The United States' endless demands for a revaluation in ... - Hussonet

strategy in order to reduce import prices and attract investors. Perhaps the demands ... not post the same purchasing power parity (PPP) as Germany (Chart 3). Chart 1. China: Unit .... Chart 8. China: Capital flow s (as % of GDP). -8. -6. -4. -2. 0.
187KB taille 1 téléchargements 298 vues
21 March 2006

No. 2006 - 120

The United States’ endless demands for a revaluation in the RMB are incomprehensible The US administration is repeatedly asking the Chinese government to revalue the Renminbi (RMB). Such demands are quite astonishing, even though, in real terms, the RMB is clearly undervalued. In fact, a noteworthy point is that: •

a revaluation in the RMB would lead to an increase in US import prices in a situation where products imported from China are no longer, in practice, made in the United States. Accordingly, there would be a loss in US purchasing power without the support of real output and an inflation risk. As a result, there would be a rise in interest rates when US growth mainly depends on further increases in household indebtedness;



a revaluation in the RMB would appear because the Chinese central bank would reduce its accumulation of official reserves. Currently, this accumulation of official reserves ensures that the RMB/USD is virtually fixed. Therefore, there would be a problem in terms of financing the United States’ external deficit and, thus, a rise in interest rates and a decline in US domestic demand;



a revaluation in the RMB would result in expectations of a depreciation in the dollar. This is extremely dangerous for a country like the United States that has a massive external debt given the risk of substantial sales of dollar-denominated assets.

Therefore, overall, the US position is quite astonishing. In fact, economic analysis suggests that a country in the United States’ situation, i.e. particularly high external debt, durably weakened smokestack industry, domestic production substituted for, on a huge scale, by imports, a need for low inflation to sustain purchasing power and growth dependent on household indebtedness, should choose a strong currency strategy in order to reduce import prices and attract investors. Perhaps the demands of the US administration are aimed at US public opinion to a greater extent than the Chinese government.

Author: Patrick Artus

The US government regularly asks the Chinese government to revalue the RMB, because of its real undervaluation of 20% or 27%. The RMB is clearly undervalued against the dollar by far more than 20% or 27%, as is shown by the level of wages or unit wage costs between the United States and China (Chart 1, Table 1).

The repeated requests of the US government

Table 1 Average hourly labour costs in manufacturing (USD per hour) 1999 United States China

2000

2001

2002

2003

19.1

19.5

20.3

21.1

22.0

-

0.5

0.5

0.6

0.6

Source: Eurostat, US Department of Labor, Bureau of Labor Statistics, May 2004.

However, purchasing power parity, i.e. PPP or the equalisation of traded product prices in a single currency, is not a useful reference for determining the optimal exchange rate between two countries of such different economic and social structures and levels of development (Chart 2). Moreover, twenty years after joining the European Union, Spain and Portugal still do not post the same purchasing power parity (PPP) as Germany (Chart 3). Chart 1 China: Unit w age cos ts (Unite d State s = 100) 29

29

28

28

27

27

26

26

Chart 2 China: Pe r capita GDP in USD (as % of pe r capita GDP in USD) 7.0

7.0

6.5

6.5

6.0

6.0

5.5

5.5

5.0

5.0

4.5

4.5

4.0 So urces: Dat ast ream, IX IS CIB calculat ions

25 96

97

98

99

00

01

02

03

04

05

25

4.0

So urces: Dat ast ream, IX IS CIB

3.5

3.5 96

97

98

99

00

01

02

03

04

05

Chart 3 Unit w age cos ts * (Ge rm any = 100) 100

100 Spain

P o rtugal

90

90

80

80

70

70

60

60

50 Sources: Dat ast ream, IX IS CIB

40 85

p. 2

50

(*) Calculat ed b y PPP GDP

87

89

91

93

95

40 97

99

01

03

05

Flash no. 120

Accordingly, from the United States’ viewpoint, it would be more worthwhile to base their analysis of the optimal RMB exchange rate on an objective study of the impact of fluctuations in the RMB/USD on the US economy as opposed to PPP calculations. Such an analysis shows that an appreciation in the RMB would be extremely dangerous for the United States. The dangers of an appreciation in the RMB for the United States

According to our analysis, an appreciation in the RMB would have three types of negative effects on the US economy transmitted by: •

import prices;



the financing of the external deficit;



exchange rate expectations.

