Friday, May 18, 2007
With the Strategic Economic Dialogue between the US and China rapidly approaching, the newswires are heavy with stories on all things Chinese. US lawmakers file a petition with the Administration to get China to reval (uh, fellas, what do you think Paulson [and Snow before him] has been doing?) PBOC governor Zhou says the RMB exchange rate will increasingly reflect market forces (a statement as reliable as "the cheque is in the mail.")
Meanwhile, SAFE has slipped Blackstone a cheeky $3 billion for private equity investment- could there be any clearer statement of China's intent on moving up the risk curve (and why it is so tough to be structurally bearish of risky assets?)
Anyhow, it seems reasonable to expect more plaintive requests from the US for the Chinese authorities to "speed up the pace of the currency reform process", aka let USD/RMB plunge. The Chinese willingness to do so, of course, ultimately depends on how resilient the export sector is. Now, with the trade surplus rising at exponential speed, it would seem pretty obvious that Chinese exporters are uber-competitive at current FX levels.
But are they? Mingchun Sun of Lehman Brothers has written an article suggesting that Chinese exporters may not be as competitive as you think, simply because they enjoy a number of artificial advantages:
* Subsidized energy prices
* Subsidized prices for other resources, such as land, water, and minerals
* Low environmental standards and enforcement
* Lax labour legislation and enforcement
* Lax protection of intellectual property rights: why spend on R&D when you can just steal someone else's idea?
* Large tax exemptions and rebates for exporters (a subsidy by any other name would smell as sour...)
Now, there's not much that the US can or should do about some of these, while others represent legitimate points of contention- particularly the latter two. Stephen Roach thinks that enforcing IP would be an "easy win" for China, or at least a legitimate source of complaint for the US.
Others perhaps aren't so sure.
Regardless, Sun's point is that China is focusing on all of the above, as well as the level of the RMB. And that could mean that those of us waiting for a cessation of intervention and a legitimately market-driven exchange rate will be waiting a long time.