Below is a graph from the FT site that shows growth rates in leading developing countries and it makes a good comparison with the Eurozone and the World. Some emerging economies have, nevertheless, achieved high economic growth rates in recent years. China has witnessed particularly rapid economic growth and has become the second largest economy in the world behind the US. China’s increase in output has been driven by increases in investment and exports. This has been helped by a fall in the renminbi which makes Chinese exports cheaper. India’s growth rates has also been significant because of an increase in the labour force and advances in IT. Remember that ‘economic development’ is the process of improving people’s economic well-being and quality of life whilst economic growth is an increase in an economy’s output and the economic growth rate is the annual percentage change in output.
Here is a very good explanation from the FT on China’s exchange rate and the fact that the US no longer sees China as a manipulator of its currency – the Renminbi.
- In May 2019 with the threat of US tariffs on Chinese goods the Renminbi depreciated in value – notice the chart is inverted which means that 1 US$ buys more Renminbi and the value of the currency falls. To look at it another way it takes more Renminbi to buy 1US$. This makes Chinese exports cheaper in the US.
- In August 2019 when the US came good on their threat to impose tariffs the Renminbi fell below 7 Renminbi / US$ in order to protect its exports to the US. Below 7 Renminbi / US$ is seen as a major threshold – the last time this happened was after the GFC.
How do China authorities intervene to manipulate the Renminbi?
The Renminbi is not a floating exchange rate which it is not determined by supply and demand. The government manages its exchange rate in two ways:
- Peoples Bank of China (Central Bank) can or sell US$ on the foreign exchange market – this depends on what they wish for the value of the Renminbi against the US dollar
- People’s Bank of China permits the Renminbi to trade 2 per cent on either side of a daily midpoint set by the. Basically at 9.15am the Peoples Bank of China and the SAFE (State Administration for Foreign Exchange) issues a circular to all the trading banks stating that this is the exchange of the Renminbi to the US$. It is then permitted to trade 2 per cent on either side of the midpoint rate.
But is China a currency manipulator? According to the US Treasury a country is a currency manipulator when it does the following 3 things:
- A significant bilateral trade surplus with the US.
- A material current account surplus of more than 3% of GDP.
- Persistent one-sided intervention in its currency market.
But in August the Chinese economy was slowing down and the Peoples Bank of China (Central Bank) provided stimulus to the economy which would depreciate the currency anyway. However with more trade talks between the US and China and both agreeing to no more tariffs and phase one of a trade deal, the value of the Renminbi against the dollar starts to appreciate. Although the US has no longer called China a currency manipulator it seems that it didn’t have the grounds to do so. This must be a concern for other trading partners with the US.
I have blogged quite a few times about the ‘Resource Curse’ but what about the ‘Trade Partner Curse’? New Zealand has been renowned for its primary exports but is it a concern that a third of every dollar earned in the primary sector comes from China. Dr Robert Hamlin (University of Otago) stated that based on experience no more than 20% of revenue should be earned from one source to ensure a buffer against changes in terms of trade and the economic conditions in the favoured country of destination.
Higher Terms of Trade – would be beneficial because the country needs fewer exports to buy a given number of imports.
Lower Terms of Trade – country must export a greater number of units to purchase the same number of imports.
New Zealand which is traditionally dependant on primary exports usually faces instability which arises from inelastic and unstable global demand especially from China. By relying on the Chinese market, New Zealand exposes itself to greater risk of recessions in that market which may reduce in the demand for New Zealand products. Having numerous export markets means that there isn’t such exposure to economic volatility. Furthermore, countries that are commodity dependent or have a narrow export basket usually faces export instability which arises from inelastic and unstable global demand. The 2018-19 Ministry for Primary Industries’ Situation and Outlook report stated that from the year to June 2019 – total primary exports = $46.3bn but when you look at the breakdown from which country you get the worrying sign that more trade is going to China and less to other countries – essentially China is crowding out other markets:
China – $14.4bn
Australia – $4.5bn
USA – $4.2bn
EU – $3.1bn
Japan – $2.6bn
In 2017 China accounted for 24% of all New Zealand’s trade exports (see above). China also was the top export destination for New Zealand primary sector – 24% of primary sector exports went to China – by value:
25% of dairy,
43% of forestry,
31% of seafood and
21% of red meat.
China is taking a long-term approach to secure food supplies for its growing population by also buying NZ processing companies, giving it control of the supply chain. The reliance on China comes with risks that its economy remains strong. A downturn in their economy could have implications for New Zealand’s primary sector so it is important to have a diversified portfolio.
Another PBS video from Paul Solmon about the trade war between the US and China. The trade war hits China more for two reasons:
- Trade makes up a much higher proportion of China’s GDP than that of the USA
- With the Chinese economy slowing there is a big reliance on the export sector as an employer
The Chinese have certain options (see below) open to them which are discussed in the video below.
