Category Archives: China

The Mommy Wars Go International

Amy Chua at Wall Street Journal:

A lot of people wonder how Chinese parents raise such stereotypically successful kids. They wonder what these parents do to produce so many math whizzes and music prodigies, what it’s like inside the family, and whether they could do it too. Well, I can tell them, because I’ve done it. Here are some things my daughters, Sophia and Louisa, were never allowed to do:

• attend a sleepover

• have a playdate

• be in a school play

• complain about not being in a school play

• watch TV or play computer games

• choose their own extracurricular activities

• get any grade less than an A

• not be the No. 1 student in every subject except gym and drama

• play any instrument other than the piano or violin

• not play the piano or violin.

I’m using the term “Chinese mother” loosely. I know some Korean, Indian, Jamaican, Irish and Ghanaian parents who qualify too. Conversely, I know some mothers of Chinese heritage, almost always born in the West, who are not Chinese mothers, by choice or otherwise. I’m also using the term “Western parents” loosely. Western parents come in all varieties.

All the same, even when Western parents think they’re being strict, they usually don’t come close to being Chinese mothers. For example, my Western friends who consider themselves strict make their children practice their instruments 30 minutes every day. An hour at most. For a Chinese mother, the first hour is the easy part. It’s hours two and three that get tough.

Despite our squeamishness about cultural stereotypes, there are tons of studies out there showing marked and quantifiable differences between Chinese and Westerners when it comes to parenting. In one study of 50 Western American mothers and 48 Chinese immigrant mothers, almost 70% of the Western mothers said either that “stressing academic success is not good for children” or that “parents need to foster the idea that learning is fun.” By contrast, roughly 0% of the Chinese mothers felt the same way. Instead, the vast majority of the Chinese mothers said that they believe their children can be “the best” students, that “academic achievement reflects successful parenting,” and that if children did not excel at school then there was “a problem” and parents “were not doing their job.” Other studies indicate that compared to Western parents, Chinese parents spend approximately 10 times as long every day drilling academic activities with their children. By contrast, Western kids are more likely to participate in sports teams.

Maureen O’Connor at Gawker:

This weekend, I came across “Why Chinese Mothers Are Superior” by Amy Chua. Since I have a Chinese mother, I assembled my face into a self-righteous smirk and began to read. But—woe is me!—my Chinese mother’s a fraud.For Amy Chua revealed that my Chinese mother (maiden name: Lily Chua) failed her ethnicity by failing to slave-drive me with the “screaming, hair-tearing explosions” necessary for raising a superior child. Consequently, I am not a math genius who performs open heart surgery and violin concertos simultaneously, but a blogger who spends her days contemplating Katy Perry’s breasts. I learned arithmetic not by “every day drilling,” but the way every red-blooded American does, by typing equations into my TI-86 during marathon sessions of Drugwars. (Maybe I got the “sneaky Chinaman” gene instead of the “obedient Chinese daughter” one?) And my mother and I never had showdowns like this:

Back at the piano, Lulu made me pay. She punched, thrashed and kicked. She grabbed the music score and tore it to shreds. I taped the score back together and encased it in a plastic shield so that it could never be destroyed again. Then I hauled Lulu’s dollhouse to the car and told her I’d donate it to the Salvation Army piece by piece if she didn’t have “The Little White Donkey” perfect by the next day. […] When she still kept playing it wrong, I told her she was purposely working herself into a frenzy because she was secretly afraid she couldn’t do it. I told her to stop being lazy, cowardly, self-indulgent and pathetic.

“The Little White Donkey,” just like Amy Chua’s husband, a stupid caucasian ass named Jed who lacks her superior Asian childrearing skills:

“Everyone is special in their special own way,” I mimicked sarcastically. “Even losers are special in their own special way. Well don’t worry, you don’t have to lift a finger. I’m willing to put in as long as it takes, and I’m happy to be the one hated.”

Reading Amy Chua’s article, I am sad as a broken fortune cookie. If only my Chinese mother had humiliated me in newspaper articles that would plague my dating life forever—maybe I, too, could have performed piano solos in Carnegie Hall, like Amy Chua’s daughter did, according to Amy Chua. How unlucky I am: I have never hated my mother.

My only solace: that Irish-American father’s inferior academic genes came packaged with superior genes for drinking.

That said, Amy Chua appears to have absorbed a few American parenting skills, like the incessant upper-class need to one-up every other upper-class parent in the tri-state area. Mommy bragging: The virtue that unites us all.

Ann Hulbert at Slate:

Chua’s mindset and methods—bolstered by faith in Chinese family tradition—pose a useful challenge for an era haunted by a helicoptering ethos as hard to shake as it is to like. Here is an alternative to the queasy hypocrisy of typical hyperparents, buffeted by shifting expertise that leaves them anxious about overpressuring even as they push. Chua breaks through all that. She is a crusader invigorated by practicing what she preaches: the arduous work she believes necessary to do anything well, child-rearing included. Her exacting program is incredibly time-consuming and burdensome, for her as much as her kids, and is bound to look outlandish to others. (While teaching, writing her second book, and traveling constantly, Chua types up elaborate practice instructions, which freak out one of her law students when he stumbles on them—and which are to be found on pages 163-165.) But precisely because Chua slaves away as hard as her girls do, one thing her program is not is guilt-inducing. In the end, her ordeal with Lulu teaches Chua humility and proves her daughter’s very healthy autonomy—and inspires next to no regrets.

Let’s hope a furor over the book doesn’t change all that. Boris Sidis lived to regret his boastful diatribe, or at least his wife did, lamenting poor Billy’s interlude in the spotlight, which complicated an already rocky transition to adulthood that ended in a lonely retreat. “Educators, psychologists, editorial writers and newspaper readers were furious” with her husband, Sarah Sidis wrote. “And their fury was a factor in Billy’s life upon which we had not counted.” Norbert Wiener, who battled depression to become the future founder of the field of cybernetics, was devastated as a teenager when, browsing in a magazine, he learned that his father, Leo, had claimed his son’s successes as his own, while blaming failures on the boy. Proselytizing and prodigy-raising are a fraught mix.

In a coda to her book, Chua loosens up, describing how she gave her daughters the manuscript and welcomed them as collaborators. The wise girls are wary about getting roped in. “I’m sure it’s all about you anyway,” Lulu says. As they hunker down to criticize, and make her revise, revise, revise, Sophia, now 17, issues a warning well worth keeping in mind if, or when, the mommy wars erupt over Chua’s provocative portrait. “It’s not possible for you to tell the complete truth,” Sophia tells her mother. “You’ve left out so many facts. But that means no one can really understand.” Let’s not forget that it’s only how the girls themselves understand their mother’s methods that really counts in the end.

