MNCs decide to repatriate oversea profits, it will not have direct impact on the US fiscal & trade deficits. Granted there are secondary effects. For example, if the profits are taxed, it will help reduce fiscal deficit; moving money from overseas to the US will drive up USD value, which should worsen the trade deficit.

    If your point is that the US-based MNCs are performing very well, just bear in mind that they aren’t the same as the US. Halliburton (HAL), an S&P 500 component is in the process of moving its headquarters to Dubai, and its stocks to be traded there too. It already makes business sense. Just in case its previous association with KBR becomes too political, it can just pack up and leave. GM makes more cars and far more profits in China than in the US. If this persists, it may make sense to move its headquarters to say Shanghai. US-based MNCs don’t have to be always US-based, especially if the popular anti-corporation sentiment (e.g. OWS) gets hold, and/or the business taxes go up. While on this subject, the corporation that has been rumored and subsequently denied several times, to consider moving its HQ is HSBC, the only major Western bank that didn’t take any government bailout money. My money is that within this decade, HSBC will move its HQ from London to Hong Kong or even Shanghai.

    These MNCs are mostly lean and mean money-making machines. The US, on the other, is a collection of some 300 million people with high unemployment rate, high entitlement expectations, relatively poor education compared to their income expectations. For example, youths at early 20s in China on average already have more lifetime school hours than their American peers, and the gap is getting wider. Moreover, the US seems to be incapable of making any political decisions. BTW, the idea that at this very moment in time, China should learn from the US political system is simply absurd. Why should a nation with only 10% dissatisfying with the country’s direction model after another nation with 73% dissatisfying? The dissatisfying rate of the US now is actually higher than that of Egypt prior to the “Arab Spring”. The saving grace, in my opinion, among some other reasons, is the availability of anti-depressant drugs. On second thought, maybe the whole thing (the media trumpeting the non-existent “democratic movement”) is not a NED conspiracy or a US DoS conspiracy, but rather a conspiracy by the anti-depressant drug makers — China must be pulled down so that we can sell to them. Think about it, the budgets of the drug makers should be much larger. But I digress.

    Of course, unlike the current arrangement between the ECB and the 17 fiscal authorities in the Eurozone, the US can monetize its debts as much as it wants, without going through the austerity programs, and tax increase initiatives in Europe – so long as Asian producing nations consistently support USD. However, my main point is, this is like a “black swan” in the making. Asian producing nations can’t keep buying US treasuries forever. When the reckoning comes, the world will be like…

    When Intel invests $100 million in China, that $100 million is counted as a deficit because the U.S. dollar is transferred to China (held by Chinese banks).

    That’s capital-account deficit. Trade deficit is current-account deficit. In a longer horizon, capital-account and current-account should balance. The US has been running a large current-account deficit, and a capital-account surplus vis-a-vis China, i.e. the US runs large trade deficit with China, and China invests a lot in the US (mainly treasuries).

  42. January 1st, 2012 at 21:44 | #43


    When Intel invests $100 million in China, that $100 million is counted as a deficit because the U.S. dollar is transferred to China (held by Chinese banks).

    That’s capital-account deficit. Trade deficit is current-account deficit. In a longer horizon, capital-account and current-account should balance. The US has been running a large current-account deficit, and a capital-account surplus vis-a-vis China, i.e. the US runs large trade deficit with China, and China invests a lot in the US (mainly treasuries).

    Well, technically you are right. Of course, the two has to balance because as I said before, no nation, including China, works for free. The Chinese gov’t buys treasury because it is not interested in holding U.S. dollars per se; it wants something back from the U.S. But people in the U.S. do not seem to think of Chinese buying treasuries as fixing the “trade deficit” problem it has with China.

    My point is to stress that to the extent capital is moving to China and goods are flowing from China back, the profits made by U.S. companies, the assets gained by U.S. companies abroad – these should not be counted as Chinese profits or Chinese assets. They are ultimately still assets under control of U.S. multinational companies.

  43. jxie
    January 1st, 2012 at 21:59 | #44

    I think you are onto something there. When are you gonna write it? 😀

  44. January 2nd, 2012 at 08:40 | #45

    Allen answered part of the issues you raise. Basically one of my point is that US MNC still owns the companies (or rather stock) and thus profit. As you clearly pointed out they are fast becoming truly multinational, US citizens still own the biggest share, even if it is listed in London or Abu Dabi. I remember Biden stating that China own just 1 percent of US financial assets.