- Bond dump
- Squeezing US firms in China
- Pull back on the number of Chinese coming to US for education
- Devalue their currency
- China might make sweetheart trade deals with other countries leaving out the US
The Department of Statistics recently published wealth distribution figures for New Zealand. According to Stats NZ, the median household net worth in the year ended 30 June 2018 was $340,000, up from $289,000 in 2015. The increase was mainly driven by an increase in property values over the last three years.
% of net wealth held by % of Households – 2018
According to the survey, the top ten percent of households hold 53 percent of total wealth in New Zealand, which is unchanged from 2015. The top one percent of households hold 16 percent of total wealth in New Zealand, which is down slightly from 2015. New Zealand’s Gini Coefficient is approximately 0.33.
The Lorenz Curve
The Gini Coefficient is derived from the same information used to create a Lorenz Curve. The co-efficient indicates the gap between two percentages: the percentage of population, and the percentage of income received by each percentage of the population. In order to calculate this you divide the area between the Lorenz Curve and the 45° line by the total area below the 45° line eg. Area between the Lorenz Curve and the 45° line ÷ Total area below the 45° line.
The resulting number ranges between:
0 = perfect equality where say, 1% of the population = 1% of income, and
1 = maximum inequality where all the income of the economy is acquired by a single recipient.
* The straight line (45° line) shows absolute equality of income. That is, 10% of the households earn 10% of income, 50% of households earn 50% of income.
In 2010 China’s Gini coefficient was 0.61 which was one of the world’s most unequal countries however officially it has been falling for seven years from 0.49 in 2008 to 0.46 in 2015. Rural incomes have grown more quickly that their urban counterparts – in 2009 the average urban income was 3.3 times that of a rural worker but now it is 2.7 times. Many of those living in rural areas actually work in cities but are prevented from living there because of the strict residency system. Also companies have now been looking to the rural areas for cheap labour.
But at the top end you would get the impression that inequality of wealth is extremely high – wealth = what you own, as opposed to what you earn. China has more dollar billionaires (596) than the USA (537). Research has shown that 1% of the population control a 1/3 of China’s assets.
Doing trade barriers with my NCEA Level 2 class and below is a good clip from Al Jazeera about the issues that are arising from it and who will lose the least from a trade war. The last ten years saw a marked improvement in trade between the United States and China. But Trump’s battle of the tariffs is threatening that. And there are fears of an all-out trade war. The U.S. is putting tariffs on 50 billion dollars worth of Chinese imports. The president says he wants a fairer trade with China. But Beijing’s fired back with a tit-for-tat response. It’s published a list of more than 600 American products it plans to hit with its own taxes. Is it a case of who blinks first in this economic brinkmanship? And what will it mean for global trade? The comments by Philippe LeGrain are particularly good.
After a third round of trade talks between China and the US ended in stalemate a US$100bn trade war is on the horizon. America has published a list of 1,300 Chinese products which it proposes to hit with a 25% tariff. China has it own list covering 106 categories. As the Chinese embassy in Washington DC said “As the Chinese saying goes, it is only polite to reciprocate.” See graph below from The Economist.
US list covers Chinese products worth – $US$46bn in 2017 – 9% of exports to USA.
Chinese list covers US products worth – US$50bn in 2017 – 38% of exports to China
Historians of trade have an advantage over those who study wars of the military kind. Each side is a trade dispute lays out in detail the products to be affected. That makes it easier to analyse their strategies. Trump’s blunt attack targeting of a particular industry – steel and aluminium – is to supposedly make the industry in the US stronger. China retaliated by placing tariffs on US$0.2bn-worth of iron and steel tubes, pipes and hollow profiles, and US$1.2bn-worth of aluminium waste.
The US face a trade-off between protecting their own industries with import tariffs at the same time as increasing the cost of goods for its consumers. There is also the likelihood of causing disruptions to the US economy by increasing the cost of intermediate goods (aircraft parts, robots, semiconductors) which ultimately leads to higher prices.
Good long-run deal for China
It seems that China has the dominant position for the following reasons:
- China can stop purchasing US aircraft
- Impose an embargo on US soybean products
- Dump US Treasury Bills and other securities
- Chinese companies could reduce demand for US business services
- The government could persuade firms not to buy US products
China is indirectly one of America’s biggest employers. China could look to buy all it commercial aircraft from European consortium Airbus rather than Boeing. That move alone wold cost 179,000 US jobs. China controls key components in global supply and production networks
Initially a trade war would mean job losses for both countries but in the long-run with China looking to develop a more domestic led consumption model the export market becomes less significant – Project Syndicate. See video below:
Source: The Economist – Blow for Blow – April 7th 2018
Interesting video from Al Jazeera about pollution in China.
Smog levels in Beijing were almost seven times the maximum exposure recommended by the World Health Organization. That makes the smog a matter of life and death. In the first quarter of this year more than 90 percent of Chinese cities failed to meet the government’s own air-quality standards.
