Recently, one piece of important news is overlooked by the western media. That is the visit to China of a delegation of leaders from a major US trade union, Change to Win. The relevant news can be found in many Chinese media, but not in western media.
The delegation was led by the president of Change to Win, Anna Burger at the invitation of All China Federation of Trade Unions and participated with some famous leaders of US trade unions such as James Hoffa, the son of famous Jimmy Hoffa. For a long period, the biggest trade union in the US, AFL-CIO does not commit the position of All China Federation of Trade Unions as a real trade union due to its affiliated position under the leadership of the China Communist Party. The visit of Change to Win, the second largest trade union in the US, was believed to create a new chapter of the relationship between the trade unions in China and the US.
The common ground between the trade unions probably lies in the concentrated force to help improving workers’ working and living standards. The news that All China Federation of Trade Unions organized the labor unions for some branches of Wal-mart Stores Inc. is one important catalyst for this visit. It seems to display the endeavor and strength of All China Federation of Trade Unions in helping the workers. However, there are underlying reasons.
Change to Win was founded in 2005 by 7 member unions which gave up the affiliated membership of AFL-CIO. They are International Brotherhood of Teamsters, Laborers' International Union of North America, Service Employees International Union, UNITE HERE, United Brotherhood of Carpenters and Joiners of America, United Farm Workers of America, and United Food and Commercial Workers International Union. To some extent, large proportion of their 6 million members is influenced by the globalization. As James Hoffa said, the establishment of trade unions in the foreign invested companies in China might help to adjust the balance of the competitiveness between Chinese labors and US workers. The stronger the trade union is, the higher wages they can probably negotiate with the employer.
The communication between All China Federation of Trade Unions and the western trade unions also has benefit to the side of China. All China Federation of Trade Unions is bound to find some ways to strengthen its power in the course of China’s development. Chinese government is making every effort to protect the benefit of its farmers. They believe that it is a good way to stabilize China’s economy. It is also true that a stronger trade union will help to stabilize China’s economy through providing better salaries for workers. The rationale behind it is that the higher income the workers (also the peasants) can get, the more likely they are going to consume. This will be the very solution China tries to find to the trade conflict between China and the US. If the internal supply can be promoted, the pressure for exports to support China’s economic growth will become less. This will finally reduce the business friction problem of China.
23 May, 2007
14 May, 2007
China’s Economy Is at a Critical Point
News on China’s economy is always popular. In recent days, reports about China’s economy are catching eyes particularly. “China Regulator Urges Investor Awareness of Stock Market Risks”, “China's Inflation Probably Broke Central Bank Target”, “China Money Supply Rises 17.1%, Exceeding Target” and etc. (Headlines from Bloomberg.com) Those headlines are delivering the same message: China’s economy is at a critical point.
Then what is the clue for these problems? One bold guess is the unexpected inflation. It seems reasonable that since the inflation is 3.1% (an estimated number from Bloomberg. com), the negative real interest rate has forced citizens to give up saving at banks as a traditional way of investment and to turn to other financial assets, stocks in particular. In the first quarter this year, 8.58 million new accounts have been opened at brokerages. In contrast, the number for last whole year was only 5.38 million. And the investment of stocks also explains the breaking of the China’s money supply target partially. Many people even try to borrow money to buy stocks which increases the M1 greatly.
Where does the inflation come from? It may result from undervalued RMB. When RMB is undervalued, we can see great trade surplus and higher demand for RMB. To stable the exchange rate of RMB, China’s government purchases a lot US Treasury bond to create demand for US dollar artificially. This method may not give US economy a great impact as I mentioned in “A Brief Overview on RMB and the US Dollar” (May 8th), but it may have great side-effect on Chinese domestic market. One effect is mainly caused by the constant payment of Chinese Yuan, which may lead to the excess printing of RMB and cause an excess money supply. The ending of the circle is a higher inflation rate.