Blake Eskin at New Yorker:

It did not escape my attention that “Jewish” was not on Chua’s list, and furthermore that her softie foil in the essay was her husband, who is identified as Jed—and is presumably why their daughters can be intimidated with threats of withheld Hanukkah presents. (Minimal Internet research reveals that Jed is, like his wife, a Yale Law School professor and a published author; his last name is Rubenfeld.) Most American Jews are comfortably assimilated, although Chua could probably forge a Sino-Soviet alliance with a few Russian-speaking recent arrivals. But even in the early twentieth century, when Jews were known for toughness (see Siegel, Bugsy; Rosenbloom, Slapsie Maxie) the stereotypical Jewish mother used what Joseph Nye would call soft power, wrapping specific and restrictive ideas about her children’s future in a nurturing bosom. This blend of stubborn guidance and smothering affection has produced successful doctors, lawyers, and engineers. It has also inspired characters from Sophie Portnoy to Estelle Costanza (who, though technically not Jewish, qualifies, too), envisioned by creative children scarred by their childhoods.

Some children, Chinese and otherwise, may respond well to “Chinese mothering,” and I hope for their sake that Chua’s two daughters are among them. But it’s simply not possible that every child becomes “the No. 1 student in every subject except gym and drama.” And not every child is well served by forcing them to try. Some children will fail with tragic consequences, others, if we are more fortunate, with literary ones, finding humor and meaning in stories of suffering. In a perfectly plotted world, one of Chua’s girls will, according to plan, become the concertmistress of a world-class orchestra, and the other will avenge herself by novel or memoir—and sell more books than her mother and father combined.

Julianne Hing at Ta-Nehisi Coates’ place:

Chua’s tone is arrogant but filled just the same with bullseye observations, and I spent a long time trying to untangle the sincere from the deadpan. So much of the piece is an accurate reflection of a specific brand of hard-ass Asian parenting. But would other people be able to sense the gleeful embellishments in her piece, the way she seems to relish insulting and threatening her kids to get them to perform? And then I doubled back: was I being too charitable to read it as exaggeration?

Meanwhile, on the other side of the Internet, one of my aunties sent the piece around to other women in my family last night. “Thought you might enjoy this,” my auntie wrote to other mothers. “Were you raised by a Chinese mother … or are you perhaps one yourself?”

My mother was horrified at the piece, called it embarrassing and terrible and outrageous, said that she resented the fact that Chua used the term “Chinese mother,” even with the disclaimers at the opening that not all Chinese mothers deserve the title, and some non-Chinese mothers could be admitted to the club of harsh, ultra-strict parenting.

Like Chua, my parents sacrificed a great deal to raise me and my siblings–they make for great stories now that we’re all adults. My mom would hand us math workbooks to occupy us during car rides the way other parents hand their kids Pop Tarts or carrot sticks. She, like Chua, packed our violins in the trunk of the minivan so we could practice even while we were on vacation and forbade sleepovers and weeknight television well into my high school years. I struggled mightily with math and science and my mother would wake me up at 6 am on weekends so we could go over math drills together for hours. Letting me fail was not an option to her, though I occasionally wished she would have. Thanks to her, I didn’t.

All of this I recognize as love.

Tom Scocca at Slate:

There are many, many bizarre and debatable notions in the memoir extract that Yale law professor Amy Chua published in Saturday’s Wall Street Journal, in which she argued that screaming at one’s children to do drill work and depriving them of entertainment or social contact with their peers are the secrets to why Chinese people raise smarter and more successful children than regular decadent Americans do. A working-class Jamaican-immigrant mother, for instance—who would be an honorary “Chinese mother,” according to Chua—might be surprised to learn that good, hard parenting means spending a week at the piano, going “right through dinner into the night,” threatening and yelling at a seven-year-old girl to force her to learn a difficult piano part. Not everybody’s boss gives out flex time as readily as Yale Law does.

But mostly, as with so many child-rearing success stories, the biggest question Chua raises is: what makes you so sure you’ve succeeded? God bless Chua’s daughters, but according to some simple arithmetic and the pictures accompanying the Journal piece, they’re considerably younger than, say, 60. Or 40. Or even 25. There’s plenty of time yet to find out what fruit all those years of rigorous “Chinese” alpha parenting—no sleepovers with friends, Chua brags, no personally chosen extracurriculars, no musical instruments other than piano and violin (sorry, Yo-Yo Ma; your parents weren’t Chinese enough)—will really bear. Marv Marinovich wouldn’t let his son eat Big Macs, either. Discipline and high standards, all the way. “I don’t know if you can be a great success without being a fanatic,” was how he put it

Rebecca Greenfield at The Atlantic

Kate Zernike at The New York Times:

In the week since The Wall Street Journal published an excerpt of the new book by Amy Chua, a Yale law professor, under the headline “Why Chinese Mothers Are Superior,” Ms. Chua has received death threats, she says, and “hundreds, hundreds” of e-mails. The excerpt generated more than 5,000 comments on the newspaper’s Web site, and countless blog entries referring in shorthand to “that Tiger Mother.” Some argued that the parents of all those Asians among Harvard’s chosen few must be doing something right; many called Ms. Chua a “monster” or “nuts” — and a very savvy provocateur.

A law blog suggested a “Mommie Dearest” element to her tale (“No. Wire. Hangers! Ever!!”). Another post was titled “Parents like Amy Chua are the reason Asian-Americans like me are in therapy.” A Taiwanese video circulating on YouTube (subtitled in English) concluded that Ms. Chua would not mind if her children grew up disturbed and rebellious, as long as she sold more books.

“It’s been a little surprising, and a little bit intense, definitely,” Ms. Chua said in a phone interview on Thursday, between what she called a “24/7” effort to “clarify some misunderstandings.” Her narration, she said, was meant to be ironic and self-mocking — “I find it very funny, almost obtuse.”

But reading the book, “Battle Hymn of the Tiger Mother,” it can be hard to tell when she is kidding.

“In retrospect, these coaching suggestions seem a bit extreme,” she writes in the book after describing how she once threatened to burn her daughter’s stuffed animals if she did not play a piano composition perfectly. “On the other hand, they were highly effective.”

In interviews, she comes off as unresolved. “I think I pulled back at the right time,” she said. “I do not think there was anything abusive in my house.” Yet, she added, “I stand by a lot of my critiques of Western parenting. I think there’s a lot of questions about how you instill true self-esteem.”

David Brooks at the New York Times:

I have the opposite problem with Chua. I believe she’s coddling her children. She’s protecting them from the most intellectually demanding activities because she doesn’t understand what’s cognitively difficult and what isn’t.

