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China Unbalanced
6-18-2013
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How to see if a currency is undervalued/overvalued?
Price Big Mac in RMB (---------------------------- - 1 )* 100 Price Big Mac in US *e Where e=RMB/$
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How to generalize this?
Price of Basket of goods in RMB vs.
Price of Basket of goods in US * e
• Where e=RMB/$
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What about ULCs?
• What about differences in costs?
• Wus/MPL US vs. Wchi/(e*MPLChi)
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China Unbalanced
Diego Comin
HBS
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China unbalanced
• A case with many different angles
– An old growth strategy
– The New Growth strategy
– More pieces to construct the framework
– China-US relationship
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The Old Growth Strategy
• Gain access to international markets through – WTO
– Surplus labor in rural areas (low urban wages)
– Low exchange rate
• To maximize employment
• Foster accumulation and technology transfer through FDI
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A turning point?
• With recession China saw
– Decline in exports
– Growth deceleration
– Increased unemployment
– Signs of unrest
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New Growth Strategy
• Wen Jibao new growth model to alleviate tensions in the system based on: – Growth of domestic demand to rely less on Net Exports – Reduce regional inequality (G directly mostly to rural
areas) – An increasing military power to secure commodities
needed to satisfy domestic demand – More efficient, more technology-intensive – Still controlled by the CCP
• But exports keep growing (a lot) • Will the exchange rate policy adjust to the new
strategy? • Will the PBOC liberalize the banking sector?
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The framework
Wages (in $)
Competitiveness =
Productivity
Accumulation Efficiency Technology
Adoption
Openness / Policies
Institutions / Markets
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China-US relationship
• Lost of manufacturing jobs…
• … some going to China
• Large trade deficit…
• … while China has a growing surplus
• China accumulates US bonds…
• … while the US runs a large deficit
• And senator Schumer (DNY) complains about the exchange rate
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This reminds me of
Darling, you got to let me know
Should I stay or should I go?
…
If I go there will be trouble
And if I stay it will be double
So you gotta let me know
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