    This is what he said while in China, “I also know that some of you are skeptical about America’s future prospects. With that in view, I would like to suggest that I respectfully disagree with that view and will allay your concerns. Let me put this in perspective so you can understand why the American people are also confident about their future. America today is by far the world’s largest economy with a GDP of almost $15 trillion, about two and a half times as large as China’s, the second largest; with a per-capita GDP which is more than $47,000 – 11 times that of China’s. I’ve read that some Chinese are concerned about the safety of your investments in American assets. Please understand, no one cares more about this than we do since Americans own 87 percent of all our financial assets and 69 percent of all our treasury bonds, while China owns 1 percent of our financial assets and 8 percent of our treasury bills respectively.”

    I agree with your assessment of the US population as a whole but currently the whole trade and financial system actually is still rigged in their favour. The problem is that the bottom quarter of the US public simply does not know how to benefit from this system. Case in point, the min wage in the US is $7-10/hr; there is no min wage in China but is around $1/hr. How does this disparity comes about? This is due to the competitiveness of US companies. And this also allow US MNC to pay on average $50-60k/yr to their workers. You did raise many good points of the so-called average American. Frankly, I don’t think the political system, economical model, cost of living of China is applicable to the US and vice versa.

    Allen also make a good point on the flow of goods and capital etc between US and China. Basically, if Dell shipped a $400 computer to US, does it count as China’s export to the US? Under current accounting it is. In reality, does the US suffer a trade deficit of $400 in trade with China because of this? And what about Dell shipping the computer to EU, Japan or rest of the world? All this surplus would show up as China’s but the lion share would go to Dell, AMD or Intel; Japanese, Korean or Taiwan companies usually take up the other half. Only a little maybe just 2-3% of that profit go to Chinese companies and thus workers.

    Of course, labour cost is just one aspect of the cost of manufacturing. Infrastructure (port, road, power etc) and supporting industries etc are the most decisive factor. Chinese government and private enterprise invested massively to build up this manufacturing edge. In fact, I don’t think this aspect will change in the next decade or more. For these industries to move to say India or Indonesia, the government has to invest in infrastructure first. Presently it make no sense for US companies to invest in these factories to make 2-3% profit. In fact, since the supporting industries (transistor, RAM, HD, petro-chemical etc) are now mostly in Japan, Korea or China it is almost impossible for US or European companies to even try and compete in some areas. My friend did a cost analysis for building a factory in Ontario, it turned up the raw material costs alone cost more than importing the finished goods from China. So to make even 2-3% profit is impossible for mass market product. Apple might be able to assemble the iPhone in the US but manufacturing cost would probably doubled. Some might argue that it might create employment for 10k or 30k jobs but what would happen to Apple’s stock price? Drop to 1/3? Or at worse lost its competitiveness to Samsung, LG, Nokia, HTC, ZTE etc in other world market and end up as an also run? On top of that China also paid the environmental cost of hosting the factories.

    The current account surplus might seems to be totally in favour of China but in my research the actual reality might be balanced or even be in the US’s favour. From the examples I stated earlier, China made maybe 2-3% on its manufacturing export, the rest goes to MNC and raw material cost. Jxie stated that GM made more profit in China than US market (could be around 60-70% of GM’s total profit). Basically, GM, Ford and host of German, Japanese, Korean companies sell millions of cars in China. Granted Chinese state enterprise got half the profit for the cars manufactured in China, how many cars did China export back to the host countries? If you do a research on the Fortune 500 MNC, I would say the Chinese market easily contribute anywhere from 10-50% of their profit (with around 25% being the average figure). Think of all the big names like Airbus, Boeing, Procter Gamble, Nestle, Coca Cola etc, basically the whole list from Fortune 500 or 1000. Look up the profit they made in China. How much did Chinese companies and thus Chinese people actually make from this surplus.

