Chinese Growth Risk

Chinese Growth Risk

April 25, 2005

Today there were stories on my Bloomberg about Asia growth slowing to 6%, declining March job ads, retail sales and services demand in Japan, the BOJ deferring end of deflation forecast by a year, slowing growth in Germany, and the likely end of the commodity price run-up (The CRB index down 4.1% in the past month and shipping rates for dry, bulk commodities have fallen 29% sine their December 6 peak), US chest-thumping about China’s need to revalue the yuan, and a signal from a Chinese official that they may actually to so…someday.

When you put the jigsaw pieces together, they tell one story. People are starting to worry about Chinese growth. Keeping the Chinese economy growing fast enough to contain the growing political pressures that erupted last week over Japan (see LA Times, Passions Could burn Beijing).

My friend Jim Flanigan, the Economics Editor of the LA Times, wrote an interesting piece this weekend, Globalization Is Doing a World of Good for U.S, and another recent piece on the misleading trade deficit data, both of which point out how US companies and workers benefit from trade.

As I discussed with Jijm last week, however, not everyone in the US benefits from trade with China, which is why there is such a strong political lobby pressing Congress to force China to revalue their currency. The worker left standing in Indiana with a wrench in his hand, wondering where his factory went, is not a happy camper.

A few thoughts on the subject I will write more about later.

1. China is pegging their currency to the dollar in order to attract foreign capital. Pegging effectively subcontracts Chinese inflation to the Fed and removes currency risk from the return calculations of foreign investors.

2. They should continue to peg. Attracting capital to grow fast enough to satisfy Chinese workers is the right thing to do.

3. Simple free trade arguments citing David Ricardo and comparative advantage are not convincing to people. If Ricardo were alive today he wouldn’t even make them. More on this later.

4. US government pressure on China is driven by politics, not economics.

5. In the short-term, our main risk is doing something to inadvertently trip-up Chinese growth.

6. In the long-term, we are going to have to figure out whaqt to do when China and India are both larger than the US economy. Keep a special eye on Japan-China frictions over energy supplies, the issue I vote as most likely to lead to a serious clash in future.

JR

John Rutledge

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