Archive by Author

Is China’s appreciating Yuan a good thing?

27 Mar

China is under significant international pressure to appreciate its currency because it is believed that it is having a substantial negative impact on foreign economies (Zhang and Fung, 2006, Yang et al, 2013). This article will weigh up the pros and cons of allowing the Yuan to appreciate.

Many believe that the Yuan is undervalued compared to other currencies such as the US dollar, although by how much is contested; estimates range from 5%-25% (Tung and Baker, 2004). In contrast some studies find little evidence that the Yuan is undervalued (Cheung, Chinn and Fujii, 2007). Since 2005 China has had a managed exchange rate system, wherein the value of the Yuan is weighted to a basket of foreign currencies (a managing float regime). However a limit is set on how much the value can change.

The benefit of such as system is it has helped create a stable macroeconomic environment which helped facilitate china’s extraordinary growth (Tung and Baker, 2004). This has also helped stabilised the regional and global economy.

Figure 1 shows that the Yuan has steadily appreciated since 2005; among other things, this is because China’s growth has been consistently high which has increased purchasing power. China has been limiting the appreciation of the Yuan because it reduces the cost of exports making them more competitive in the global market, fuelling China’s rapid growth (Tilford, 2009).

Image

 

Benefits of an appreciating Yuan:

 

As the Yuan appreciates there are benefits which are expected to follow for the economy and for the nation as a whole. It has helped to control inflation, which in a developing nation like China is very important (Davies, 2014). High inflation puts a squeeze on consumers, which in a country where 27% of the population live on less than $2 a day (World Bank, 2009), can have dire consequences; rising food prices risks triggering unrest.  

One of the main reasons allowing the currency to appreciate is it may help with vital efforts to reduce the trade surplus and rebalance the economy. There are several reasons for this and for why it will be beneficial.

China is over reliant on exports, (See figure 2) a situation which is not helped by high global demand. Appreciation would increase the price of its exports, reducing the surplus and the demand which will help prevent overheating in the economy which jeopardises growth (Yang et al, 2013). At present in the population, consumption is too low and saving is too high. A stronger Yuan means citizens have more spending power which will help increase consumption, raising living standards (Tilford, 2009). It will also help rebalance the economy, reducing reliance on exports making the economy more stable.

Image

An undervalued currency also exerts a negative impact on the development of a service sector (Ozyurt, 2013). This is significant because development of services is crucial to rebalancing and modernising the economy; because it will lead to higher incomes (Tilford, 2009). Moving away from manufacturing towards service industries will ease the environmental costs of economic growth that China has experienced (Tilford, 2009). However, to boost services, and consumption, china will also need to invest in social security and reform domestic financial markets (Ozyurt, 2013)

Another key benefit of allowing the Yuan to appreciate is it eases tensions with other nations, particularly the USA, reducing the danger of policy confrontations. At one point popular discourse in America labelled China a “currency manipulator”, because it was giving its exports an unfair advantage which was hurting U.S businesses (BBC, 2012). This is controversial because China’s purchasing of huge quantities of US dollars in bonds kept the Yuan low, but also helped the US stay solvent (Amadeo, 2014). As the Yuan has appreciated this criticism has died down. Another widely held belief is that a stronger Yuan will reduce the US’s trade deficit with China (Cline and Williamson, 2009). Modelling by Yang et al (2013) and others find that China’s trade balances improve, but not with the US.

 

 

Disadvantages of letting the Yuan appreciate

 

Concerns with an appreciating Yuan centre around the effects it will have on the continuation of China’s economic growth. In an ex ante study, Yang et al (2013) warn that the economy would shrink significantly and would suffer decreasing exports leading to a reduction in output. Tung and Baker (2004) contest this prediction, believing cheaper import costs will make up for it. A reduction in output, particularly labour intensive industries, will lead to job loses which may threaten social stability. The employed population would benefit from higher real wages while the hardship for the unemployed would be compounded (Zhang and Fung, 2006). Influences on real GDP would affect welfare and living standards which will hinder efforts to increase consumption (Yang et al, 2013).  From a global perspective there are concerns a stronger Yuan will lead to a global welfare loss as the purchasing power of other currencies falls (Zhang and Fung, 2006).

 

Concluding thoughts

 

The cost-benefit analysis of an appreciating Yuan is a highly complex and contested issue. There are prospects for many benefits to come, however the CCP is wise to be concerned. A weak Yuan has served China well, however in order to complete the transition to a developed economy it needs to take this step. The most pressing economic hurdle is the rebalancing of the economy and imports need to be boosted. Economic models such as those employed by Zhang and Fung and Yang et al warn that appreciation will hinder rebalancing, however there are limitations with these models, they only look at short term effects and they do not provide an alternative currency policy to solve the imbalance.