Whatever the reason is, it is a critical point of China’s economy. The flood of new shareholders is not from the elites or at least people with financial know-how. However, they are those who have little understanding of the risks of financial investment. The once popular saying, “there are risks in the stock market, and you should be careful when you enter it” does not prevent the irrational growth of shareholders. If the increase in stock investment could not be contained immediately, an economic bubble would be easily forming at a quick pace, especially for China, such a large and immature economy.
It is reasonable to predict that the government will try to tight its monetary policy (to raise the interest rate) seriously, as the former changes in policies do not work effectively.
Then what is the clue for these problems? One bold guess is the unexpected inflation. It seems reasonable that since the inflation is 3.1% (an estimated number from Bloomberg. com), the negative real interest rate has forced citizens to give up saving at banks as a traditional way of investment and to turn to other financial assets, stocks in particular. In the first quarter this year, 8.58 million new accounts have been opened at brokerages. In contrast, the number for last whole year was only 5.38 million. And the investment of stocks also explains the breaking of the China’s money supply target partially. Many people even try to borrow money to buy stocks which increases the M1 greatly.
Where does the inflation come from? It may result from undervalued RMB. When RMB is undervalued, we can see great trade surplus and higher demand for RMB. To stable the exchange rate of RMB, China’s government purchases a lot US Treasury bond to create demand for US dollar artificially. This method may not give US economy a great impact as I mentioned in “A Brief Overview on RMB and the US Dollar” (May 8th), but it may have great side-effect on Chinese domestic market. One effect is mainly caused by the constant payment of Chinese Yuan, which may lead to the excess printing of RMB and cause an excess money supply. The ending of the circle is a higher inflation rate.
Whatever the reason is, it is a critical point of China’s economy. The flood of new shareholders is not from the elites or at least people with financial know-how. However, they are those who have little understanding of the risks of financial investment. The once popular saying, “there are risks in the stock market, and you should be careful when you enter it” does not prevent the irrational growth of shareholders. If the increase in stock investment could not be contained immediately, an economic bubble would be easily forming at a quick pace, especially for China, such a large and immature economy.
It is reasonable to predict that the government will try to tight its monetary policy (to raise the interest rate) seriously, as the former changes in policies do not work effectively.
08 May, 2007
A Brief Overview on RMB and the US Dollar
The topic of China and the US is always hot and the relationship between China and the US is too complicated to be fully explained. There are always different views and arguments from different stances are just there to be picked up. You will never feel alone when you try to say some words about China and the US. Out of this reason, I would like to write some things about the relation between RMB and the US dollar.
A brief discussion on RMB and the US dollar would be started from 1994 when China adopted the policy to peg against the dollar at 8.28 yuan per dollar. At that time, China faced severe inflation (the inflation rate in 1994 was 24%). As a result, China took the policy of pegging against the dollar to stable the dollar prices for the goods they sold in the United States.
With the country’s ability to control the national economy increasing, China was gradually able to bring down the inflation rate at a very low level and keep the fast economic growth rate at an average of about 9%. The demand for RMB and the dollar began to change accordingly. By the early 2000s, many economists argued that the yuan was undervalued against the dollar, possibly significant so.
This point was well taken use of by those politicians in the US to explain the great trade deficit of the United States. The pressure on China’s currency to appreciate was since then became heavier. Any policies Chinese government used to keep RMB stable might be regarded as a violation of the common practice and was irresponsible for the international financial market. Is that true? Or more specifically, are those policies really hurt the United States that much?
If you are equipped with some macro-economic knowledge, you should able to establish the demand and supply model for RMB and the US. If the exchange rate between RMB and the dollars is significantly undervalued as argued, then the exchange rate should be well below the equilibrium exchange rate. This leads to a shortage between the supply and the demand for RMB. The shortage should pressure the Chinese yuan to appreciate until it gets to the equilibrium exchange rate. However, since Chinese yuan was pegged against the US dollar, Chinese government had to cover the shortage by selling RMB and purchasing US dollars. In reality, Chinese government chose to purchase large amounts of US Treasury bonds to keep the fixed exchange rate.
