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IMF issues rare public report on Chinese economy

By Howard Schneider

The International Monetary Fund released its first detailed assessment of the Chinese economy in four years, a document less interesting in its details than for the fact that it was made public at all.

There were the expected broad conclusions - that the country's currency is undervalued, growth is vigorous, property values may be rising too fast - and some new insights. The Chinese were, it turns out, spooked by the recent crisis in Europe, concerned the developed world is drowning in debt, and as a result have become even more cautious than usual in their own policies.

But this is the first IMF staff assessment of the country to be released in four years, a breakthrough of sorts not just for the IMF, but also for the Obama administration's efforts to make China a more active player in the G20 group of nations.

Staff assessments of China have been performed, as they are for other countries, on an annual basis, but Chinese officials since 2006 had not authorized their release - a rarely exercised prerogative that reflected disagreement with authorities in Beijing over the IMF staff's portrayal of its currency and other policies.

Since then, however, China witnessed the collapse of its exports during the recent recession, and perhaps realized its future would not be as bright with U.S. and Europe in the dumps. The country has been given wide credit for responding quickly to the crisis by opening the purse of both its central government and its banks. Lending, for example, spiked by an estimated 30 percent of gross domestic product, a fact that helped during the downturn but which the IMF says raises more than a few questions about the quality of the loans and what that might mean for Chinese banks. The country is now approaching double-digit growth again, and is helping Asia lead the world recovery.

The IMF and the U.S., meanwhile, have opened discussions on giving China a larger formal voice in the fund's affairs, and more notably have tempered criticism of the country's currency policy.

The staff assessment was open in its conclusion on that issue, saying the renminbi was "substantially" undervalued, and that China needed to lets its currency appreciate as a way to become less dependent on exports and encourage more local spending. A rising currency makes foreign goods cheaper while raising the price of the products the country sends abroad.

But the paper avoided getting too specific. According to press reports in the Wall Street Journal and elsewhere, the staff deleted a footnote estimating the undervaluation at as much as 25 percent, though IMF China mission chief Nigel Chalk said as a rule he "doesn't like" point estimates for the currency of an economy changing as quickly as China's.

"Any of these quantitative estimates don't do a good job and are not reliable," Chalk said in a conference call this morning, and added that the staff looked at broader and simpler indicators. The fact that China has accumulated $2.5 trillion in foreign currency reserves - expected to hit $3 trillion next year -- is not consistent with a properly valued renminbi, or a well-balanced economy.

But he said the Chinese authorities gave the IMF credit in deciding to release the report, for better capturing a debate that is politically charged in the U.S., but from their perspective needs more nuance. Along with dropping specific estimates for the value of the currency, an accompanying statement from the fund's executive board excluded the word "substantially."

China, of course, as well as other countries that closely manage their currencies, has representatives on the fund's executive board, so the fact that there is disagreement at that level is not surprising, and has been reflected in past board statements.

What was interesting, however, was this comment in the staff document: that if the Chinese forecasts "prove accurate, the resulting undervaluation (as measured by standard methodologies) would be negligible."

In essence, the IMF projects that China's current account surplus - the overall inflow of money from around the world, driven by the country's export juggernaut - is rising now that recovery is underway, and will soon approach the same unhealthy levels it did in 2007, when it topped 10 percent of gross domestic product.

Chinese officials, however, say they are taking other measures that amount to a "structural break" with the past that will reduce the current account surplus to about 4 percent of GDP - a more sustainable number and perhaps a proxy for where central authorities in Beijing feel the surplus should be.

Yes, they say, the currency will appreciate. But changes in their domestic economy -- the buildup of social safety nets, wage increases, urbanization,and other steps -- will create a society that naturally spends more, regardless of how the yuan relates to the dollar.

Chalk said there is reasonable debate on this point.

"We see the currency not in isolation but as part of a broader package of reform. When you are dealing with macro-engineering, you have to use all the tools."