Practicing a piece of music for four hours requires focused attention, but it is nowhere near as cognitively demanding as a sleepover with 14-year-old girls. Managing status rivalries, negotiating group dynamics, understanding social norms, navigating the distinction between self and group — these and other social tests impose cognitive demands that blow away any intense tutoring session or a class at Yale.

Yet mastering these arduous skills is at the very essence of achievement. Most people work in groups. We do this because groups are much more efficient at solving problems than individuals (swimmers are often motivated to have their best times as part of relay teams, not in individual events). Moreover, the performance of a group does not correlate well with the average I.Q. of the group or even with the I.Q.’s of the smartest members.

Researchers at the Massachusetts Institute of Technology and Carnegie Mellon have found that groups have a high collective intelligence when members of a group are good at reading each others’ emotions — when they take turns speaking, when the inputs from each member are managed fluidly, when they detect each others’ inclinations and strengths.

Participating in a well-functioning group is really hard. It requires the ability to trust people outside your kinship circle, read intonations and moods, understand how the psychological pieces each person brings to the room can and cannot fit together.

Laura Donovan at The Daily Caller:

In a letter to the New York Post, Sophia Chua-Rubenfeld responded to the critics of her mother’s recent Wall Street Journal piece, “Why Chinese Mothers Are Superior,” which details the numerous restrictions Chua imposed upon her two daughters during their childhood. Among many other things, Chua has been blasted for forbidding her daughters from attending sleepovers and calling one of her girls lazy, cowardly, self-indulgent, and pathetic for playing a piano piece incorrectly.

In “Why I Love My Strict Chinese Mom,” Chua-Rubenfeld says outsiders don’t know what her family is actually like.

“[Outsiders] don’t hear us cracking up over each other’s jokes,” Chua-Rubenfeld wrote. “They don’t see us eating our hamburgers with fried rice. They don’t know how much fun we have when the six of us — dogs included — squeeze into one bed and argue about what movies to download from Netflix.”

Though it was “no tea party” growing up under all Tiger Mother’s rules, Chua-Rubenfeld claims to be more independent as a result of her rigid upbringing.

“I pretty much do my own thing these days — like building greenhouses downtown, blasting Daft Punk in the car with Lulu and forcing my boyfriend to watch ‘Lord of the Rings’ with me over and over — as long as I get my piano done first,” Chua-Rubenfeld wrote.

Chua-Rubenfeld may have thicker skin than her mother’s critics think. Chua has received lots of flak for rejecting the “not good enough” birthday cards her daughters made, but Sophia writes that she wasn’t all that offended.

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And The Silver Medal Goes To China… Or Does It?

Heather Horn at The Atlantic with the round-up

Ryan Avent at DiA at The Economist:

CHINA has, at long last, surpassed Japan in terms of nominal GDP, making the Chinese economy the world’s second largest. Second quarter output in China came in at $1.337 trillion, to Japan’s $1.288 trillion (Japan’s output was larger in the first quarter; for comparison, America’s second quarter nominal output was $3.522 trillion). The shift is sure to be widely discussed and widely misinterpreted. There are a few key things to mention.

First, while Chinese growth has been truly impressive in recent decades, the rapid overtaking of the Japanese economy also reflects years of disappointing growth there. This story is as much about Japan’s travails (and the risk to other rich economies facing a descent into Japanese-style stagnation) as it is China’s boom.

Second, China remains a very poor country in per capita terms. It uses over four times as many citizens as America to produce less than half America’s output. That’s a bit misleading—urban productivity in China doesn’t lag America by quite as much but is offset by the limited growth contribution of China’s hundreds of millions of rural poor. Still, the total output figures encourage observers to vastly overstate the developmental level of the Chinese economy.

Joshua Keating at Foreign Policy:

The world economy reached a major milestone Monday when China officially became the world’s second-largest economy, displacing Japan, which has held the title for more than four decades. The recognition of China’s new status came after the Japanese government reported that, after a quarter of slow economic growth, the country’s annual gross domestic product (GDP) was estimated to be around $1.28 trillion, slightly below China’s $1.33 trillion. Do all countries use the same method for estimating GDP?

They’re supposed to. The System of National Accounts (SNA), a set of guidelines developed jointly by the United Nations, the European Commission, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development, and the World Bank, specifies the methods by which countries measure the size of their economies.

There are two main methods for estimating GDP. One involves looking at production. This includes the value of the goods produced by all the firms in the country, the added value of government work projects, and — particularly in developing countries — the value of goods produced for personal consumption, like the crops grown by subsistence farmers. Not all wealth counts toward GDP. For instance, if you build a new house, that’s considered value added to the economy.  If a pre-existing house increases in value, the owner may be better off, but the country’s GDP is unaffected. Of course, companies often have a vested interest in exaggerating their profits, so reliable figures can sometimes be tough to calculate.

The other method of calculating GDP involves measuring total consumption of products by a country’s population. Since it relies mostly on household surveys, this method also has flaws. People tend to underreport the amount they spend on alcohol and cigarettes, for instance. But hopefully, the two measures should come up with close to the same number and when the results from the two approaches are compiled, they should give you a pretty good idea of the size of a country’s economy.

[…]

But for most countries, there’s no international legal authority to ensure that statistical offices are following the SNA guidelines, and international economists largely have to rely on self-reported numbers. While no one’s disputing China’s new status, the country has often been suspected of cooking its books. Although China is not a member of the OECD, it does cooperate with the organization in producing statistics according to the SNA guidelines.

Those guidelines are updated every few years. The most recent edition, which was made in 2008 and has so far only been implemented by Australia, was revised so that a firm’s investments in research and development are considered added value. This means that as the new standard is implemented worldwide over the next four years or so, many countries will see their GDP numbers increase by as much as 1 percent. That’s one way to stimulate growth.

Joe Weisenthal at Business Insider:

Let’s just put some of today’s headlines about Japan’s GDP being surpassed by Chinese GDP in perspective.

In the quarter, Japan had economic output of $1.28 trillion, or $10,085 per capital, based on a population of 127 million.

China?

It had economic output of $1.337 trillion for the quarter, but a population of about $1.3 billion, so per-capita output of… $1000, about a 1/10th as big.

Let us know when China passes Albania.

Derek Scissors at Heritage:

It’s true that simple GDP does matter. The increasing size of China’s economy means the entire world is now affected by its voracious demand for oil, iron ore, and other commodities, as well as its low-cost supply of consumer electronics, clothing, and other goods.

But for successful economic development, what matters far more is the wealth of individuals and families. Japanese economic weakness is not shown in its still impressive 3rd place in world GDP but in its roughly 40th place on measures of personal income. From an economy once thought better managed and better performing than the U.S., the average citizen of Japan is now poorer than the average citizen of Mississippi. American citizens are noticeably richer than citizens of most other developed countries, such as in the EU. But Japan, in particular, is moving backward.

