Tag Archives: China

China Is Not Yet #1

Widespread recent reports have trumpeted: “China to overtake US as top economic power this year.”  The claim is basically wrong. The US remains the world’s largest economic power by a substantial margin.

The story was based on the April 29 release of a report from the ICP project of the World Bank: “2011 International Comparison Program Summary Results Release Compares the Real Size of the World Economies.”     The work of the International Comparison Program is extremely valuable.  I await eagerly their latest estimates every six years or so and I use them, including to look at China.  (Before 2005, the data collection exercise used to appear in the Penn World Tables.)

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IMF Reform and Isolationism in Congress

A long-awaited reform of the International Monetary Fund has now been carelessly blocked by the US Congress.   This decision is just the latest in a series of self-inflicted blows since the turn of the century that have needlessly undermined the claim of the United States to global leadership. 

The IMF reform would have been an important step in updating the allocations of quotas among member countries.  From the negative congressional reaction, one might infer that the US was being asked either to contribute more money or to give up some voting power.   (Quotas allocations in the IMF determine both monetary contributions of the member states and their voting power.)  But one would then be wrong.  The agreement among the IMF members had been to allocate greater shares to China, India, Brazil and other Emerging Market countries, coming largely at the expense of European countries.  The United States was neither to pay a higher budget share nor to lose its voting weight, which has always given it a unique veto power in the institution.

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Protectionist Clouds Darken Sunny Forecast for Solar Power

On July 27 negotiators reached a compromise settlement in the world’s largest anti-dumping dispute, regarding Chinese exports of solar panels to the European Union.   China agreed to constrain its exports to a minimum price and a maximum quantity.   The solution is restrictive relative to the six-year trend of rapidly rising Chinese market share (which had reached 80% in Europe), and plummeting prices.  But it is less severe than what had been the imminent alternative:  EU tariffs on Chinese solar panels had been set to rise sharply on August 6, to 47.6%, as the result of a “finding” by the EU Trade Commissioner that China had been “dumping.”   The threat of likely retaliation by China helped persuade the Europeans to back off from their determination to impose such high protective walls around their own solar panel industry. 

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McKinnon’s Claim that RMB-$ Appreciation Would Not Reduce Trade Imbalances

The International Economy magazine (Winter 2013) asks 16 authorities, “Can Changes in Exchange Rate Valuations Affect Trade Imbalances?”   It is referring to the claim in a recent book by Stanford economist Ron McKinnon that pressure on China to let the renminbi appreciate against the dollar is fundamentally misconceived because such a movement in the exchange rate would not reduce China’s trade surplus nor American’s trade deficit.  This is part of an old debate that pre-dates the rise of the China trade problem.  Ron has long claimed that exchange rates don’t determine trade balances because they are “instead” determined by national saving versus investment.   I thought Paul Krugman demolished the argument pretty effectively 25 years ago, with a textbook graph of internal balance versus external balance.   But evidently many still fall for the argument (including some of the experts in the TIE symposium).   So I try again:

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Economists Polled on the Pre-Election Economy

         A survey of economists is published in the November 2012 issue of Foreign Policy.  One question was whether we thought that the US unemployment rate would dip below 8.0% before the election.   When the FP conducted the poll at the end of the summer, unemployment was 8.1-8.2%.  Now it’s 7.8%.  Only 8% of the respondents said “yes.”   (I was one.  I basically just extrapolated the trend of the last two years.)   

My fellow economists choose defense spending and agricultural subsidies as the two categories of US federal budget that they think the best to cut.  They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.   

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Will Emerging Markets Fall in 2012?

Emerging markets have performed amazingly well over the last seven years. They have outperformed the advanced industrialized countries in terms of economic growth, debt-to-GDP ratios, and countercyclical fiscal policy.  Many now receive better assessments by rating agencies and financial markets than some of the advanced economies.

As 2012 begins, however, emerging markets may be due for a correction, triggered by a new wave of “risk off” behavior among investors. Will China experience a hard landing? Will a decline in commodity prices hit Latin America? Will the sovereign-debt woes of the European periphery spread to neighbors such as Turkey in a new “Aegean crisis”?

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The Rise of the Renminbi as International Currency: Historical Precedents

All of a sudden, the renminbi is being touted as the next big international currency.   Just in the last year or two, the Chinese currency has begun to internationalize along a number of dimensions.   RMB bank desposits are now available in Hong Kong.  A RMB bond market has grown rapidly there as well, with the issuers including major multinationals such as McDonald’s.   Some of China’s international trade is now invoiced in the currency.  Foreign central banks have been able to hold RMB since August 2010, with Malaysia going first. 