    The world trade picture isn’t that bright for China if this is taken into consideration. So to say that China is the biggest winner in globalization for the past twenty years is stretching things a bit. Who is the actual winner? MNC and elite? Again, I would disagree because the consumers all over the world especially the ones in the developed economies benefited the most. Real wage and standard of living rise the most for the OECD countries for the past thirty years through world(free?) trade. The things that killed it is the bubble economies that were also being created in the financial and property sector. On top of that, the government’s and people’s fiscal irresponsibility also create the so-called financial crisis. The financial problem we see right now in Europe and US is that the growth of the past decades also created a new market sector that relied on the bubble economy and irresponsible government spending. The problem they have now is to decide which sector to cut back without risking another recession hence the continuing government spending deficit. There is no denying that China also benefited from world trade. The other BRICS also made real progress especially for the last decade, so do most SE Asian and S. American countries. I will stop here and leave you guys to ponder and come up with why China was able to have 8-10% annual growth despite making a pitiful percentage in world trade.

  45. January 2nd, 2012 at 09:52 | #46

    Government infrastructure spending and domestic consumption.

  46. jxie
    January 2nd, 2012 at 11:27 | #47


    Love the exchange, which shall make all of us better regardless of how much we agree or disagree. Since I am not writing a treatise, some of the following numbers are ball-park figures pulled from my memory.

    About GDP. If some aliens land on earth now, and try to compare the economic outputs of China and the US, I would think chances are they would conclude China is ahead of the US. By outward appearances, China consumes more energy and electricity, produces more manufacturing value-added, and agricultural products. Of course the aliens need to take ECON 101 first…

    As to collecting GDP data, China uses a production-based method, and the US uses an expenditure-based method. Theoretically after adjusted for inventory change and foreign trade, both sets of data should match each other. However, once you look into the details, it’s quite obvious China understates its GDP output by a mile in the US standard, especially the service output. For example, in the US PCE, there are 2 big chunks, “housing and utilities” (near $2 trillion), and “health care” (near $1.8 trillion). Within “housing and utilities”, there is $1.2 trillion of “imputed rental of owner-occupied nonfarm housing”, which roughly stands for the virtual rent, house owners pay to themselves. The economic theory behind the computation is quite solid, but China simply doesn’t add that to its GDP. The other big part is “health care”, in China it’s less than 5% of the GDP.

    BTW, a lot of the arguments out there about how China under-consumes, and the global economy is “imbalance”, can be largely discounted because of the data discrepancies. For the GDP components “motor vehicle and parts” that is quite comparable between the 2 countries, China actually consumes about the same as the US, some $300 billion.

    Right after the WW2, it was hard to imagine one day the US would run a trade deficit — everybody in the world just couldn’t get enough of US-made products. If you had that impression stuck in your head, you wouldn’t be able to foresee the drastic changes in the 70s including the gold price and inflation, at least not able to accept the changes early and adjust your business/investment strategies. The driving force behind it, was the other major developed nations, catching up the US in education (hence future productivity) a couple of decades earlier.

    If we go by the theory that the economic output of China is reasonably close to that of the US, China still produces less than a quarter of America, at a per capita basis. Here is the base of future dislocations: Chinese youths are already better educated than their American peers, and increasingly so. I am not predicting the “black swan” tomorrow or next year, just saying be prepared.

    I will stop here and leave you guys to ponder and come up with why China was able to have 8-10% annual growth despite making a pitiful percentage in world trade.

    Would love to hear your theory, Ray.

    A picture is worth a thousand words. Here are some pictures taken by somebody in 1978/79, before Deng’s reform started:

    1978 Guangzhou
    1978 Taiwan
    1979 Japan

    Some key points in my observation: clothes, automobiles on road, people’s expression.

    Arguably China may directly make less than many believe in plugging itself into the world trade system. However, through being a part of the world trade system, Chinese certainly have changed the mindset and improved the overall productivity, especially total factor productivity.

    I remember Biden stating that China own just 1 percent of US financial assets.

    Last year, the Fed overtook China as the largest holder of US treasuries. Unlike China through years of hard work and capital accumulation, the Fed did that by simply creating more USD out of the thin air.

    In the commonly known tale of 2 economists who ate each other’s excrement and created $100 million GDP each, a way to ascertain the value of $200 million GDP being created is some outsiders accepting the valuation and being a part of the exchange system.

    China may hold relatively little financial assets in the Western world, however China serves an important role in the valuation discovery. In other word, in a way, China gives USD value. In my opinion, this will become more apparent down the road.

  47. January 2nd, 2012 at 11:59 | #48

    Ha, YinYang gave the classic short answer. If all developing countries did the same, would we have the same result?