In contrast to Japan’s 20 years of weakness, there has been stunning growth in Chinese GDP per capita for 30 years. Yet China is still a developing economy. Chinese GDP per capita, even adjusted for purchasing power, is about 15 percent the level of the U.S. Further, GDP per capita actually exaggerates China’s performance.

The PRC’s incomplete data revisions undermine comparisons but, from the middle of 2000 to the middle of 2010, GDP per capita increased by more than 9500 yuan or, at present exchange rates, another $2800 in annual income. However, urban disposable income increased less than 6800 yuan, or about $2000 in annual income. And rural income increased less than 2000 yuan, or $600 in annual income.

Razib Khan at Discover

Robert Reich at Wall Street Pit:

Think of China as a giant production machine that’s growing 10 percent a year (this year, somewhat less). The machine sucks in more and more raw materials and components from rest of world – it’s now the world’s #1 buyer of iron ore and copper, and close to the #1 importer of crude oil – and spews out a growing mountain of stuff, along with huge environmental problems.

But because the Chinese consume a smaller and smaller proportion of this stuff, it has to be exported to consumers elsewhere (Europe, North America, Japan) to keep the Chinese working. Much of the money China earns by selling it around the world is reinvested in factories, roads, trains, and power plants that enlarge China’s capacity to produce far more. Another big portion is lent to or invested in the rest of the world (helping to finance America’s budget deficit at very low cost).

But this can’t go on. China’s workers won’t allow it. Workers in other nations who are losing their jobs won’t allow it, either.

The answer is not simply more labor agitation in China or an upward revaluation of China’s currency relative to the dollar. The problem is bigger. All over the world, we’re witnessing a growing gap between production and consumption, while the environment continues to degrade. The Chinese machine is fast heading for a breakdown only because it’s growing fastest.

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Uh… They’re Number One?

Frank James at NPR:

The U.S. is no longer the single largest consumer of the world’s energy resources. That distinction now goes to China, according to the International Energy Agency.

The IEA says that according to an analysis of its data for 2009, China, with a population of 1.33 billion compared with the U.S.’s 310.2 million, has outstripped the U.S.

It’s been known for some day that this day would come. But it happened faster than was forecast because China was hurt less by the global recession than the U.S.

Nicholas Deleon at Crunch Gear:

The actual numbers are pretty impressive, particularly when you consider that a mere 10 years ago China was quite a bit behind the U.S.

China consumed some 2,252 millions tons of the oil equivalent of sources such as coal, nuclear power, natural gas, and hydropower. The U.S. consumed 4 percent less. These are numbers from last year, by the way.

But that’s where energy efficiency comes into play. Since the year 2000, the U.S. has increased its energy efficiency by about 2.5 percent annually. China? 1.8 percent. So not a huge difference, but a difference nonetheless.

Does this really mean anything to you? Eh, maybe. Certainly it’ll have implications for the world at large though. Now that China is the biggest consumer of energy, it alone is in the position to tell energy providers, “Look, we’re willing to pay X for Y units of energy.” If China’s X is bigger than the U.S.’s X, then we may be looking at a situation where energy prices will go up simply because “someone else” is willing to pay more.

Which could mean that all the factories that produce all the lovely electronic gizmos we talk about day in, day out, could see their costs of doing business go up. And who would make up the difference? Yes, you!

Then again, it could have the very opposite effect, and end up lowering prices.

Mark Wilson at Gizmodo:

A different metric? Three years ago, China was the world’s biggest exporter of coal. Now it’s the leading importer. And last year, for the first time ever, Saudi Arabia sold more oil to China than the US.

Given that China’s consumption will give them more negotiation power in the world’s power market, it may be a good time to buck our trend of a mere 2.5% energy efficiency increase per year.

Frank Holmes at Wall Street Pit:

While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.

In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.

But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.

Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.

Paul Denlinger at Forbes:

This is why the Chinese government has chosen to invest in developing new green energy technology.

The country is very fortunate in that most of the discovered deposits of rare earths used in the development of new technologies are found in China. While these deposits are very valuable, up until recently, the industry has not been regulated much by the Chinese central government. But now that Beijing is aware of their importance and value, it has come under much closer scrutiny. For one, Beijing wants to consolidate the industry and lower energy waste and environmental damage. (Ironically, the rare earth mining business is one of the most energy-wasteful and highly polluting industries around. Think Chinese coal mining with acid.)

At the same time, Beijing wants to cut back rare earth exports to the rest of the world, instead encouraging domestic production into wind and solar products for export around the world. With patents on the new technology used in manufacturing, China would control the intellectual property and licensing on the products that would be used all over the world. If Beijing is able to do this, it would control the next generation of energy products used by the world for the next century.

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China’s Going All Bendy On Us

Robert Flint at Wall Street Journal:

With a brief announcement Saturday of more flexibility for the yuan, China sent a powerful message about its confidence in the health of the world’s economy and financial system.

The resumption of the yuan’s crawling peg to a basket of currencies, with a daily fluctuation range of 0.5% on either side of a central parity rate, in no way implies a large one-off revaluation of the yuan.

In fact, the People’s Bank of China doused any such expectations by stating, “the basis for large-scale appreciation of the RMB exchange rate does not exist. “Instead, the PBOC will “maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.”

Basically, the PBOC has decided the recovery inside and outside China has reached the point that an appreciating yuan won’t put the country at a disadvantage. That’s been China’s stance since 1994. The goal has always been more flexibility for the yuan, with the ultimate goal of hard currency status at some unspecified point in the future.

The statement released Saturday says nothing about the pace of yuan appreciation. Using history as a guide, the yuan gained about 21% in the three years following the abandonment of the defacto peg to the dollar on July 21, 2005.

Derek Scissors at Heritage Foundation:

Beijing finally made a move on exchange rates, probably. Assuming there is some action to go with the People’s Bank of China’s stilted language, two critical errors are being made in the international response.

The first concerns the nature of the change. The one-line summary, in China and elsewhere, is that the PRC has broken the peg of the yuan to the U.S. dollar. Or re-broken it, since the peg is said to have been broken in July 2005, then reestablished in July 2008.

This view is badly mistaken. The yuan peg to the dollar was not ended in July 2005, it was simply loosened. There is no evidence in the yuan’s movement against other currencies that the peg was broken, or even dented.

From mid-2005 to mid-2008, the yuan tracked the dollar against the euro, just as it always had. It tracked the dollar against the yen. The yuan did not fall as much as the dollar over this period because a tight peg was replaced by a “crawling peg,” where the yuan rose 20% against the dollar. The yuan was not, however, allowed to move independently of the dollar against any other currency.