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Telling China to Stop Buying Dollars Now Would Be More Foolish Than Before


The current visit of Secretary Tim Geithner to Beijing once again shines the spotlight on the Renminbi (RMB) and on demands by US politicians that the People’s Bank of China (the country’s central bank) abandon the peg to the dollar.  


Throughout the period 2003-2008, I, as some others, have thought that demands from American politicians of both parties that China loosen the dollar link have been misguided in a number of particulars.    They were misguided in thinking that an appreciation of the RMB would, alone, do much to boost US output or employment.  The demands were especially misguided in putting such high priority on the entire exchange rate issue, given that we need China’s help on more important things, such as preventing a nuclear-armed North Korea.   But my arguments during this period might reasonably have been viewed by non-wonks as quibbles.   After all, I did agree, along with a majority of other economists, that an increase in the flexibility of China’s exchange rate would be a good thing.

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The RMB Has Now Moved Back to the Dollar

In July 2005, the Chinese government announced that it was changing its official exchange rate regime. As American politicians had been demanding, the yuan or renminbi would no longer be pegged to the dollar. Rather the authorities would: 

(1) set its value with reference to a basket of foreign currencies (with numerical weights unannounced), and 
(2) allow a margin of fluctuation in the exchange rate that, though small in any given day, could cumulate substantially over time.
What has the actual or de facto exchange rate regime been, as opposed to the official or de jure announcement? It would not be surprising if the two differed.   Many currencies show such a discrepancy between de jure and de facto. Accordingly, statistical techniques were developed some years ago to discern the true exchange rate regime.

The standard techniques show that, in practice, the RMB initially continued to maintain a tight peg to the dollar after July 2005. Gradually, in 2006, the relationship loosened. Statistical analysis suggests that the People’s Bank of China did indeed begin to assign a little weight within the anchor basket to a few non-dollar currencies, beginning with the Korean won during a period centered on January-March 2007.   However most of the weight remained on the dollar.  [Frankel & Wei, in Economic Policy.]

The use of a new, more sophisticated, statistical equation reveals that during the course of 2007 the anchoring basket began for the first time to assign substantial weight to the euro.   For a period that ran up to approximately May 2008, the anchor was a true basket that put virtually as much weight on the euro as on the dollar.  There was also some limited flexibility around that anchor.   When high or low international flows were working to push the currency away from the basket, the authorities would intervene, or “lean against the wind,” to push the currency back. [Frankel, 2009, forthcoming in Pacific Economic Review.])


        During the course of 2008, however, weight began to return to the dollar. My newly updated estimates show that during the most recent period, September 2008-February 2009, all the weight has once again fallen on the US currency. The regime has come full circle, virtually back to what it was in late 2005.  At first glance, this sounds like news to get the juices of US Congressmen flowing. It sounds as though it might confirm recent complaints that the RMB has stopped its earlier slow-but-steady, appreciation against the dollar. Is it time to dust off the Schumer-Graham bill, which threatened tariffs against China’s exports if it did not stop “unfair manipulation” of its currency?

In fact, these results imply something quite different, almost the opposite. American politicians don’t really care whether the RMB is fixed or floating. What they want, of course, is for it to be stronger against the dollar rather than weaker, so that American firms have an easier time competing against Chinese exports. In 2007, when the RMB was loosely tied to a basket that put heavy weight on the euro, it appreciated against the dollar because the euro was appreciating against the dollar. Indeed from mid-2006 to the end of 2007, the overall value of the RMB did not in any month fluctuate outside a band of plus-or-minus 1%, if one defines the value in terms of a yardstick that assigns half-weight to the euro and half-weight to the dollar. The graph below shows the foreign exchange value of the RMB, in terms of three different measures.  One can see around 2007: (i) the steadiness of the currency measured in terms of a euro+dollar average (the green line in the middle), and (ii) the resulting observed appreciation of the yuan against the dollar (the magenta line on top).  The appreciation was apparently due to the presence of the euro in the basket, and not in fact to appreciation against the basket as usually implied in the press.





De facto regime of RMB: 100% weight on $     Some weight on won½ weight on $  +  ½ on €  ↓   100% weight on $


The recent link to the dollar is visible in the flattening of the magneta line at the end.   What has been the implication of the movement back toward a dollar peg over the last year?    It has been to strengthen the RMB above what it would be if Beijing had stuck with the regime of 2007.  Why?    Because over the last year, the dollar has appreciated strongly against the euro.  If the RMB had stuck with the basket peg in 2008 and 2009, it would have depreciated against the dollar (because the euro depreciated) by an estimated 14%.  This would have been the opposite of what congressmen really want!  

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