It is quite likely that there will be short term pain, as many predict, however if it means china can wean itself off exports, allowing it to develop a strong service industry and enjoy more of the fruits of its labour by increasing consumption, it may be worth it in the long term. The Yuan is going to appreciate no matter what the CCP does, what is important is the how the appreciation is managed and the policies which are put in place to mitigate negative effects.

 

 

References

 

Amadeo, K., 2014, China’s Economy: Facts About China and Its Economy, Available at http://useconomy.about.com/od/worldeconomy/p/China_Economy.htm  Last accessed 27/03/2014.

Cheung, Y., Chinn, M. D., & Fujii, E. 2007, “The overvaluation of Renminbi undervaluation”, Journal of International Money and Finance, 26, 762–785.

Cline, W. and Willamson, J. 2009, “2009 estimates of fundamental equilibrium exchange rates”, Peterson Institute for International Economics, In Policy brief. PB09-10

Davies, G. 2014, Watch China’s exchange rate policy, The Financial Times http://blogs.ft.com/gavyndavies/2014/02/25/watch-chinas-exchange-rate-policy/? Last accessed 26/03/2014

Ozyurt, S. 2013, “Currency Undervaluation and Economic Rebalancing towards Services: Is China an Exception?”, China & World Economy, Vol. 21, pp 47-63.

The BBC, 2012, US says China not a currency manipulator. Available at http://www.bbc.co.uk/news/business-20518490 Last accessed 27/03/2014

Tilford, S., 2009, “Rebalancing the Chinese Economy”, Centre for European Policy Reform

Tung, C-Y. and Baker, S. 2004, “RMB revaluation will serve China’s self-interest”, China Economic Review, Vol. 15, pp 331-335.

World Bank, 2009, http://data.worldbank.org/indicator/SI.POV.2DAY Last accessed 24/03/2014

Yang, J., Zhang, W. and Tokgoz, S. 2013, “Macroeconomic impacts of Chinese currency appreciation on China and the Rest of World: A global CGE analysis”, Journal of Policy Modelling, Vol. 35, pp 1029-1042.

Zhang, J. and Fung, H-G. 2006 “Winners and losers: Assessing the impact of Chinese Yuan Appreciation”, Journal of Policy Modelling, Vol. 28, pp 995–1009

Figures:

http://www.tradingeconomics.com/china/currency

http://www.tradingeconomics.com/china/balance-of-trade

Planting the seeds for soft-power?

14 Mar

China is often regarded as a failure when it comes to soft power, at least when it is seen through western eyes. Joseph Nye, who coined the term “soft power”, see’s China’s efforts as centralised top down schemes, such as the wide spread diffusion of Confucius Institutes across the world which is interpreted by some as propaganda (Moss, 2013). China has spent billions of dollars on developing soft power yet it has only seen a limited return (Moss, 2013).

Soft power is the result of being liked, trusted and respected and is more “in the mind” than hard power which consists of tangible strategic assets like warships (Moss, 2013, Toh, 2013). Soft power is important to China because it can be used to advance the state’s interests in ways which are often difficult to force. In this sense it is likely that China wishes to be treated with greater respect on the international stage, not least because of its tremendous growth and its past achievements (Toh, 2013). Improving the image of China will have boosting effects ranging from increased commercial opportunities to a greater sense of national pride in its citizens.

However, China has not been totally unsuccessful and it is important not to forget that not everyone is watching China through Western eyes. In western settings Chinese efforts to develop soft power are often greeted with suspicion, perhaps sometimes unfairly. In other regions like Africa it is a different story entirely. China is the most influential world power in Africa and extends its soft power though cooperative developments (Moss, 2013). Western observers have been quick to interpret this as a cynical land-grab however (Toh, 2013). China also invests heavily in education and cultural dissemination through the use of Confucius institutes, which have received a much better reception than in the West.

There is debate however about how much soft power china actually develops out of its commercial activities in Africa because its companies in Africa do not possess soft-power in their businesses or in their brands (Toh, 2013). Another reason is that Chinese product quality in Africa is low and this is perceived by Africans. Soft Power associated with branded products is an area where China lags behind the rest of the developed world like the USA and UK (Moss, 2013). Things are improving though as Chinese multinationals start to make waves in the developed world, such as Huawei in the UK. It seems then that China is taking significant steps to increase it influence on the rest of the world. In Africa and the developing world prospects for substantial and rewarding soft power look most promising, however in these areas there is still much work to do.

