Trade between China and the U.S.

The U.S. runs a trade The U.S. runs a trade ““deficitdeficit”” with with China.China.

- U.S. sends $$, China sends goods.- U.S. sends $$, China sends goods.

- Chinese government takes the - Chinese government takes the dollars from exporters in exchange dollars from exporters in exchange for Yuan (RMB), which is priced for Yuan (RMB), which is priced artificially low.artificially low.

The value of the $$ artificially high, The value of the $$ artificially high, at least against the Yuan.at least against the Yuan.

The iPhone: The iPhone: ““Made in ChinaMade in China”” What What sensesenseis that when less than 4% of the is that when less than 4% of the revenue goes there? Trade stats are revenue goes there? Trade stats are weak, but still clear that China weak, but still clear that China dominates in US relations.dominates in US relations.

The total trade is less than is generally believed. Federal Reserve Bank, SF, 2011; of the 2.7% of GDP in trade with China, 1.2% is actually Made in China content.

Consequence?Consequence?

China pays a premium for the $ to China pays a premium for the $ to encourage us to buy more—it encourage us to buy more—it forces development in China (an forces development in China (an implicit tax on their citizens). How implicit tax on their citizens). How much?much?

1996: $100 B foreign assets1996: $100 B foreign assets

2001: $200 B foreign assets2001: $200 B foreign assets

2011: $3.2 T foreign assets (half $)2011: $3.2 T foreign assets (half $)

China and Japan Own More China and Japan Own More than $1 Trillion U.S. Debt than $1 Trillion U.S. Debt EachEachYield down from 5% to 1.5%Yield down from 5% to 1.5%

Where do the $$ go?Where do the $$ go?

Government of China invests Government of China invests heavily in conservative assets, heavily in conservative assets, such as U.S. Treasury bonds.such as U.S. Treasury bonds.

The U.S. runs big deficits, The U.S. runs big deficits, government of China buys the government of China buys the U.S. debt, sending back the $$ for U.S. debt, sending back the $$ for goods bought in U.S.goods bought in U.S.

Why not buy U.S. companies? Why not buy U.S. companies? Politically not acceptable.Politically not acceptable.

Revalue the Yuan?Revalue the Yuan?

Critics say China “manipulates” the Yuan. Critics say China “manipulates” the Yuan. True, and the Swiss manipulate the Franc True, and the Swiss manipulate the Franc and the Japanese the Yen.and the Japanese the Yen.

So what if the value of the Yuan is “too low”?So what if the value of the Yuan is “too low”?

Double its value. In $ terms that means Double its value. In $ terms that means average factory wages go from $300 per average factory wages go from $300 per month to $600 a month. Oral-B toothbrush month to $600 a month. Oral-B toothbrush ($30) is ($30) is ““Made in ChinaMade in China”” for $3 revenue in to for $3 revenue in to China assembler. Make that $6. So what?China assembler. Make that $6. So what?

Are those jobs coming back to America? Are those jobs coming back to America?

Maybe they go to Vietnam.Maybe they go to Vietnam.

Where is the value?Where is the value?Not in assembly work.Not in assembly work.

Consequence of China Policy

Undervalued RMB (tied to $) hurts free-floating Undervalued RMB (tied to $) hurts free-floating currency competitors—Japan, Korea, Indiacurrency competitors—Japan, Korea, India

Undervalued RMB means Chinese households Undervalued RMB means Chinese households earn less—subsidizing producers of exports.earn less—subsidizing producers of exports.

Low interest rates in China also mean Low interest rates in China also mean households subsidize loans to borrowers in households subsidize loans to borrowers in China.China.

Poor performing banks in China subsidized by Poor performing banks in China subsidized by large spread between interest paid to savers large spread between interest paid to savers and interest charged to borrowers.and interest charged to borrowers.

Thrift Pays: Up to a PointThrift Pays: Up to a Point

The people of China, who are poor, save The people of China, who are poor, save perhaps 20-30% of their income.perhaps 20-30% of their income.

And the government saves foreign exchangeAnd the government saves foreign exchange Effective savings rate nears 50%. Interest Effective savings rate nears 50%. Interest

rate paid is very low (subsidy to borrowers).rate paid is very low (subsidy to borrowers). Forced economic development.Forced economic development. Life is better, but could be even better: Life is better, but could be even better:

Domestic consumption should rise.Domestic consumption should rise.

World Champion Savers: Capital Formation Exceeds Consumption

What Does It Mean to Say China Is a Socialist Country?

Will the Yuan Become a Will the Yuan Become a World Currency?World Currency?

Not Likely very soonNot Likely very soon

In China Savings exceeds In China Savings exceeds InvestmentInvestment

Hence, a surplus of cash.Hence, a surplus of cash.

Suppose you have a lot of Yuan.Suppose you have a lot of Yuan.

What do you do with it?What do you do with it?

Good luck finding stable Good luck finding stable investments in China. The investments in China. The currency not all that useful.currency not all that useful.

The TensionThe Tension

The average American worker The average American worker ““owesowes”” China about $11,000. China about $11,000.

Chinese people know the Chinese people know the government is hoarding money that government is hoarding money that could be spent on education, roads, could be spent on education, roads, pollution control, …pollution control, …

China will not subsidize U.S. deficits China will not subsidize U.S. deficits forever (especially at $1 Trillion/yr.)forever (especially at $1 Trillion/yr.)

Is there a Solution? We may Is there a Solution? We may have each other by the have each other by the throat.throat. What can China do? Dump the dollars?What can China do? Dump the dollars? They need US to keep millions working They need US to keep millions working

in factories—cut that off and serious in factories—cut that off and serious economic and political problems.economic and political problems.

Spend more at home? Managed growth.Spend more at home? Managed growth. Spend more in other countries? Power.Spend more in other countries? Power. U.S. needs to get its fiscal house in U.S. needs to get its fiscal house in

order. Stop endless deficits. Does any order. Stop endless deficits. Does any political leader address that?political leader address that?