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Thursday, September 21, 2006

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A. PERLA

Zhou Xiaochuan: "Asked by reporters on the sidelines of a financial forum whether China had a timetable for widening the band, Zhou said: "There is no need (for that)."

Typical. The Chinese are in denial.

They will let the yuan rise occasionally but not all that much. At 0.3% a day and at (say) 250 trading days a year, this gives a maximum potential for it to rise 7-8% per year. And still, 7-8% p.a. is nowhere near the level that will seriously diminish the yuan's disparity and correct the monstrous trade imbalance.

The Chinese are simply mimicking the Japanese postwar reconstruction strategy of low exchange rate to assure continuous export demand (and FDI) that create Chinese jobs.

The problem is this: the imbalance is causing serious disruptions at the level of non-qualified labor in the West presently. When Japan employed this strategy in the 50s and 60s the West (Europe and America) were growing sufficiently to create jobs that would absorb job destruction that Japanese manufacturing caused. The pain was less felt. That is not today's circumstance.

You can't have your cake AND eat it. Except, evidently, in China.

NB: Yes, instead of complaining the West could do more to migrate its unqualified labor more to more qualified levels, which will take decades of training and education.

angry economist

What would be the impact of full convertibility/ fully floating the yuan?

A. PERLA

>What would be the impact of full convertibility/ fully floating the yuan?

Depends upon interest rate policy. And their willingness to hold the dollar horde they have. If they decide to sell dollars because the yuan keeps appreciating, then the Americans are in for a bad surprise.

The Economist shows this week a projection of the Chinese and American economies (GDP) at parity (market exchange rate) by 2040 - only three and half decades hence.)

What would it take for this to happen? A two speed China where the rich are filthy rich and the poor just filthy? That is, can China create social mobility such that it encompasses its masses. I doubt it. There is not that much global trade out there to bring this about - given China's population.

It will have to develop an internal consumption-based economy that can carry China forward. Can it do that? Maybe. It has the mineral resources it needs. It can develop the necessary energy resources by investing heavily in nuclear energy. It requires a consumer propensity to spend, but that is typical of all peoples. What will stop China is what hinders most democracies. Democracy itself.

In a pluralistic and democratic society, various interest groups compete with one another for both attention and resources. In a monolithic society, as China is today, a comparative few benefit whilst the rest see almost no betterment whatsoever, because they have no or little political voice. They work very hard but the labor/capital ratio remains against them.

So, let's hope China goes democratic very quickly. Then it can stagnate in business cycles like Western democracies. ; ^ )

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