 

Moss, T. 2013 – http://thediplomat.com/2013/06/soft-power-china-has-plenty/2/

Toh, H. S. 2013 – http://www.scmp.com/news/china/article/1287767/experts-differ-chinas-soft-power-africa

“Four dishes and a soup”

7 Mar

China’s president Xi Jinping is championing an austerity drive targeted at the elites, especially communist party officials. Previously China’s civil servants were known for their free spending habits and lavish lifestyles paid for by the tax payer. President Xi’s motive for this has been a fear that gluttony and excess will threaten the party’s continuing rule. High standing party members are encouraged to share hotel rooms, car pool and even to stop throwing the banquets which they are so famed for. Party officials who conspicuously flout the rules have been dismissed, all in an effort to try and improve the legitimacy of the communist party in the eyes of the people. Xi ‘s campaign has a new catchphrase “Four dishes and a soup”, emphasising his vision of restraint (Jacobs, 2013)

Those who are feeling the effects of Xi’s campaign most are the purveyors of the good life. Businesses ranging from restaurants and liquor stores to airlines have felt a dramatic reduction in business (Bloomberg, 2014). Even funeral homes have been feeling the pinch. May this have future effects on China’s growth?

The austerity drive is part of Xi’s wider campaign to crackdown on corruption amongst party officials. However there are doubts about the strength of efforts made to address deeper and more serious issues such as the concentration of wealth and power in the state owned economy (Jacobs, 2013). It may be the case that Xi’s austerity measures are deliberate way to distract attenion from addressing the real sources of corruption (Bloomerberg, 2014).

State run news Xinhua agency has revealed that lavish lifestyles continue but in much greater secrecy. A new catchphrase has emerged which subverts Xi’s which is “Eat quietly, take gently and play secretly” (Jacob, 2013).

 

 

Bloomberg, 2014 http://www.bloomberg.com/news/2014-03-02/chinese-austerity-campaign-spreads-beyond-ferraris-to-funerals.html

Jacobs, A. 2013 Elite in China face austerity under Xi’s rule, The New York Times http://www.nytimes.com/2013/03/28/world/asia/xi-jinping-imposes-austerity-measures-on-chinas-elite.html?pagewanted=all    

 

Social Media Ignites Environmental Activism in China

28 Feb

gross-rivers-weibo-deng-fei

During the Chinese Holiday season this year environmental activist Deng Fei posted a message to his 4 million followers on Sina Weibo (China’s version of Twitter) asking them to post a photo of the river in their home town while they were home for the holidays. The response was phenomenal; thousands posted back pictures of heavily polluted rivers and streams from across the country (Custer, 2013).  While this may not have come as a particular surprise, what is significant is that using the platform of social media it has been possible to turn a local issue into a national one, almost overnight. The outpouring of images prompted local and national news agencies to write stories on the issue which eventually led to the shaming of local governments and reportedly clean-up efforts in some areas (Hook, 2013).

Social media enables for the first time a form of two way communication on environmental issues, instead of the top down one way information from the government which did not reveal the scale or severity of environmental pollution. A good example of this is the smog which chokes many of China’s cities. Until recently in Beijing the only source of public information about harmful toxins in the air came from the readings posted regularly by the Unites States Embassy (Hook, 2013). Following immense public pressure, exerted through social media, the government started posting its own readings; although these are significantly lower than the US embassy readings.

The more open forum provided by social media sites such as Weibo has encouraged other social campaigns and projects which also make use of the technology. In some cases new platforms have been developed to address the issue of environmental degradation. One such example is the “Take a picture to locate a polluter” campaign launched by the non-profit Institute of Public and Environmental Affairs (IPEA). The IPEA takes user uploaded pictures and data from Weibo and uses it to construct an interactive map showing the names and locations of sources of pollution nationwide (Stout, 2013).

Custer, C. 2013 – Tech in Asia: Deng Fei Launches Weibo Campaign to Share Images of Water Pollution http://www.techinasia.com/deng-fei-launches-weibo-campaign-share-images-water-pollution/

Hook, L. 2013 – The Financial Times: China’s environmental activists http://www.ft.com/cms/s/2/00be1b66-1f43-11e3-b80b-00144feab7de.html#axzz2uXcceMsz

Stout, K. 2013 CNN: Can social media clear air over China? http://edition.cnn.com/2013/04/19/world/asia/lu-stout-china-pollution/

The Search for GDP Growth: China’s ghost cities

21 Feb

Despite the slowdown in recent years, China still posts enviable GDP growth rates of around 7-8%. Much of this growth is owed to massive infrastructure investment worth billions of dollars. Investment in fixed assets such as roads, railway lines and residential accommodation accounted for 56 percent of the country’s growth in the third quarter of 2013 (Rabinovitch, 2013). However there are doubts as to whether such strong growth can be sustained by strong government investment. A drop in demand from key export markets such as the US and Europe has led to speculation that China is heading for a “slow down”. To help counter this, the government has tried to increase domestic demand for products to keep the factories churning out goods and to prevent unemployment in the manufacturing sector.