What little the People’s Bank has said suggests there will be even less of a shift now. The limits on daily movement in the yuan are unchanged. The announcement notes “further reform” – if there used to be a peg and now it’s broken, that isn’t “further” anything. Moreover, the present weakness of the euro will make the PRC even more reluctant than in 2005 to move off the dollar.

Why does this matter? Because genuinely breaking the peg would be a boon for the global economy. Resuming the crawling peg is just a bone for the U.S. Congress, and one the Congress and everyone else could choke on.

The Economist:

The statement was “vague and limited”, according to Charles Schumer, a Democratic senator from New York who is sponsoring a bill to slap duties on Chinese imports. It was followed by another statement on June 20th (in Chinese only) reassuring everyone that basic stability would be safeguarded.

The PBOC was clearer about what it intends not to do. It pointed out that China’s controversial current-account surplus has narrowed over recent years, from 11% of GDP in 2007 to 6.1% of GDP last year. There was therefore no justification for a “large-scale appreciation” of the exchange rate, it said. Most likely, the central bank will first allow the yuan to wobble by up to 0.5% each day. When it is confident that China’s economic momentum can survive the euro-area’s woes, it will let the yuan strengthen at about the same pace as before the crisis, ie about 5% a year, on a trade-weighted, inflation-adjusted basis.

The PBOC said it will be guided by a “basket” of currencies, not the dollar alone. If the euro resumes its slide in the next few weeks or months, the yuan might even be nudged down a bit against the dollar, to keep its trade-weighted value stable. America’s Congressmen, don’t much care for nice debates about the equilibrium, trade-weighted value of a currency. They do care about how many yuan you can buy for a dollar. Tao Wang of UBS has ventured an answer to that question. She forecasts that by the end of 2011, you will be able to get 6.2 yuan for the dollar, compared with 6.83 now.

That in itself is not a momentous change. But it is best to see this weekend’s move as an institutional reform, rather than a change in price. It was a slow, deliberate step towards a more sophisticated currency regime, rather than a stronger currency per se. As China’s economy evolves over the next few years, weaning itself off investment spending and towards consumption, it now has a suppler exchange rate that can help guide and cushion that process. Presumably that is what the PBOC meant by an “adaptive” currency.

Colin Barr at Fortune:

Geithner has been calling for the Chinese to liberalize their exchange rate policies since before he took over as Treasury secretary. He has been under pressure from U.S.  legislators who contend China has been holding down the renminbi, unfairly subsidizing its export sector. They say a free-floating renminbi would rise sharply against the dollar, raising the prices of Chinese goods and bringing manufacturing jobs back to this side of the Pacific.

Saturday’s move is only a tentative first step. Still, it is clear that the move toward a free-trading renminbi, begun in 2005 and interrupted by the near collapse of the global financial system three years later, has resumed. Geithner applauded the move, which comes ahead of next weekend’s G20 summit in Toronto.

“We welcome China’s decision to increase the flexibility of its exchange rate. Vigorous implementation would make a positive contribution to strong and balanced global growth,” Geithner said. “We look forward to continuing our work with China in the G20 and bilaterally to strengthen the recovery.”

Yet the future course of the exchange rate, and of a tightrope-walking global economic recovery, is hardly clear.

Matthew Yglesias:

There’s been a long running dispute about whether it will be necessary for the United States to formally threaten sanctions on China unless they revalue their currency. The answer now seems to be “no” as China is conceding the need to allow for more flexibility on exchange rates. The precise details are somewhat unclear, and the Chinese are cautioning the world not to expect rapid appreciation, so there will doubtless continue to be conflicts around this.

One thing I note here is that RMB appreciation is in part a form of tighter monetary policy in China. Which is good, China needs tighter monetary policy. And so do India and Brazil, all of which are likewise tightening. But no country is an island. Tightening in the three largest developing countries is the correct policy, but it makes looser policy in the U.S., E.U., and Japan all the more urgent. Likewise, fiscal contraction does seem to be the right policy for some European states (though not for Germany) but this again enhances the need for looser monetary policy from the European Central Bank.

Alex Frangos and Jason Dean in WSJ:

.In a lot of ways, this weekend’s timing is similar to what happened in 2005, the first time China loosened its currency, says Mirae Asset Securities Chief Economist Bill Belchere. “In 2005, they surprised the market. The market was waiting, waiting, waiting, got bored and then left,” he said. This time, the market was long the yuan for months before concerns about property market bubbles and euro zone troubles pushed risk takers out of the trade.

Now that the cat is out of the bag, don’t expect China to let the yuan strengthen right away, says Maguire. “In the immediate period, you’ll see very little move. They aren’t going to signal the flood gates are open, and then here goes the yuan. There will be a period of time before a significant move,” he says.

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Something To Keep In Mind When Complaining About Your Job

Laura Northrup at The Consumerist:

Is Foxconn, the huge electronics company that manufactures for global brands such as HP, Dell, and Apple (yes, they make the iPad and iPhone) a towering fortress of secrecy where employees cower in fear, ten people to a dorm room, or a normal manufacturing outfit that has had a weird cluster of employee suicides recently?

Ten Foxconn employees have committed suicide in the last year, and five in the last month alone. The first that attracted major media attention in recent months was a 25-year-old man who claimed that company security officers accused him of stealing an iPhone prototype and beat him.

The company has responded to the damage to its image with promises to improve management techniques and working conditions, a rumored 20% raise for factory workers, and asking employees to sign a pledge not to kill themselves.

Ed Sutherland at Cult of Mac:

Apple said it was “saddened and upset” by a recent spate of suicides at Foxconn, a China-based electronics manufacturer believed to be making Apple’s upcoming next-generation iPhone. The Cupertino, Calif. consumer electronics designer also announced it would launch an independent evaluation of the plant where 10 workers have committed suicide in the past year.

Earlier this month, a call for investigations was spurred by the death of another worker.

Tuesday, a 19-year-old male worker, who had been at Foxconn just 42 days jumped to his death from a company building. That death came just days after another worker reportedly committed suicide and just one day after Foxconn representatives defended the company against charges of maintaining a sweatshop atmosphere.

In the wake of the suicides, Foxconn – which also makes components for other electronic giants, such as HP and Nokia – introduced several antisuicide tactics, including putting safety nets to prevent workers from jumping from company buildings, inviting Budddhist monks to pray, and creating the “Foxconn Employee Care Center,” according to the Wall Street Journal.

Publicly, Foxconn has swung from physically attacking reporters to giving tours of the firm’s campus, complete with bakery, dormitories and Olympic-size swimming pools.

Ron Hogan at Popular Fidelity:

So what makes Foxconn workers want to put an end to their lives in such a dramatic manner?  Apparently, if you believe the critics, it’s job unhappiness.  The company is accused of using military-like discipline, maintaining shifts that are too long, and having the assembly line move too fast.  Meanwhile, the company is installing nets and barriers on all its tall buildings (I’m not joking) to curtail any future leaps.

