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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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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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I Got ‘Dem Ol Dollar Bill Blues Again, Mama!

one dollar

Robert Fisk at The Independent:

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

Naked Capitalism:

Yves here. The explicit linking of security issues in the Middle East and the desire of a lot of countries to more away from the dollar as reserve currency is troubling, and the Independent also reads this as a thinly veiled threat:

“This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy…. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold…

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.”

John Wells at Moderate Voice:

If it’s true, it signals a devastating worldwide blow to an already hammered dollar. On one hand, you can’t blame other nations for moving away from America’s currency with our current economic and budgetary woes. The move would leave America with a decidedly lessened global influence in fiscal and monetary matters and solidify a growing Chinese stranglehold on Middle Eastern oil in Iraq and Iran.

The whispers seemed to have mutated into the writing on the wall. Through whatever mechanism of blame, America’s global influence is on the decline. Our dollar weakens while our manufacturing and production is outsourced to other nations, all while government spending grows out of control and the federal debt increases with each passing day.

Against this backdrop America should be strengthening its own economic foundation instead of expanding government entitlements and running up record deficits. Instead of road signs and seasonal construction we should be fortifying and buttressing our manufacturing and tech sectors. Instead of pleading for China to finance more of our debt we should cut the burden of government spending and let the engine of American commerce sputter back to relevance.

Derek Scissors at Heritage:

If Arab and other oil producers are indeed looking to move away from the dollar, they have cause. The Federal Reserve has been too free and easy for years, pumping too many dollars into the world economy. Like anything else, too many dollars means each one is worth less.

Looking down the road, deficit spending is set to make matters worse. Unnecessary deficits under the Bush Administration have given way to colossal deficits under the Obama administration, plus a free-for-all Congress that seems to be in charge of economic policy. When a government can’t control itself, its economic partners deduce they can’t trust the value of that country’s currency.

There’s still time, though, for the U.S. to bolster the dollar, both to preserve our international leadership and because the global use of the dollar is an economic advantage to our people and our country. Strangely enough, a major friend of dollar can be found across the Pacific, in China.

Notwithstanding the constant talk of the PRC’s rise, Chinese actions overwhelmingly serve to support the dollar. The RMB, a dollar alternative according to some, is as tightly pegged to the dollar as the Bahraini dinar. In their $2.1 trillion worth of reserves, the Chinese hold approximately three times as many dollars as all other currencies combined.

Kathryn Jean Lopez at The Corner:

If true, is this what Fisk says it is? Bob Stein, a senior economist at First Trust Advisors, answers that he “doubt[s] even if true that it will have much influence on world dollar demand.” When asked if it warrants red-headline treatment, Stein says: “Not for econonomic reasons, but it sure does embarrass the current administration.”

Dan Perrin at Redstate:

President Obama’s and Congress’s obsession with spending more taxpayer dollars on the black hole known as health care will only increase the resolve of every country holding dollars.

President Obama is destroying the economic superpower status of the United States, and many sense that Obama’s trillion dollars in spending here and trillion dollars in spending there is accelerating it, but Congress and the White House will not listen.

This will be the real legacy of President Obama, a worthless currency, our international influence and power broken and the Olympics were the first visible sign — to which President Obama is oblivious.

Oh, I know, maybe Obama can give a speech about it, or go on a talk show or a Sunday News show or fly to a meeting and give a speech. The world will listen, they will believe, and then everything will be OK. Even better, he can appear on the cover of Men’s Health!

Meredith Jessup at Townhall

UPDATE: Rod Dreher

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