The city of Nanjing is one of many cities receiving massive government stimulus in the form of infrastructure projects including the construction of a new and extensive subway system (Rabinovitch, 2013). China leads the world in imports of steel and concrete. However, not all the government construction spending has been on projects for which there is real domestic demand for.  An overwhelming amount of money, materials and labour has been spent on constructing massive, sometimes city sized developments which upon completion lie empty because there is no demand for them (Banerji and Jackson, 2012). Examples include the New South China Mall in Dongguang, which has the majority of its 1500 stores empty.

The city of Ordos in Inner Mongolia is considered to be one of the largest of “Ghost Cities” in China with thousands of newly built apartment blocks lying empty and a few, if any, inhabitants. One of the reasons for this, and the failure of many other projects across the country, is a combination of poor conception and planning of demand and supporting systems, and also wide spread speculation on the housing market. The old city of Ordos is 30Km away and is a bustling and perfectly typical city. The residents are expected to move to the new city however few have because no action has been taken to establish any sort of an economy there. Despite the low occupancy many apartments have sold, but these are held onto as investments and are not lived in or considered homes – most properties are too expensive for local people anyway.

The pressure to maintain growth rates encourages the poor allocation of material and resources which may jeopardize other opportunities to tackle many of China’s growing social problems. It also may be fuelling a dangerous housing bubble which may come to haunt china in the future.

Joe Higgins

Banerji and Jackson, (2012)China’s ghost towns and phantom malls: The BBC. http://www.bbc.co.uk/news/magazine-19049254

Rabinovich, S (2013) Infrastructure drive powers China’s growth prospects: The Financial Times. http://www.ft.com/cms/s/0/3f843546-37e0-11e3-a493-00144feab7de.html#axzz2tsuHEkA0

http://www.aljazeera.com/news/asia-pacific/2009/11/2009111061722672521.html

http://www.bbc.co.uk/news/business-23251089

Innovation in China

14 Feb

China has recently joined the very exclusive club of countries to successfully land a spacecraft on the moon. The Jade Rabbit rover touched down on the 13th December 2013 to the amazement of the world (Rincon, 2013). This marks the pinnacle of China’s mission to prove to the world that it is now a global player in science and high technology, and can compete with the likes of the USA as the leader in innovation.

However, looking back over the last one hundred years almost all paradigm shift innovations, such as the generation of electricity by Michael Faraday, have emerged out of countries with high political and intellectual liberty (Sass, 2014).

It must be noted however that the number of patent fillings in China are increasing, with estimates of a doubling of patents to two million by 2015 (Gupta and Wang, 2013). China also invests heavily in Research and Development (R&D), which now amounts to 1.6% of GDP and 13.7% of world total expenditure on R&D, second only to the USA (Gupta and Wang, 2013). However despite this, Chinese patents account for less than 2% of the patents granted by any of the leading patent offices outside China (Gupta and Wang, 2013).

Innovation is often a bottom up approach and this does not marry well with the Chinese Communist Party’s centralised top down control mechanisms. Free societies encourage scepticism and invoke the questions which lead to the first steps along the path to innovation. However in China there does not seem to be this culture and intellectual expression is still constrained. The grass roots nature of innovation also negates a lot of R&D investment at the institutional level because innovations are often the bright ideas of just a few individuals (Sass, 2014). This coming together of individuals is also hampered by China’s poor representation abroad for intellectual freedom which may discourage talent in existing innovation centres (often western based) from moving to China (Sass, 2014).

Another reason for the disparity between R&D input and innovation output is associated with the structure of the Economy. The numerous and powerful State Owned Enterprises (SOE) which dominate many key industry sectors do much to squash prospects for innovation. Their primary goal is employment and job creation, not disruptive innovation which may undermine their dominant market positions (Gupta and Wang, 2013). This is exacerbated further because it is the SOEs which receive the lion’s share of R&D grants. The privileged position SOEs enjoy hinders the formation of a true market economy and the intense competition which breeds innovation.
Increasing the freedom of individuals to ask questions and share opinions and for firms to compete may provide the necessary environment to nurture future innovation, but may also lead to dissent.

Gupta A. and Wang H. (2013) Harvard Business Review: China Can’t Be a Global Innovation Leader Unless It Does These Three Things.
http://blogs.hbr.org/2013/11/china-cant-be-a-global-innovation-leader-unless-it-does-these-three-things/ (Accessed 13/02/14)

Rincon P. (2013) BBC News: China lands Jade Rabbit robot rover on Moon.
http://www.bbc.co.uk/news/science-environment-25356603 (Accessed 13/02/14)

Sass S. (2014) The New York Times: Can China Innovate Without Dissent?
http://www.nytimes.com/2014/01/22/opinion/can-china-innovate-without-dissent.html?module=ArrowsNav&contentCollection=Opinion&action=keypress&region=FixedLeft&pgtype=article (Accessed 14/02/14)