From the US perspective, since Chinese government purchased a lot of US Treasury bonds, the artificial exchange rate can be kept at 8.28 and thus the US dollar do not need to depreciate and the large demand for US Treasury produced by Chinese government helped to keep the US interest rate at a quite low level. As a result, the US did not need to pay large interest to keep stable of its exchange rate with other major currencies and this helped the US a lot to keep its economic growth. If the demand-supply shortage occurred for a developing country rather than the US, then probably the economy would fall into the vicious cycle of borrowing a lot of US dollars to keep the country’s foreign reserves and paying huge interests as a heavy burden.
The previous interpretation helps to articulate that the fixed exchange rate did not influence the US economy too much and since the dollar is the world currency, China compensated the US loss by purchasing its government treasury bonds. Then is there something wrong with the US trade sector as those politicians’ argument?
The US great trade deficit is a fact. No one is going to decline. However, it is not much to do with China. Although it seems that the US has a large trade deficit with China, the problem is that US has a large trade deficit with nearly all the countries and the proportion of that with China is not that large.
One way to explain the US trade deficit is the relationship between the government budget deficit and the current account which is greatly influenced by the balance of trade. To explain this relationship, we should have a look at the formula S = I + NFI, where S stands for savings, I stands for domestic investment and NFI stands for net foreign investment. In a closed economy, it is obvious that all the sources for investment are from the total savings of the country. A little different from the conclusion is that in an open economy, the savings of the whole country can invest in the domestic market and the international market as well. As a result, we get the formula S = I + NFI. If government tends to have a budget deficit, savings tend to be small. To boom the economy, the US needs a lot of domestic investment. Thus the NFI (net foreign investment) should be a negative number, which means that the US need the investment from other countries and its financial account should be positive. The zero-sum relation between the current account and the financial account then hints that the current account should be negative. That is to say the policy of holding budget deficit results in the large trade deficit. The US actually designs its development pattern itself!
There are other ways to explain why the US always has a large trade deficit. I would not explain all of them this time. But no matter how we explain the situation, Washington has the enough influence to press the counterpart in China to appreciate the Chinese yuan at least a little. China claimed, in 2005, to give up the policy of pegging against the dollar and to adopt the policy to link the value of the yuan to the average value of a basket of currencies that would include the dollar, the Japanese yen, the euro, the Korean won, and several other currencies.
The argument has not come to an end. Many US politicians are not satisfied the pace of appreciation of RMB, and they may push harder for a strong Chinese yuan. Is China able to stabilize its economy by change the value of its currency gradually? Maybe time can tell us everything.
A brief discussion on RMB and the US dollar would be started from 1994 when China adopted the policy to peg against the dollar at 8.28 yuan per dollar. At that time, China faced severe inflation (the inflation rate in 1994 was 24%). As a result, China took the policy of pegging against the dollar to stable the dollar prices for the goods they sold in the United States.
With the country’s ability to control the national economy increasing, China was gradually able to bring down the inflation rate at a very low level and keep the fast economic growth rate at an average of about 9%. The demand for RMB and the dollar began to change accordingly. By the early 2000s, many economists argued that the yuan was undervalued against the dollar, possibly significant so.
This point was well taken use of by those politicians in the US to explain the great trade deficit of the United States. The pressure on China’s currency to appreciate was since then became heavier. Any policies Chinese government used to keep RMB stable might be regarded as a violation of the common practice and was irresponsible for the international financial market. Is that true? Or more specifically, are those policies really hurt the United States that much?