  48. January 2nd, 2012 at 13:01 | #49

    I am actually here to learn too hence I am using the tactics抛砖引玉 to see if I can get somebody to chip in. Anyway, I like your analogy of using alien as an observer. I think this comparison would again raise the issue of currency or rather exchange rate. I do agree that the average Chinese actually have healthy consumption. And in term of overall consumption China actually exceed the US in most categories. However, if you compare their GDP it is about $15 trillion vs $6 trillion (Beginning 2012). Even using the PPP calculation China’s GDP will only exceed that of the US in 2015 the earliest.

    The health care example you use, which is almost 20% of US GDP compare to only 5% of China showed the different of both countries very well. However, I believe to have universal coverage China would need to spend around 10% of GDP on health care. Health care is one area that the US and China need serious reform on. Another great difference is on the makeup of the economy. In the US it is 70% service while it is less than 40% in China.

    I will use an even simpler example to show why the US economy is so much bigger than China today. If you have a cheap $7 hair cut in a US barber shop, does it mean that it is worth 6 times as much as a RMB7 hair cut in China? The reason is as I have stated in my previous writings, US MNC are much more numerous and competitive than Chinese’s one. This is why the US$ is 6 times that of the RMB. Chinese companies, and even individuals have to face enormous barriers to purchase assets or start operation in the west. A lot of the trade barrier is man-made. So you are right to point out that China’s economy is seriously under rated. However, does this mean the RMB is under value? Frankly, I think this is a faux question because devaluation or appreciation will benefit a firm or country in short term only. In the long run, the material cost, labour cost, opportunity cost all adjust accordingly to the market. When US$ 1 = RMB 2 in the 1970s, the west simply force the Chinese government to change to a market acceptable rate.

    From what I see the Chinese economy is still woefully under developed compare to the US and the west. US economic value in farming and fishing is about the same as China’s. However, it employs approximately 400 million Chinese farmers while it employed less than 10 million US workers. This is the major reason why China’s per capita is so low. Using this standard, easily 390 million farmers in China are under employed! Urbanizing even 100 million would be a major undertaking. The 400 million represent half of China’s work force although in 1978 the figure is 90 percent. Basically, nearly half of Chinese work force and population is not plug in into the world economy although they have to compete worldwide for the produce they generate.

    In my view the only way to absorb this work force is for the Chinese economy to develop even further like Japan, Taiwan, Korea and HK. In lay man term, Chinese firm has to move up the value chain like their counterparts in developed countries. There is simply no free lunch. COMAC would have to compete smartly with Airbus, Boeing and Embraer. However, as the Chinese market developed it would also provide enormous business opportunity as it has done to MNC so it is not zero sum game. Much like how China becomes the largest market for GM and VW, and soon will be too for most Japanese and Korean car makers. What most naysayers are saying is that China can never make the transition because of the political system, education system etc. However, Japan, Taiwan, Korea and HK all make the transition when they are far more authoritarian than current Chinese government.

    China’s present economy might be backward but I think it is actually on more solid ground despite all the rumour about Chinese property bubble and local government debt. (I’ll leave this for future discussion) The Chinese government pop the stock market bubble in 2007. Most Western economies include a large sector known as the financial service sector. It consists of pension fund, hedge fund, individual investors who creates profit by trading in properties, currencies, commodities, produce and more. This is what caused the collapse of Lehman Brothers in 2008! And the western government still refused to regulate it. This is what concerned me the most and I believe will hit the market again in the not too distance future.

    PS: Thanks for sharing the picture link. My overall point is that the west still have an edge in their high end industries and China has to catch up. However, the west also have economical weakness they have created but refuse to fix.

  49. jxie
    January 2nd, 2012 at 14:53 | #50

    Ray, it’s always fun to read your comments. I actually agree with a lot of what you said.

    GDP is a popular means to measure total economic output. There are many questions as to what are included in the computation. For instance, if one of the couple loses his/her job and decides to stay home to take care of their children instead of relying child care service, the action in the current GDP computation will not capture the parental child care as a part of the GDP. But are they (the parental child care vs. child care by a 3rd party) largely the same economic activity? On the other hand, if a renter buys a house, and stops paying other for the rent, the missing rent in the overall GDP is replaced with “imputed rental of owner-occupied nonfarm housing”, like some virtual rent the house owners pay to themselves. In the US, that comes out as about 8% of the GDP.