Air pollution contributes to 17 percent of all deaths in China. As many as 1.6 million people died this year as a result of air pollution, the Berkeley Research Group estimates. That’s about 4,400 people dying every day. But what is the government doing to tackle the issue? And why has it failed to strike a balance between economic growth and public health?
Coal remains one of the easiest and cheapest form of energy and this is very apparent in India where usage is about 62% of energy needs. India is the second largest consumer after China and ahead of the USA. Also coal consumption is growing about 7 percent a year to power the country’s economic catch-up. As China is going through a growth period similar to Europe many years earlier, their argument will be that European countries polluted the environment by a similar amount
Climate change activists have highlighted concerns of rising temperatures by 2100, however are rising temperatures as significant when you consider the long-term implications of much higher unemployment?
The Belt and Road Initiative (BRI) is a development strategy proposed by the Chinese government that focuses on connectivity and cooperation between Eurasian countries. Through infrastructure development China wants to boost trade and stimulate growth across Asia and into Europe. Ratings agency Fitch said that $900bn in projects were planned or in progress.
India is a country that will benefit from this development and recently Prime Minister Modi positively responded to Chinese President XI Jinping’s vision of the world – the BRI being the most obvious and a catalyst to India’s foreign policy aims which responds to the global trends. These are:
- India has the potential to become the world’s third largest economy by 2030. It intends to do this by sharing prosperity and working with other countries to set joint goals.
- Political ideologies are now encompassing equity and environmental issues. In India they are becoming more main stream policies for government and sustainable resources use is important in the 21st century.
- India is looking at Asia as the largest common market. Asia is reverting to its historical equilibrium of an integrated continent and does not want to choose between India or China. Instead, it supports a resetting of their relations to shape the goals of the ‘Asian Century’, which include the Bell and Belt Initiative and security related differences.
- India has a comparative advantage in the digital world and the potential to be the engine behind global growth.
- India priority is settling the boundary issues with its neighbours, enhancing diplomatic leverage and building a $10 million economy.
China is trying to improve international norms, technical standards and institutions through the BRI which covers more than 900 projects – 76 ports and terminals in 34 countries and special arbitration courts, about 80% which are contracted to Chinese companies. Whilst Prime Minister Modi is trying to divert the Western framework for reducing emissions in favour of human well-being within ecological limits.
And as the rivalry between the US, and Russia and China intensifies, India can play a stabilising role on agreed goals within the framework of a multi-stakeholder in the “Asian Century”.
Source: Neighbors move toward ‘Asian Century’ – ChinaDaily 28-29th April 2018
China’s share of global trade has surged since the 1990’s with both exports and imports increasing significantly – see graph below. Exports have been on a steep rise since 2001 with only a slight plateau with the GFC in 2008-9.
On Friday Donald Trump signed an order to impose tariffs on as much as $60 billion worth of Chinese imports. Trump wants to punish Beijing what he said is “the theft of American technology and Chinese pressure on U.S. companies to hand it over.” This deficit is significant – largest deficit of any country (see graph) – and Trump is blaming the US China trade imbalance for the loss of jobs in the US. This is an area that Trump focused his attention on in his campaign and now he is trying to fulfill the rhetoric.
Source: National Australia Bank
China has already warned that it will take “all necessary measures” to defend itself, raising the prospect of a trade war between the world’s two biggest economies. China has a few retaliatory measures it could use:
Soyabeans – US or Brazil?
The United States exported more than 30 million tons of soybeans — worth more than $10 billion — to China last year, over 57 percent of total U.S. exports of the popular legume. The soybean industry is heavily subsidised by the US government and this allows them to dump their produce on the Chinese market below the Chinese market price. China could look to Brazil for soy.
Boeing or Airbus?
Boeing make over 50% of commercial aircraft operating in China. Last November they signed an agreement to sell 300 planes to China worth $37 billion. This order supports approximately 150,000 jobs. In future China could look to the European plane manufacturer Airbus.
Earlier this year Trump imposed the following on Chinese products:
- 20% tariff on the first 1.2m imported large residential washers in the first year, and a 50% tariff on machines above that number.
- 30% tariff will be imposed on imported solar panels
In retaliation China has launched an anti-dumping and anti-subsidy investigation into imports of the grain from the US. China is the top buyer of US sorghum – US provided 4.76 million of CHina’s 5 million metric tonnes of sorghum imports – US1.1bn. China could retaliate after its investigation wraps up, expected next February.
China is a major market for the iPhone maker. Apple also depends on China’s workforce to make most of its products. As a result, China’s government has enormous leverage over the company and could, as it has in the past, target Apple for violating Chinese consumer rights.
The Chinese market is imperative for GM – China has been the largest retailer for the last 6 years. 4 million cars were sold in China last year, up from 4.4% from the previous high a year earlier. Chinese automakers like Geely and BYD are competing for market share, though, and China could make it more difficult for both GM and Ford to operate on Chinese soil. In late 2016, China fined GM’s China joint venture $29 million for “price fixing,” or setting minimum prices for certain Cadillac, Chevy and Buick models.