That’s probably cheaper than addressing the problem of why your workforce would prefer death to continued employment.

Seth Weintraub at 9 to 5 Mac:

Something we’ve suspected all along: It isn’t that Foxconn has an abnormally high suicide rate.  The suicides are actually, per capita, less than the average in China.

The issue here is that Foxconn is mind-bendingly big.  It has 500,000-800,000 employees overall and 300,000 alone in that plant in Shenzen that makes all of those iPads that we love so much.

We can’t possibly imagine how many people that is.

To put it in perspective, Foxconn is 1/5th the size of New Zealand.  The country.

Four US states, Alaska, Wyoming, Vermont, and North Dakota are smaller than Foxconn.  That means that there are more people going to work at Foxconn than every man, woman, child and elderly person in four US states.

If you’ve ever seen a Michigan-Ohio State game, Foxconn employees could fill one of those stadiums eight times over!

OK, you get the point.  They have a lot of employees.  And the suicide rate is high in China in general. So these suicides aren’t abnormal.  In fact, they are below average.  However, since they are high profile, they are followed closely.

John Biggs at Crunch Gear:

Hon Hai Precision Industry, the anchor group for Foxconn, is offering its workers a 20% increase in pay as part of a regular third-quarter cycle.

It’s important to note that this is a cyclical was planned months in advance the suicides are ancillary to the eleven suicides thus far.

“I don’t think this will impact Hon Hai’s profitability,” said Vincent Chen, an analyst at Yuanta Securities in Taipei. “Salaries for production workers are usually raised at around the third quarter, which is the peak season for most contract manufacturers as they gear up for the year-end holiday season.”

Ezra Klein:

As someone who’s read a lot of Tyler Cowen in my day, this passage from China Daily’s report caught my eye:

Zhang said the company has never talked with them about the suicides and did not disclose the compensation amount, rumored at about 100,000 yuan ($14,600).

Prodded by reporters, Gou said on Wednesday he was taking the injury contract back because its language was not appropriate.

But he noted the company will reduce the amount of compensation, since “high amount of compensation may encourage suicides”.

Also interesting was this editorial arguing that the suicides among low-wage laborers “are but extreme examples of the problems caused by China’s traditional development pattern” and they highlight the need for China to develop more businesses where they control the intellectual property and keep the profits rather than simply administer the worst, and least profitable, elements of the production process.

UPDATE: Heather Horn at The Atlantic

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The Real Question Is, Did He Bow As Well?

Michelle Malkin:

Question: Who the hell is Michael Posner, and why the hell is he apologizing to China?!

Answer: Michael Posner is the former head agitator at the transnationalist Human Rights First, who represents the textbook State Department mindset of pandering to the worst America-bashers without hesitation or shame. Foggy Bottom isn’t just stuck on stupid. It’s stuck on American self-sabotage.

John Hinderaker at Powerline:

This is unfreakingbelievable, even for the Obama administration:

The United States and China reported no major breakthroughs Friday after only their second round of talks about human rights since 2002.

The Obama administration wants to push Beijing to treat its citizens better, but it also needs Chinese support on Iranian and North Korean nuclear standoffs, climate change and other difficult issues. …

[Assistant Secretary of State Michael] Posner said in addition to talks on freedom of religion and expression, labor rights and rule of law, officials also discussed Chinese complaints about problems with U.S. human rights, which have included crime, poverty, homelessness and racial discrimination.

He said U.S. officials did not whitewash the American record and in fact raised on its [sic] own a new immigration law in Arizona that requires police to ask about a person’s immigration status if there is suspicion the person is in the country illegally.

What an idiot! China murdered millions of its citizens who opposed the government’s Communist policies and allows most of its people little or no freedom. We, on the other hand, enforce our immigration laws. No, wait–actually we don’t. That’s why Arizona had to take a shot at it. Oh, by the way, Michael Posner, you clueless moron–China actually does enforce its immigration laws.

Jay Nordlinger at The Corner:

I hope I have read that incorrectly, or am interpreting it incorrectly. Did we, the United States, talking to a government that maintains a gulag, that denies people their basic rights, that in all probability harvests organs, apologize for the new immigration law in Arizona? Really, really?

And that is to leave to one side, for the moment, the question of whether issues of crime, poverty, and so on truly belong in human-rights talks. You remember the old line, taught to us by our dear Marxist professors: “Here in the West, we have political rights: of expression, worship, assembly, etc. But you can’t eat those! In the East Bloc, they have economic and social rights: to food, shelter, health care, and the like.” Of course, free countries do better by material measures, too — better than those countries that have “economic and social rights.” Infinitely better.

A month ago, President Obama told the leader of Kazakhstan that we were still — you know: working on our democracy. An Obama national-security aide, Mike McFaul, said, “[Obama has] taken, I think, rather historic steps to improve our own democracy since coming to office here in the United States.” (For a write-up, go here.) “Historic steps”? I suppose he meant national health care, socialized medicine. I suppose, by “democracy,” he meant social democracy. Hard to tell. I don’t think he meant that the Justice Department was going to make the New Black Panthers stop intimidating voters.

Do you ever get the idea that our government is a bunch of left-wing undergraduates come to power?

Carol Platt Liebau at Townhall:

Admittedly, it’s hard to assess China’s treatment of illegal immigrants — because no one is clamoring to come to a country where Christians are persecuted and tortured, and forced (late term) abortions occur.  And even as the Chinese complain about American poverty and homelessness, one might delicately point out that it’s far preferable to be poor here than over there.  Overall, when it comes to illegal immigration, the biggest problem China has is people trying to get out, not in.  So if rational people vote with their feet, it would seem that the United States has much less for which to apologize.

The idea that the Obama administration would preemptively apologize for America’s human rights record — compared to China’s — is outrageous, and shameful.  Do these people even live in the same country as the rest of us?

Jim Treacher at The Daily Caller:

That’s right: We said “sorry” to China for violating human rights by enforcing our own immigration laws.

China.

China.

If there’s a bigger fan of the State Department than me, I’ve yet to meet one. But this screwup is even worse than the “Reset” button

There’s no gaffe that can’t be fixed with Hillary’s ear-piercing bray. Put ‘er to work, boys.

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Filed under China, Immigration, Political Figures

Beat On The New York Times Columnist With A Baseball Bat

Paul Krugman at The New York Times:

To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.

Will the next report, due April 15, continue this tradition? Stay tuned.