    China uses a production-based method to compute GDP. Basically they look at what’re produced, not what’re consumed. Afterward, typically a year or two, China will also perfunctorily release a matching set of data computing GDP using an expenditure-based method that tend to come out a somewhat larger GDP, which personally call it BS. It’s pretty hard to find the match of China’s production-based categories, to the expenditure-based categories. For housing rental payment (in “PCE/housing and utilities”), if it’s paid to a company, at the production side it’s captured in the company’s profit, which will go to the category of Services/Financial Services and/or Services/Others. If it’s paid to individuals and the said economic transaction isn’t reported (e.g. cash transaction), likely it’s not captured; if it’s reported (yeah right), it will go to Services/Others. For the “virtual” housing rental payments (also in “PCE/housing and utilities”), there simply isn’t anything in the production-based ledger to match them.

    The point is China’s GDP, is already understated, before any PPP adjustment. Actually if you ask any Chinese bureaucrats, they will vehemently deny the validity of PPP. “What? I am not as poor as I claimed? Screw you!”

    China’s 2010 GDP (based on the above discussed production-based method) came out as about 40 trillion yuan. Using the WB “Atlas Method” (average 3-year exchange rate), it was about $6 trillion. The nominal GDP growth in the first 3Q in 2011 was about 19.3%. If the pace holds, the 2011 GDP will be about 48 trillion yuan. Using the year-end exchange rate, this will come out as $7.6 trillion (before the problem discussed above and PPP adjustment).

    Oh, remember the day when US$1was supposed to exchange for 2 yuans. The only problem was that you couldn’t find anybody who would be willing to change $1 for even 4 yuans with you. In terms of the perceived value, it was $/yen/etc. (“hard currencies”) > foreign exchange certificate > yuan. I think I have some foreign exchange certificate stashed somewhere…

  50. January 2nd, 2012 at 17:38 | #51

    Thanks. I like to write to dispel some myths masquerading as fact. I also like to see what other people has to add, intelligently of course.

    GDP computation is actually accounting, different countries sometimes use different accounting method. The general public in the west actually believe that China cooked their account book and over report the GDP while the truth is the opposite. One reason of the low figure of the Chinese GDP is that a lot of companies and individuals actually under report their income. To what extend is a calculated guess. China’s GDP also did not include HK and Taiwan. If you include that I am pretty sure greater China would have the largest PPP GDP in 2013 or so. Another reason of the low GDP figure is China’s high saving rate, it actually forego short term spurt growth but allow long term sustainable growth.

    I assume China’s nominal GDP would be around $5.9 billion for 2010 sing CIA’s figure. For 2011 it is $6.4 billion (my estimate). Can you tell me how you get the ($7.6 trillion) RMB 48 billion figure for 2011? I believe if the underground economy is included your figure would be closer. Actually if you use PPP, China GDP would already be $10 billion in 2010.

    That’s the problem with the US. When China needs to import they force China to revalue the RMB from 2 to 1, to 8 to 1. Today when China is exporting they want to switch the rule. I still remember when the Euro first came out it is designed to be 1 to 1 to the US$. Today it is 1.3, does it mean US export has jumped by 30% to Europe? So in reality the labelling of China as a currency manipulator to aid export is the biggest propaganda ever. Yen also rise from Y120 to Y80 today. Again, it did not help US export. The US public refuse to see that the real manufacturing competitor to them is the European and Japanese which actually have similar pay level to them. The fact that the US$ has lost around 30%-40% of its value to the Yen, Euro and RMB over the last ten years is lost on them as well.

  51. jxie
    January 3rd, 2012 at 08:34 | #52


    Q1-Q3’10 nominal GDP: Y26.9 trillion
    Q1-Q3’11 nominal GDP: Y32.1 trillion
    Real growth: 9.4%, nominal growth: 19.3%

    Assuming the nominal growth of 19.3% holds, on top of 2010 GDP Y40.1 trillion, the 2011 GDP is projected to be Y47.9 trillion. However, since the Q4 growth rate and GDP deflator likely are lower than the first 3 quarters, likely the final GDP will be closer to Y47 trillion than Y48 trillion.