If you are equipped with some macro-economic knowledge, you should able to establish the demand and supply model for RMB and the US. If the exchange rate between RMB and the dollars is significantly undervalued as argued, then the exchange rate should be well below the equilibrium exchange rate. This leads to a shortage between the supply and the demand for RMB. The shortage should pressure the Chinese yuan to appreciate until it gets to the equilibrium exchange rate. However, since Chinese yuan was pegged against the US dollar, Chinese government had to cover the shortage by selling RMB and purchasing US dollars. In reality, Chinese government chose to purchase large amounts of US Treasury bonds to keep the fixed exchange rate.
From the US perspective, since Chinese government purchased a lot of US Treasury bonds, the artificial exchange rate can be kept at 8.28 and thus the US dollar do not need to depreciate and the large demand for US Treasury produced by Chinese government helped to keep the US interest rate at a quite low level. As a result, the US did not need to pay large interest to keep stable of its exchange rate with other major currencies and this helped the US a lot to keep its economic growth. If the demand-supply shortage occurred for a developing country rather than the US, then probably the economy would fall into the vicious cycle of borrowing a lot of US dollars to keep the country’s foreign reserves and paying huge interests as a heavy burden.
The previous interpretation helps to articulate that the fixed exchange rate did not influence the US economy too much and since the dollar is the world currency, China compensated the US loss by purchasing its government treasury bonds. Then is there something wrong with the US trade sector as those politicians’ argument?
The US great trade deficit is a fact. No one is going to decline. However, it is not much to do with China. Although it seems that the US has a large trade deficit with China, the problem is that US has a large trade deficit with nearly all the countries and the proportion of that with China is not that large.
One way to explain the US trade deficit is the relationship between the government budget deficit and the current account which is greatly influenced by the balance of trade. To explain this relationship, we should have a look at the formula S = I + NFI, where S stands for savings, I stands for domestic investment and NFI stands for net foreign investment. In a closed economy, it is obvious that all the sources for investment are from the total savings of the country. A little different from the conclusion is that in an open economy, the savings of the whole country can invest in the domestic market and the international market as well. As a result, we get the formula S = I + NFI. If government tends to have a budget deficit, savings tend to be small. To boom the economy, the US needs a lot of domestic investment. Thus the NFI (net foreign investment) should be a negative number, which means that the US need the investment from other countries and its financial account should be positive. The zero-sum relation between the current account and the financial account then hints that the current account should be negative. That is to say the policy of holding budget deficit results in the large trade deficit. The US actually designs its development pattern itself!
There are other ways to explain why the US always has a large trade deficit. I would not explain all of them this time. But no matter how we explain the situation, Washington has the enough influence to press the counterpart in China to appreciate the Chinese yuan at least a little. China claimed, in 2005, to give up the policy of pegging against the dollar and to adopt the policy to link the value of the yuan to the average value of a basket of currencies that would include the dollar, the Japanese yen, the euro, the Korean won, and several other currencies.
The argument has not come to an end. Many US politicians are not satisfied the pace of appreciation of RMB, and they may push harder for a strong Chinese yuan. Is China able to stabilize its economy by change the value of its currency gradually? Maybe time can tell us everything.
02 May, 2007
Globalization and Neo-Marxist Theories
This is the first time that I realize that I am touching some political theories to explain the economic world. Originally I had the perception that there are relations between politics and economics, but I could not put forward the exact example to prove my sense.
Born in the socialist state, I was taught with some Marxist theories to understand the economic world, especially from the angle of possession of materials; however, I did not realize that.
This time, the learning of neo-Marxist theories to explain the globalization in a capitalist society helped me to bridge the gap between politics and economics.
Neo-Marxists were active during 1960s and 1970s and their theories were marginalized with the demise of the former Soviet Union. It was the heat of globalization and its stagnancy in some parts of the world that brought those theories into light again.
In liberalists’ views that globalization is the panacea for the Global South. The lower the barriers for trade and finance integration, the better the Global South countries can develop in the long run. However, no matter how better those liberalists promote their theories, they could not ensure the short-run stability for those poor countries. If what they mean by “in the long run” is foreseeable in a decade, it would be more persuasive. Nevertheless, common people without professionally trained by advanced economics or brainwashed by the western values may cast doubt on this point when the international division, using natural resources or agricultural commodities in exchange of sophisticated manufactured goods. If this openness requires more preliminary loss of partial sovereignty, then the enthusiasm of change may be even lower. These analyses lead to a picture of a poorer future than even today for those economies at the bottom of the world.