Ryan Avent at Free Exchange at The Economist:

But that’s just the warm-up. Here’s the call to action:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

This is really remarkable. Mr Krugman is careful to explain why we shouldn’t fear that China, as a major creditor, has the leverage to punish America, but it seems as though he has given no thought at all to what leverage America has over China. Neither does he seem to pay the least mind to the potential fallout from such a reckless rush to a more aggressive approach to China. Perhaps the decision to impose these surcharges will have the desired effect. Or perhaps, the Chinese government will retaliate, touching off a trade war at the worst possible economic moment. The potential upside to Mr Krugman’s recommendation is trifling; the potential downside is massive.

And Mr Krugman seems entirely uninterested in the domestic political constraints facing China’s leaders. He doesn’t consider for a second the possibility that a bullying strategy on America’s part might make China less likely to do what the administration wants. Why on earth would a nationalistic nation anxious to establish itself as great power want to come off to all observers as a weakling in the face of American bluster? Mr Krugman would paint China into a corner, forcing them to take steps detrimental to all involved.

The general tone of his column—focused on toughness, insensitive to the internal politics of foreign nations, blind to potential negative outcomes, reckless and impatient—is familiar. It looks like nothing so much as the argumentation deployed by the Bush adminstration as it rushed to war in Iraq. Mr Krugman was prescient and prudent in fighting back against that misguided policy. He would do well to stop for a moment, take a deep breath, and think again before urging America to “take a stand”, damn the consequences.

He should respect China enough to know that its leaders understand that RMB appreciation is in their interest. And he should be humble enough to understand that patience and reserve is far more likely to lead to his desired outcome than ill-considered sabre rattling.

Krugman responds:

I never thought of it that way: Ryan Avent says that my advocacy of a get-tough approach to the renminbi is just like the Bush administration’s push for war with Iraq.

But now that he mentions it, it’s true, it’s true! My case for action is entirely based on dubious claims made by unstable informants with code names like “Curveball”, questionable evidence about things like aluminum tubes, and obviously forged letters allegedly from Niger. The actual, public facts and figures I cited have nothing to do with it.

And the real tell is the fact that I’m closely following arguments made by rabble-rousers like Fred Bergsten and the Institute for International Economics, which, um, is a big supporter of free trade and international cooperation … but nonetheless is just like PNAC.

Oh, and I’m showing disrespect for China’s leaders by not giving them credit for understanding the need for appreciation, even though they consistently say that no change in the exchange rate is warranted. The respectful thing would be to assume that everything they say in public about the issue is a lie.

Ryan has me nailed.

Avent responds:

This is extremely disappointing, because it ignores the substance of my criticism and because it so wildly distorts the analogy I drew. I never said Mr Krugman was using false data. I never said he was relying on faulty sources. I never implied anything like that. What I suggested was that he seemed to be ignoring the potential for things to go badly wrong with his plan, overestimating the potential that they may go right, and misreading the net benefit of both of those potential outcomes. His response basically sidesteps all of these issues.Let me briefly rephrase my argument and see if I can’t provoke a more substantive answer from Mr Krugman. I agree with him that there would be some benefit to China, America, and the rest of the world if China allowed its currency to appreciate against the dollar. But it seems to me that this benefit is easily overstated; both China and America can trace their current account situations to significant structural imbalances, and even without an end to the dollar peg, America’s trade balance with China has improved and continues to improve through the recovery. It also seems to me that an aggressive American push for currency revaluation is unlikely to work, because China’s government does not want to be seen, at home and abroad, as a weakling in the face of American pressure. And there is a not insignificant risk that America’s decision to “take a stand”, and particularly to pursue a series of trade surcharges, would provoke a trade war with China which, given the current feeble state of the global economic recovery, could prove extremely costly. The downside risk to such a policy is quite large relative to the potential upside from Chinese revaluation.

What’s more, I think China understands that it is in its interest to revalue and will do so eventually. Why do I think this? Well, China was more than willing to revalue before the onset of the global recession. Mr Krugman hints that I am the one being disrespectful to China for not taking its leadership at its word when they say that no change in the RMB exchange rate is warranted. But this is par for the course where currency levels are concerned. In America, it’s a time-honoured tradition for leaders in Washington to declare that a strong dollar is warranted, good, right, proper, and so on, despite the fact that this clearly isn’t the case. I suppose we could say that they’re fools or liars, but we generally just note that this is something they say because they feel it is in their interest to do so, for political and economic reasons. Meanwhile, it isn’t as though it’s been ages since a Chinese official hinted that RMB appreciation was just a matter of time.

Krugman responds:

I got a little snippy with Ryan Avent yesterday over the remminbi issue; I guess I don’t like being compared to Donald Rumsfeld. In any case, however, I think it would be useful for me to explain how I think about the current China syndrome, and why I believe that most of the responses I hear are missing the point. In what follows, I’ll focus on three questions: the macroeconomics of Chinese currency intervention, the fallacies of elasticity pessimism (which I’ll explain when I get there), and the political economy issue of how to deal with Chinese intransigence.

1. Macroeconomics of intervention

Let me start with a proposition: the right way to think about China’s exchange rate is, initially, not to think about the exchange rate. Instead, you should focus on China’s currency intervention, in which the government buys foreign assets and sells domestic assets, on a massive scale.

Although people don’t always think of it this way, what the Chinese government is doing here is engaging in massive capital export – artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country.

Now, bear in mind the two basic balance of payments accounting identities:

Capital account + Current account = 0

Current account = Domestic savings – Domestic investment

By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

In normal times, you could argue that this policy provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.

Notice that I didn’t mention the value of the renminbi at all in this account. It’s there implicitly: a weak renminbi is the mechanism through which China’s capital-export policy gets translated into physical exports of goods. But you want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.

What this means, in particular, is that you can disregard people who offer calculations suggesting that by some criterion – say, Balassa-Samuelson adjusted purchasing power parity – the renminbi isn’t undervalued. We know that the renminbi is grossly undervalued, not through questionable estimates that can be endlessly debated, but on a PPE (proof of the pudding is in the eating) basis: the current value of the renminbi is consistent with massive artificial capital export, and that’s that.

Avent responds:

This is a happy world, is it not, when Europe and America slap punitive import surcharges on China and China just sits there and takes it? What if China responds with tariffs of its own? What if it seeks to carve out its own regional trade bloc in Asia? What if it refuses to help America with Iran or North Korea? What if it occupies Taiwan? Where are the careful considerations of all the possible ways China might respond? Certainly we should be very aware of and concerned with these risks.

Especially since it was just one week ago that China central bank governor Zhou Xiaochuan said of the dollar peg that, “These kinds of policies sooner or later will be withdrawn.”

So, to recap. In recent years, exchange rate shifts in China and America have not produced the changes in trade balances one might expect, suggesting that structural issues are an important reason for these persistent imbalances, further suggesting that the benefits of revaluation may not be that big. Meanwhile, despite China’s currency policy, the Chinese trade balance has shrunk. An aggressive campaign to get China to revalue might not generate the desired results, and it might lead to unpredictable and costly retaliation from the Chinese government. And there is recent evidence that Chinese leaders are aware of the problems with the dollar peg and plan to adjust it, even in the absence of American action.