It's an argument not likely to convince many on Capitol Hill, where midterm elections and still high unemployment mean pressure will build again for a legislative response if the value of the renminbi does not change in some substantial way. China announced a month ago that it was dropping its peg to the dollar and would once again allow the renminbi to float, albeit in a controlled way.

The first weeks suggest just how controlled: The currency has appreciated less than 1 percent since the announcement.

By Howard Schneider  |  July 29, 2010; 9:28 AM ET
Categories:  China  
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"The country's currency is overvalued"? Isn't it "undervalued"?

Posted by: Lizzy | July 29, 2010 10:21 AM | Report abuse

Americans have Subsidized and Sacrificed enough Jobs to help China Job growth. Now it's time to encourage China to play fair and for the USA to Do more than just Talk about China's Currency Manipulation that is costing the USA millions of Jobs. Actions speak louder than words. China’s currency manipulation and other Policies Cheat the USA in several areas:

1) Currency manipulation. China "pegs" its currency at a very low, or "weak" rate, so goods from China cost up to 40% less than they otherwise should.
2) Labor-rights suppression has lowered manufacturing wages of Chinese workers by 47% to 86%.
3) There is massive direct government subsidization of export production in many key industries.
4) China allows environmental degradation that ends up affecting all of us.
5) Intellectual property theft and piracy mean that American products that could be sold are stolen instead.
6) China has a number of policies that block U.S. firms from market access.

This costs USA Industry Millions of Jobs. Not the Walmart and dollar store product Jobs, but the big industrial multi-million dollar steel, carbon fiber and technology (Nuclear, Aviation, Transportation etc.,) products.

The USA must Immediately enact a gradual tariff on all goods imported from China up to 40% within 12 months in response to their currency manipulation that keeps the Yuan/Renminbi 40% below value. Ratify the free trade agreement with South Korea which will allow fairer trade than what we have with China.

“American manufacturers say the Chinese currency is undervalued by as much as 40 percent. They contend that this undervaluation is a key reason for America's huge trade deficit with China, the largest with any country. It is also a factor in the loss of millions of American manufacturing jobs over the past decade, they say.” “Sen. Charles Schumer, D-N.Y., one of China's leading critics in Congress, said he plans to seek a vote on his legislation at the earliest opportunity.”

S. 1254: Currency Exchange Rate Oversight Reform Act of 2009: A bill to identify foreign currency manipulation and apply tariffs to their imported good as is fair to the US consumer:

The Fair value for the Chinese Yuan is ¥4/$1 not ¥6.78/$1. An exchange rate of ¥4/$1 makes USA made products more affordable for the Chinese and promotes America based Job growth.

Posted by: Airborne82 | July 29, 2010 12:09 PM | Report abuse

The Middle Class in America Is Radically Shrinking. Here Are the Stats to Prove it^DJI,^GSPC,SPY,MCD,WMT,XRT,DIA

"The 22 statistics detailed here prove beyond a shadow of a doubt that the middle class is being systematically wiped out of existence in America.

The rich are getting richer and the poor are getting poorer at a staggering rate. Once upon a time, the United States had the largest and most prosperous middle class in the history of the world, but now that is changing at a blinding pace.

So why are we witnessing such fundamental changes? Well, the globalism and "free trade" that our politicians and business leaders insisted would be so good for us have had some rather nasty side effects. It turns out that they didn't tell us that the "global economy" would mean that middle class American workers would eventually have to directly compete for jobs with people on the other side of the world where there is no minimum wage and very few regulations. The big global corporations have greatly benefited by exploiting third world labor pools over the last several decades, but middle class American workers have increasingly found things to be very tough."