As a result, the prescription is not favored by the authorities of those poor countries. They would like to use neo-Marxist theories to excuse themselves from globalization and from the vicious cycle, at least in the short term. Even the examples of fast developed Asian Tigers and China can not eliminate their fear to be the victim of neocolonialism. They coined “semiperiphery” to accommodate those leaders in the Global South and kept their attention mainly on the dependent development and the negative effect of national bourgeoisies or compradors. They may hope that the closure of the countries to the international intercourse may not affect too much as hundreds years back countries were generally independent without much intercourse. However, the world has changed with high outside pressure and little patience. Their path may not be an easy one.
Politically speaking, it is quite confused to say which way is right or at least is with rightness. The meaning of politics itself is the struggle for solving the conflicts. However, watch the issue from an economics view, maybe it is the problem of seeking the balance. If you can not ensure the long run fruit, just try to get those easier to pick up. That does not mean that those poor countries should give up and totally secluded from the global community. They should try to prepare for the openness gradually. In the sort term, they are safe and in the long run they can try to embrace the present situation. However, the treacherous assumption is that the international political system is not that violent.
The only conclusion I want to draw at the present point is:
Try to solve the problem peacefully by economics and to avoid fierce monsters in international politics.
Born in the socialist state, I was taught with some Marxist theories to understand the economic world, especially from the angle of possession of materials; however, I did not realize that.
This time, the learning of neo-Marxist theories to explain the globalization in a capitalist society helped me to bridge the gap between politics and economics.
Neo-Marxists were active during 1960s and 1970s and their theories were marginalized with the demise of the former Soviet Union. It was the heat of globalization and its stagnancy in some parts of the world that brought those theories into light again.
In liberalists’ views that globalization is the panacea for the Global South. The lower the barriers for trade and finance integration, the better the Global South countries can develop in the long run. However, no matter how better those liberalists promote their theories, they could not ensure the short-run stability for those poor countries. If what they mean by “in the long run” is foreseeable in a decade, it would be more persuasive. Nevertheless, common people without professionally trained by advanced economics or brainwashed by the western values may cast doubt on this point when the international division, using natural resources or agricultural commodities in exchange of sophisticated manufactured goods. If this openness requires more preliminary loss of partial sovereignty, then the enthusiasm of change may be even lower. These analyses lead to a picture of a poorer future than even today for those economies at the bottom of the world.
As a result, the prescription is not favored by the authorities of those poor countries. They would like to use neo-Marxist theories to excuse themselves from globalization and from the vicious cycle, at least in the short term. Even the examples of fast developed Asian Tigers and China can not eliminate their fear to be the victim of neocolonialism. They coined “semiperiphery” to accommodate those leaders in the Global South and kept their attention mainly on the dependent development and the negative effect of national bourgeoisies or compradors. They may hope that the closure of the countries to the international intercourse may not affect too much as hundreds years back countries were generally independent without much intercourse. However, the world has changed with high outside pressure and little patience. Their path may not be an easy one.
Politically speaking, it is quite confused to say which way is right or at least is with rightness. The meaning of politics itself is the struggle for solving the conflicts. However, watch the issue from an economics view, maybe it is the problem of seeking the balance. If you can not ensure the long run fruit, just try to get those easier to pick up. That does not mean that those poor countries should give up and totally secluded from the global community. They should try to prepare for the openness gradually. In the sort term, they are safe and in the long run they can try to embrace the present situation. However, the treacherous assumption is that the international political system is not that violent.
The only conclusion I want to draw at the present point is:
Try to solve the problem peacefully by economics and to avoid fierce monsters in international politics.
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