    The other factor is exchange rate. At the year end it was $1:Y6.3, but the Atlas Method WB and others use is about $1:Y6.69 (3-year average). So at Y47 trillion, it will be reported as $7.0 trillion; at Y48 trillion, it will be reported as $7.2 trillion. Some use year-end exchange rate, it will be between $7.5 trillion and $7.6 trillion.

    No, the numbers don’t include underground economy, which I have no clue the size, or any upward adjustment to fit the US standard expenditure-based method. They certainly are not PPP numbers.

  52. January 3rd, 2012 at 13:59 | #53

    I like to think of GDP as a burning candle. The more candles you can burn in a given year, the higher the GDP. Trade encourages more competition and has the effect of wind on a candle, obviously not too strong as to put out the fire, but strong enough with more oxygen to accelerate the burning.

    In my view, China’s primary benefit from global trade comes in the form of experience. The experience in building and running a state-of-the-art shoe factory to the new Intel 65nm fab in Dalian can be applied elsewhere – into non-export industries too. Trade accelerates China’s experience in securing and managing supply chains, to efficient allocation of financing, and to sound economic planning and policies.

    That experience fosters more competition and enables more value creation.

    Over time, the candle gets fatter with the flame getting bigger.

  53. LOLZ
    January 4th, 2012 at 04:58 | #54

    Ray :
    I still remember when the Euro first came out it is designed to be 1 to 1 to the US$. Today it is 1.3, does it mean US export has jumped by 30% to Europe? So in reality the labelling of China as a currency manipulator to aid export is the biggest propaganda ever.

    Well, to be fair, last week the US avoided calling China “currency manipulator”, while it came close to calling Japan one for the later’s efforts to lessen the value of Yen.

    If you look at the history of Yuan/USD you will find that in the last 5 years the value of the Yuan dropped by close to 20% (7.75 Yuan/USD in Jan 2007 and 6.3 Yuan/USD Jan 2012). Yet the trade deficit between the two nations certainly didn’t diminish by 20%. The argument that some single magical solution (in this case currency) can suddenly solve US’ trade deficit, let alone overall economic slump is therefore unrealistic and unlikely. By the same token, the Yuan/Euro ratio went from 11 in 2008 to 8.25 today, but Germany’s exports to China certainly didn’t drop by close to 30% during this time.

    What most US “experts” never mention are the reasons why do countries like Japan and Korea sell more to China than the US, although these nations face the same trade restrictions as the US while their currencies have actually rose against the Yuan while the US’ dropped. Methinks US companies are still only thinking about exporting from China and make money of the US consumers, rather than go through the trouble and try to sell US goods in China.

  54. January 4th, 2012 at 08:34 | #55

    Thanks for the link. I believe these are the most accurate figures regarding China’s GDP. However, I won’t be surprised with the CIA or IMF using $6.4 trillion as the 2011 GDP of China.

    Interesting analogy with the candles. For me, I usually explain GDP as the sum people doing economic activities. Basically, what you do everyday that involved dollar and cent got counted.

  55. January 4th, 2012 at 08:44 | #56

    I think you meant to say the Yuan increased by 20% compare to 2007.

    Despite the rise of the RMB, Germany and France export also increased significantly. The fact is US export to China also increased but is offset by the bigger increased of import. A big part is due to US own export restriction forcing Chinese companies to buy from others.

    Another problem is that US MNC is using China as a manufacturing and export base as well. Basically, these export and sales are counted as China’s, a serious distortion in my opinion. It makes China looked better but made US looked worse than it is.

    My analysis is that, the US general public did not spend their money wisely. How’s does paying for tanning, cosmetic surgeries, eat out daily, burning many time more gas per capita than anybody else going to be positive for the economy in the long run? The US govn’t all the way from federal down to the city council spend money like there’s no tomorrow too.

    No republican candidate dare to mention the energy import deficit of the US economy. In the region of $500 billion? Of course cheap gas drive the US economy in a way. Same with what cheap coal did for China. But the more efficient you are the better it is.

  56. January 4th, 2012 at 09:35 | #57

    Back to your question why an economy on its own government spending and domestic consumption alone not generating as big a GDP, the answer has to be trade with someone who has more experience which helps bring your experience along faster. So, back to my analogy if you will – trade has the effect of the wind on the candle. Hence, I am generally pro free trade. And that has benefited China greatly despite China’s paltry share of 2-3% in the value chain.

