Sharp statements regarding China ignore the economic realities

Last week, Washington was again to discuss their concerns about China and its currency. At a time when there are many other important issues facing the US-China relations, many of us do not understand why the problem of currency worries Congress the most. Once every six months, this time on April 15 U.S. Treasury checks, whether China currency manipulator ", and it is not clear whether such a fuss even help someone else.

Indeed, from a macroeconomic point of view, the timing of this could not be more inappropriate. About four weeks ago, Obama introduced a plan to double exports over the next five years. Very ambitious, given the past weak dollar and rising domestic demand in many developing countries, including China, but the U.S. has a chance to achieve this goal. So why follow the path of retribution "eye for an eye" if the course of events and so can turn in the opposite direction?

There are three main problems which need to focus American policy: domestic demand in China, its trade relations with other countries, and exchange rates.

With all due respect to domestic demand in China, it is clear that he is now far too strong, and certainly not at that level, so that you can blame China that its influence on the world economy "is not great." Approximately thirteen years we have used our own GDP for China, the so-called index of Chinese activity Goldman Sachs. Currently, he is growing annually by 14 percent or more. In fact, and this is the trick, if Washington and the other would maintain silence, China's policy would become even more vigorously to contain inflationary pressures by, inter alia, the introduction of more flexible exchange rate.

Take a look at several indicators of data to local or global companies that do business in China, published data on consumption and investment, or, more importantly, the trade data, true. Talk to someone who is involved in any level of consumer business, whether it be Tesco, Walmart, or Louis Vuitton, as well as look at their records. Chinese consumption is probably true is growing by about 15%, which compares with 2-3% growth for the American consumer.

While the involvement of China in the rest of the world is saved, the worst in the current crisis is not a strong Chinese exports, but the strong imports. The forthcoming publication of reports on trade in just a few days before the report of the Treasury is likely to show a huge increase in imports, in absolute terms and relative to exports. A similar situation is observed not only in China but also in many other important countries with high levels of foreign trade. Indeed, quite surprisingly, that the trade turnover between Germany and China shows strong growth so that if the trend until the next spring, they will exceed the growth of trade with France. Last year, China announced that its balance of payments surplus amounted to 5.8% of GDP, significantly below the levels predicted by many people in Washington. In 2010, the surplus could be closer to 3% (by the way, the level below 4% is considered a "balance" in the Peterson Institute for International Economics).

Which brings me to exchange rates. I spent much of his career, working on models of exchange rates, and familiar with all the difficulties. We develop our own model for many years at Goldman Sachs, including the yuan. At the moment, and this is very strange, our model shows that the yuan is very close to its fair value. Model usually shows that the currency is undervalued by 20%, but in past five years the situation has changed. Of course, we are less confident in the accuracy of the model than the conventional monetary model, given the huge changes in the growth dynamics of the Chinese and the world at large.

This brings us to the irony of the question. Why American politicians have to click on the buttons of protectionism at the very moment when there is clear evidence that the opposite outcome of events will only benefit? In addition, all should be clear that linking the yuan to the dollar lost its meaning, which, incidentally, recently the president of the People's Bank of China.

 

 

By Jim Neal - Chief Economist, Goldman Sachs