• Negative effect no. 1: An increase in import prices A rise in import prices leads to an improvement in competitiveness and, normally, real external trade. Nevertheless, the competitiveness effect in the United States’ case is outweighed by the negative import price effect. Imports, in particular from China, meet a growing share of US domestic demand (Chart 4A). In addition, this has implied the transfer to China of production that might have previously been located in the United States and the re-importing of such products into the United States — resulting in the trade deficit with China (Chart 4B) — as well as the stagnation in US industrial production ex IT (Chart 4D). We estimate that US companies produce 50% of US imports from China, in China. Accordingly, this offshoring is irreversible and, as a result, the appreciation in the RMB would barely reduce real US imports, and hardly increase the already low US exports to China (Chart 4B). Chart 4B Unite d State s : Exte rnal trade w ith China (USD bn pe r ye ar)

Chart 4A Unite d State s : Im ports Impo rt s (as % of do mest ic d emand, in vo lume t erms) Impo rt s f rom China (as % o f t ot al impo rt s, in value t erms)

18

18

16

16

14

14

12

12

10

10

8

8

6

6

So urces: DRI, IX IS CIB

4

4 96

97

98

99

00

01

02

03

04

05

06

Expo rts to C hina Im po rts fro m China Trade balance with C hina

360 300 240 180 120 60 0 -60 -120 -180 -240 -300

360 300 240 180 120 60 0 -60 -120 -180 -240 -300

So urce: Census B ureau

96

97

98

99

00

01

02

03

04

05

06

In the United States, as imports are noticeably larger than exports (Chart 4C), and they cannot be substituted for by domestic production, the main effect of a revaluation in the RMB versus the dollar would be an increase in the US import price deflator, hence:

Flash no. 120

p. 3

Chart 4C Unite d State s : Im ports , e xports and im ports -toe xports ratio

Chart 4D Unite d State s : Im port price s / GDP de flator and indus trial production (1996 = 100)

Imp ort s-t o -exp ort s rat io (as %, LH scale) Tot al expo rt s (USD bn, RH scale)

210 200 190 180 170 160 150 140 130 120 110

2,000

Tot al impo rt s (USD bn, RH scale)

1,800

Im po rt prices ex energy / GD P deflato r

120

120

H eadline IP I ex IT

110

110

100

100

90

90

80

80

1,600 1,400 1,200 1,000 800 600 96

97

98

99

00

So urces: Dat ast ream, IX IS CIB

01

02

03

04

05

06

Sources: B EA , B LS, Fed

70 96

97

98

99

70 00

01

02

03

04

05

06

− a further deterioration in the US trade balance. The estimated elasticity to the real exchange rate of US exports is – 0.22 and imports 0.12. Such elasticities are far too low to offset the effect of import prices, − a loss in real income in the United States through the deterioration in terms of trade, − an inflationary effect: a 20% appreciation in the RMB would lead to an automatic rise of 0.4% in consumer prices in the United States under the hypotheses of a 20% increase in prices of imports from China. This hypothesis is reasonable if, in the United States, there is no output to substitute for Chinese products. The rise in US domestic prices would lead to a rise in interest rates and a loss in labour’s purchasing power. Note that such a decline has already begun to a large extent due to the rise in energy prices since 2002 (Chart 5). • Negative effect of the appreciation in the RMB, no. 2: A difficulty in the financing of the United States’ external deficit. The virtual stability of the RMB/USD, i.e. despite the minor revaluation in the RMB since July 2005 (Chart 6), requires further accumulation of official reserves in China (Chart 7) because of the Chinese current-account surplus, and direct investment inflows (Chart 8).

p. 4

Flash no. 120

Chart 5 Unite d State s : Wage and inflation (Y/Y as %) 8.4

No minal per capit a wage incl. b enef it s CPI Co re CPI Real p er cap it a wag e incl. benef it s (def lat ed by CPI)

8

Chart 6 RM B / USD

8

6

6

4

4

2

2

0

0

8.3

8.3

8.2

8.2

8.1

8.1 Sources: Dat ast ream, IX IS CIB

Sources: Dat ast ream, B EA , IX IS CIB

-2

-2 96

97

98

99

00

01

02

03

04

05

800

300

14

250

12 10

200

400

100

200 So urces: Dat ast ream, IX IS CIB

97

98

99

00

01

02

98

99

03

04

05

00

01

02

03

04

05

06

14 N et direct investm ent C hange in o fficial reserves

06

12 10

C urrent-acco unt balance Sho rt-term capital flo ws

8

150

96

97

Chart 8 China: Capital flow s (as % of GDP)

1-year change (R H scale)

0

8.0 96

Official reserves (LH scale)

600

8.0

06

Chart 7 China: 1-ye ar change and le ve l of official re s e rve s (USD bn)

1,000

8.4

6 4

8 6 4

2 0

2 0

-2

50

-4 -6

0

-8

-2

Source: EIU

-4 -6 -8

96

97

98

99

00

01

02

03

04

The accumulation of official reserves by China, and we can estimate 75% to 80% of these reserves are denominated in dollars, plays a crucial role in terms of financing the US external deficit. It finances approximately 25% of this deficit (Chart 9). The changeover to a policy of gradual appreciation in the RMB against the dollar would entail the, total or partial, end of the accumulation of official reserves in China. In the case of a complete interruption, purchases of US bonds by nonresidents (Chart 10) would decline 25%, thus resulting in an inevitable increase in long-term interest rates.