  57. jxie
    January 4th, 2012 at 11:21 | #58

    Ray :
    I won’t be surprised with the CIA or IMF using $6.4 trillion as the 2011 GDP of China.

    Not gonna say never, but I will be extremely shocked if that’s their final number. $6.4T will mean likely close to -30% GDP real growth in Q4. In Yuan term:

    [2011 GDP] = [2010 GDP] * (1 + [Real GDP Growth]) * (1 + [GDP Deflator])

    Many people (including “economist” Larry Lang, go figure) overlook the “GDP Deflator”. In the first 3 quarters, the GDP Deflator was at 9+%, quite a bit higher than CPI. Massaging the GDP deflator is a way how China has been understating its real GDP growth in good time, and overstating it in bad time — since there has been more good time than bad time, even the impressive real GDP growth of China has been understated, but that’s another story.

    All of the GDP data, in one form or the others, come from National Bureau of Statistics (NBS). The process in 2012 will roughly go this way:

    1. In late January or early February, NBS will release the preliminary 2011 GDP data, which I expect to be between Y47T and Y48T. Since the Q4 growth and inflation had come down quite a bit, there may be a slim chance that the final number is slightly less than Y47T.

    2. Before the folks at WB/IMF/CIA complete their calculation, many commentators will use the year-end exchange rate of Y6.30:$1 and call the Chinese GDP at $7.4T to $7.6T.

    3. Soon somebody in WB/IMF/CIA will complete their calculation (likely IMF/CIA share the WB number). The base exchange rate in “Atlas Method” (3-year average) is about Y6.69:$1. They will call the Chinese GDP $7.0T to $7.2T.

    4. The number will show up in the Wiki pages.

    5. In July, NBS will release the first revised number. Historically the number is slightly larger than the preliminary number. WB will capture it, but CIA/IMF won’t, which is why in the Wiki page, the WB GDP is a bit bigger.

  58. January 4th, 2012 at 13:20 | #59

    Yes, I totally agree with your conclusion. That’s how Japan became the 2nd largest economy in 1968, a mere 23 yrs after WWII. During WWII, its economy was behind UK, France, Germany etc.

    Despite the small profit China got, it still employ anywhere from 30-40 million workers. Although, their yearly wage is probably around $3000-5000 (depending on region).

  59. January 4th, 2012 at 13:30 | #60

    In 2009 it is around $4.9 trillion, 2010 $5.9 trillion. I am the one who is pleasently surprised. I was expecting 2011 to be around $6.4 trillion due to a worldwide slow down, not to mention the rediculous price of gold and oil. (commodities price seems to have softened)

    You may say I am always prepared for the worst. Frankly, China’s figure has beat my expectation for the past ten years or so. So basically we can conclude that China’s economy increased by 1 Canada in 2011. I was expecting an increase of 1/3 or at most 1/2 Canada.

  60. jxie
    January 4th, 2012 at 14:08 | #61

    Exactly! Another amazing dataset:

    In 2011, the US federal government tax revenue is expected to be (based on a recent private source, not the 2/11 Obama government projection, which put the tax revenue a bit higher in both categories):

    $0.8T social security tax
    $1.5T personal/business/other federal tax

    In the same year, the Chinese central government tax revenue is expected to be:

    $0.38T social security trust fund contribution (it’s not called a “tax”)
    $1.67T personal/business/other tax

    In the case of the US, it spends all the $2.3T (with nothing other than the government IOUs created out of thin air going to the “Social Security Trust Find”), plus another $1.4T new debts, total at about $3.7T.

    In the case of China, it spends about $1.67T (may run a small surplus or deficit either way). It will stash away and invest the $0.38T social security trust fund contribution after payouts.

  61. jxie
    January 9th, 2012 at 18:00 | #62


    The 2nd half of this amazing dataset is the military spending. The US FY’11 military spending is at $708B, and the Chinese military spending budget is at $95.4B (Y601B). Both numbers don’t include some non-core off-budget spending.

    11 years ago in 2000, the US federal government tax revenue was:

    $0.7T social security tax
    $1.3T personal/business/other federal tax

    In that year, the military spending was $313B. In 11 years, the nominal core tax base (not including SS tax) had grown 15% in nominal term, while the military spending had gone up 162%, to a mind-boggling 47% of the core tax base.

  62. January 9th, 2012 at 20:39 | #63

    Exactly, no sane person would think that is reasonable and some republican think defence spending is still not enough.