"Giant Sucking Sound

The reality is that no matter how smart, how strong, how educated or how hard working American workers are, they just cannot compete with people who are desperate to put in 10 to 12 hour days at less than a dollar an hour on the other side of the world. After all, what corporation in their right mind is going to pay an American worker 10 times more (plus benefits) to do the same job? The world is fundamentally changing. Wealth and power are rapidly becoming concentrated at the top and the big global corporations are making massive amounts of money. Meanwhile, the American middle class is being systematically wiped out of existence as U.S. workers are slowly being merged into the new "global" labor pool. "

Posted by: Airborne82 | July 29, 2010 12:25 PM | Report abuse

Foreign companies in China sound off on business policies

“(China) policies known as "indigenous innovation," which essentially requires firms operating here (in China) to transfer their latest technology to China; it also favors homegrown Chinese companies for government business and contracts.

A foreign company here (in China) "has to register its technology in China, innovate in China and, in some cases, make it in China." Without… safeguards of intellectual property, some foreign business leaders are worried that Chinese companies will copy their technology and use it to compete against the foreign firms in the global marketplace.

Technology-based multinational firms -- particularly those involved in telecommunications, aerospace, semiconductors, pharmaceuticals and alternative energy -- are finding China increasingly assertive and more interested than ever in acquiring their know-how. "”

The Fair value for the Chinese Yuan is ¥4/$1 not ¥6.78/$1. An exchange rate of ¥4/$1 makes USA made products more affordable for the Chinese and promotes America based Job growth.

China combines the Power of the State to help create Private Industry Jobs. The Chinese government is investing $738 Billion over the next 10 years in clean energy jobs and manufacturing. Every dollar invested generally attracts two and more dollars in Private investment. The USA "Wastes" money on 100% taxpayer funded Defense spending while China "Invests" money on Products they can sell. China trade surplus with the USA is projected to be $250 Billion for 2010 ($71 Billion for 1st Quarter) and their Defense budget is under $150 Billion versus $722 Billion for the USA in 2010. This $800 Billion Dollars a year goes towards Creating Jobs and Industries in China.

Posted by: Airborne82 | July 29, 2010 12:31 PM | Report abuse

While the GOP is blocking clean energy jobs and American manufacturing and giving themselves Trillions in subsidies, China is not wasting any time:

World Nuclear Association: 23 Nuclear Reactors under construction In China:

* Mainland China has 11 nuclear power reactors in commercial operation, 23 under construction, and more about to start construction soon.
* Additional reactors are planned, including some of the world's most advanced, to give more than a tenfold increase in nuclear capacity to 80 GWe by 2020, 200 GWe by 2030, and 400 GWe by 2050.
* China is rapidly becoming self-sufficient in reactor design and construction, as well as other aspects of the fuel cycle.”

China is pulling ahead in worldwide race for high-speed rail transportation:

“Last year (2009), China surpassed the United States as the world's largest automaker. The country is aggressively making jets to compete with Boeing and Airbus. And in recent years, with little outside notice, China made another great leap forward in transportation: It now leads the world in high-speed rail.”

In 2009 China invested $100 Billion into High speed rail compared to US stimulus investment of $8 Billion. China is investing $120 Billion in High speed rail for 2010.

Bush era Tax Cuts, Oil Industry subsidies; and Feedstock and Cotton Subsidies from top to bottom should end. Hit 'Reset' until America can bring its military men and women home from the Middle East. Until then, it’s all Americans civic duty to create the Jobs and manufacturing America needs now, and the jobs veterans will need when they return.

Posted by: Airborne82 | July 29, 2010 12:51 PM | Report abuse

"The first weeks suggest just how controlled: The currency has appreciated less than 1 percent since the announcement."

Smart people, those Chinese.

Rather than let open market speculators determine their fortunes or free-market fundamentalists control their policies, they are seeking a balance between dynamic adjustment and stability. It protects sunk investments in production and infrastructure while sending the signal that firms must anticipate and plan for a more competitive future.

Contrast this with the damage done to emerging economies in the past by IMF shock therapy - yes, the IMF has much to learn from the Chinese, if it will.

Posted by: j3hess | July 29, 2010 2:53 PM | Report abuse

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