Flash no. 120

p. 5

Chart 10 Purchas e s of bonds in the Unite d State s by nonre s ide nts and change in Chine s e official re s e rve s (as % of US GDP)

Chart 9 Unite d State s curre nt-account balance and change in Chine s e official re s e rve s (USD bn)

Change in Chinese o f f icial reserves over 1 year (LH scale)

United States: C urrent-acco unt balance China: Change in o fficial reserves o ver 1 quarter

400 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800

400 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800

Source: Dat ast ream

96

97

98

99

00

01

02

03

04

05

Net p urchases o f b ond s in t he Unit ed St at es by no n-resident s (RH scale)

2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

6 4 2 0 Sources: Dat ast ream, IX IS CIB

-2 96

06

8

97

98

99

00

01

02

03

04

05

06

At this stage, a noteworthy point is that US growth depends to a significant extent on the increase in household indebtedness (Chart 11), which explains more than half of GDP growth, and is made possible by the low level of interest rates. An increase in long-term interest rates, therefore, could have a dramatic impact on US growth. • Negative effect of an appreciation in the RMB, no. 3: Exchange rate expectations that are negative for investment in US external debt A significant appreciation in the RMB against the dollar and the concomitant slowdown in China’s exchange rate interventions would undoubtedly lead the markets to change over to negative expectations about the dollar’s exchange rate. Currently, the markets expect, in a year’s time, a 6% to 8% depreciation in the dollar (Charts 12A and 12B), but this expected depreciation could become far more significant should the Chinese stop propping up the dollar. Such a situation would be very risky in a country like the United States that posts a substantial external debt (Chart 13). Note that it accepts all the more easily this burden because expectations are positive for the dollar’s exchange rate. Chart 11 Unite d State s : Hous e hold de bt load 1.4

To tal ho useho ld debt lo ad (as % o f GD I, LH scale) 1-year change in ho useho ld debt lo ad-to -GD P ratio (R H scale)

130 125

8 6

120

1.4

USD / EUR Fo recast every m o nth in 12 m o nths’ tim e

1.3

1.3

1.2

1.2

1.1

1.1

1.0

1.0

-2

0.9

0.9

-4

0.8

4

115 110

2

105

0

100 95 90

So urces: Dat ast ream, IX IS CIB

85 96

p. 6

Chart 12A USD / EUR and cons e ns us fore cas t

97

98

99

00

01

02

03

04

05

06

So urces: Co nsensus Fo recast , Dat ast ream, IX IS CIB

99

00

01

02

03

04

05

0.8

06

Flash no. 120

Chart 12B JPY / USD and cons e ns us fore cas t

Chart 13 Unite d State s : As s e ts he ld by non-re s ide nts (as % of GDP)

JP Y / USD

140

140

Fo recast every m o nth in 12 m o nths’ tim e

135

135

130

130

125

125

120

120

115

115

110

110

105

105

100

100

95 90

90 00

01

02

03

04

100

05

06

100

80

80

60

60

40

40

20

20

95

Sources: Consensus Forecast , Dat ast ream, IX IS CIB

99

To tal Treasuries and co rpo rate bo nds Equities Other financial assets

Source: Fo F

0 96

97

98

99

00

01

02

03

04

05

0

06

The cost of a shift to negative expectations about the dollar would be a decline in demand for US assets among non-residents and, therefore, a decline in asset prices, i.e. a downturn in stock market prices and an increase in long-term interest rates. Conclusion: The astounding point — a country in the United States’ situation should have a strong currency policy

A country with: − weak industry that cannot be rebuilt, and therefore has growing external deficits; − purchasing power sustained by the improvement in terms trade due to the rise in imports from emerging countries; − growth that depends on further increases in household indebtedness and, therefore, on interest rates remaining low; − a massive external debt should choose a strong currency strategy in order to reduce import prices, interest rates and inflation. Moreover, it should avoid expectations about its currency that have a negative impact on investment in its external debt. Perhaps the US administration does not really want the RMB to be revalued?

Flash no. 120

p. 7