  63. zack
    January 9th, 2012 at 22:43 | #64

    remember, these are the very same kinds of ppl who bitch and moan when Chinese goods, being substantially lower priced, manages to raise the living standards of the American people. Yet no, the Chinese bogeyman is frequently invoked so as to distract blame from the corporate sponsors who were themselves instrumental in shipping all them jobs overseas, and not necessarily to China either.

  64. Charles Liu
    January 10th, 2012 at 14:01 | #65

    Exactly it’s not China, but our own homeboy CEOs and decision makers who end up patting themselves on the back with millions and millions in bonus.

  65. January 12th, 2012 at 15:31 | #66


    Continuing with our balance of trade discussion, let’s not forget all the $ Chinese students are pumping into the Western educational institutions.

    See, e.g., http://behindthewall.msnbc.msn.com/_news/2012/01/11/9679479-chinese-applications-to-us-schools-skyrocket

  66. jxie
    January 16th, 2012 at 19:26 | #67

    Preliminary 2011 GDP came out as Y47.2 trillion. At year-end exchange rate, it was $7.5 trillion; with Atlas method (3-year average exchange rate), it was $7.1 trillion.

  67. January 17th, 2012 at 08:02 | #68

    You are fast, this is the 1st day the 2011 GDP is announced!

  68. jxie
    January 31st, 2012 at 20:08 | #69

    South Korea will invest a part of their reserves in China, see this. In the same article, it also mentioned Japan, Thailand and Nigeria that have done so.

  69. March 29th, 2016 at 22:28 | #70

    Finally an admission from WSJ that accusations of Chinese dollar manipulations for the last decade or so have all been much ado about nothing.

    Of course, it’s taken a Trump to force WSJ to admit to this – http://www.wsj.com/articles/the-trump-sanders-china-syndrome-1459291205

    Presidential candidates Donald Trump and Bernie Sanders, with a phalanx of lawmakers behind them, continue to bash China as a “currency manipulator.” Both men claim that Beijing is engaged in a permanent strategy to keep the yuan weak and prop up its trade surplus. But the reality was never that simple, and the charge is ludicrous at present.

    Beijing began pegging its currency to the U.S. dollar over two decades ago, as part of its plan to integrate the Chinese economy into a global marketplace in which transactions were overwhelmingly priced in dollars. It stuck by this strategy even during the height of the Asian financial crisis, in 1998, when much of the world was expecting it to devalue. This earned it great praise from the U.S. government. “China, by maintaining its exchange rate policy,” pronounced President Clinton’s Treasury Secretary Robert Rubin, “has been an important island of stability in a turbulent region.”

    But once market pressures reversed, and capital began flowing into China, U.S. lawmakers suddenly decided that currency stability was bad: They wanted the yuan to rise, while China continued to keep it fixed. In a 2006 op-ed for this newspaper, Sens. Charles Schumer and Lindsey Graham declared that “one of the fundamental tenets of free trade is that currencies should float.” Such a tenet, remarkably, was unknown to either Adam Smith or John Maynard Keynes, neither of whom ever supported any such thing.

    Fast forward to 2016, and capital is now flowing out of China at a prodigious rate. In an effort to slow the resulting fall in its currency, China’s central bank has been selling vast amounts of dollars and buying up yuan. At $3.2 trillion, China’s reserves still seem enormous. But they are down $790 billion from their 2014 peak, and $325 billion in the past four months.

    At this pace of decline, China’s reserves will fall to $2.8 trillion in July. To put this in perspective, China, using the International Monetary Fund’s framework for reserve-adequacy measurement, needs to hold between $2.8 trillion and $4.2 trillion in reserves to safeguard against a balance-of-payments crisis. Once reserves fall below an adequate precautionary level, China is at risk of being unable to pay for essential imports or its dollar debts. The IMF estimate could be overly cautious, given China’s relatively low level of external debt, but it could also be too sanguine in that some significant portion of China’s reserves, estimated to be around a third, is believed to be tied up in nonliquid assets—and unavailable in a crisis. These include China’s capital commitment to the new Asian Infrastructure Investment Bank.

    American charges that China’s currency was massively undervalued were based on the flawed assumption that capital would want, indefinitely, only to get into China and not out. It’s a sure bet no one in Washington will be calling for China to float its currency again anytime soon.

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