So why roll the dice? I appreciate Mr Krugman’s discussion of the macroeconomic issues involved here, but he hasn’t begun to address why it’s vital to risk international comity over this.

It’s certainly true that the dollar was overvalued back in 1971.  What Krugman forgets to mention — and see if this sounds familiar — is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy.  They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it.  This macroeconomic policy created inflationary expectations and a “dollar glut.”  Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar’s value — not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.

In other words, the United States was the rogue economic actor in 1971 — not Japan or Germany.

So, how about acting multilaterally first before engaging in unilateral action that alienates America’s friends and allies alike?

Brad DeLong responds to Drezner:

I count four big howlers:

  • Paul Krugman is not a neoconservative.
  • There is no no multilateral institution that manages exchange rates within which the U.S. could work.
  • The current overvaluation of the dollar vis-a-vis the renminbi is in no wise due to large current U.S. budget deficits.
  • At the start of the 1970s other countries kept their pegs to the dollar rather than revaluing not because they were obliged by treaty to do so but because they wanted to: they had rejected U.S. requests for revaluation under Bretton Woods procedures.

Why would anybody do this?

More Drezner

Scott Sumner at Wall Street Pit:

Suppose China’s government began a new policy.  They announced their government would spend $500 billion each year adding to their foreign reserves, but would no longer peg the yuan.  Would that satisfy China’s critics?  Probably not, as Krugman noted the real issue is the Chinese accumulation of dollars, not the exchange rate per se.  If you are buying foreign reserves at a massive rate it is quite possible to lift exchange controls and let the currency float, and yet still end up with what most people would regard as an overvalued currency.  So the real question is whether China is justified in holding large and increasing quantities of foreign reserves.

I’d like to point out that there are many commonalities between China and 5 other East Asian economies; Japan, Taiwan, HK, Singapore and South Korea.  One of those similarities is that they all have huge stocks of foreign reserves.  In per capita terms China’s CA surplus is by far the smallest of any of the six East Asian powerhouse exporters.  The most recent data I could find in The Economist shows China’s CA surplus as $284.4 billion whereas the other five economies combine for a $286.7 billion surplus.  So if Krugman is right, those five economies actually are doing more damage to the world economy than China, which has 7 times the population and a modestly larger (PPP) GDP than other other five economies.

Krugman might respond that the other five economies are fairly wealthy, and have very low birthrates, so it makes sense for them to save a lot.  Their surpluses reflect the natural forces of their economy.  China is a developing country, and like South Korea in the 1970s and 1980s might be better off running deficits, and borrowing against future income.  There are many ways in which the government could use those funds to address domestic challenges.  Instead they accumulate massive stocks of foreign exchange, which help neither us nor the Chinese people.  I think that would be a respectable argument, but there are other considerations as well.  China faces a looming demographic nightmare that Korea did not face in the 1970s.  It is likely that in a few decades China will be much richer than today.  The hundreds of millions of Chinese that will then be retiring will expect to be provided with decent pensions.  Yet the Chinese social security system is woefully underfunded.  You can make a strong argument that the Chinese government should be setting aside a lot of money right now, in light of the fiscal challenges that they will face in the future.

I would add that there seems to be a big difference between East Asian and Western attitudes toward saving.  I think that there is a lot to be said for the high saving models developed by places like Singapore.  Even though I am a libertarian, I’d much prefer the sort of high forced saving/low tax economy of Singapore to the low saving/high tax economy that we have in the West.  Our fiscal situation reminds me of those guys who live week to week.  Who say “I should be able to swing that vacation to South Beach as long as my transmission doesn’t blow out on me.”  Yes, we should be able to just barely afford national health care as long as it doesn’t turn out to be much more expensive than expected, like Medicare turned out to be much more expensive than expected.  And if things really get bad we can always add a VAT.  Of course the Europeans already have a VAT, maybe they’re hoping some loose change will turn up under the cushions.  Seriously, in about 20 years, when the West is struggling to deal with ever-increasing debts, I predict that the Singapore high saving/low tax model will look clearly superior to the Western model.  So while there are many things I don’t like about the Chinese government, I am not willing to condemn them for setting aside a big pot of foreign exchange reserves.  It’s their choice.

Ryan McCarthy at Huffington Post:

In an interview with Bloomberg Television, Stephen Roach, Morgan Stanley’s Asia chairman blasted Nobel Prize-winning economist Paul Krugman over the latter’s stance on China’s economic policy.

Here’s the gist of the dispute: in comments earlier this week, Krugman said that the U.S. needs to get tough with China over its currency policy. According to Krugman, China is intentionally devaluing its currency in order to boost its booming export sector. Specifically, Krugman argues that a properly valued Chinese yuan could add 1.5 percent to global economic growth. (You can check out video of his comments here.)

Roach wasn’t having any of it. The U.S. needs to increase its savings rate, remake its economy and “handle its own business.” And, Roach told Bloomberg TV, the U.S. needs to stay out of Chinese affairs:

Here’s Roach:

I think we should take out the baseball bat on Paul Krugman. I think the advice is completely wrong. The US has had a conscious policy here of maintaining, quote, a strong and stable dollar. China is saying basically the same thing in terms of its stable currency. Isn’t it the height of hypocrisy for America to articulate to articulate a particular position in its currency but the Chinese are not allowed to do that, especially since they as a developing economy – with an embryonic financial system – need a currency anchor probably a lot more than a sophisticated, quote unquote, economies like the United States.”

Krugman responds:

I really don’t understand Roach’s argument here; he seems to have subscribed to the Underpants Gnomes theory of trade balances:

1. Increase savings
2. ?????
3. Exports!

To be honest, sometimes I feel that I’ve spent most of my adult life knocking down the same misunderstanding, over and over again. I wrote about more or less the same issue more than 20 years ago:

There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes.

Also, from the Bloomberg article:

“I’m a little curious what Steve thinks would happen if the U.S. increased savings” without a stronger yuan, Krugman said today. “Where would the demand” for goods and services come from, he asked. Boosting savings should be done “in the long run,” not now, he also said.

Krugman is “giving Washington very, very bad advice,” Roach said in a later interview when asked to respond to Krugman’s reaction to his remarks. “I totally reject his idea that savings is bad.”

(Btw, this was from a cell phone conversation held while I was, um, sitting on the beach).

What I wonder here is how Roach — or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene — but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?

Update: I probably should add that I never said anything about taking a baseball bat to China. That was Bloomberg’s characterization of what I’ve been saying, and not one I would agree with.


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