Thinking the Unthinkable: What if China Devalues the Renminbi?

By , a fund manager and investment strategist who writes for and Yves Smith

Conventional wisdom holds that the Chinese are due (as in overdue) for a revaluation of their currency, the renminbi. For instance, a recent report from Goldman argues that The argument is that the move is needed to slow down an overheating economy.

But to a large degree, whether you agree with that as a remedy depends on what one’s reading is not just of China’s notoriously misleading statistics, but of the underlying growth dynamics, which are well out of bounds of any previous pattern, and not in a good way, either.

We question whether a revaluation is the right answer for them, and more important, whether the Chinese themselves see a revaluation as a . The government has engineered. In fact, it seems to be as great as 5 years’ growth in credit in the previous Chinese bubble. The increase in money and credit is so great and so abrupt that you tend to get a high inflation quite quickly even if there are under utilised resources. Add to this the fact that China simultaneously is providing massive fiscal stimulus.

This combination is the making of a very messy situation. If China seeks to sustain demand via fiscal policy, the result is likely to be a big inflation problem. With many Chinese students steeped in Chicago School monetary theory coming home and assuming positions of authority, they could push for an aggressive, Paul Volcker-style effort to stop inflation.

But, what if the they don’t? Inflation can take off and thereby begin to ERODE the competitiveness of Chinese exports. Nouriel Roubini pointed out this issue in 2007: if China didn’t revalue, inflation would do the trick regardless. A continued high rate of inflation relative to its trade partners would push up the price of goods in home currency terms, which in turn translates into higher export prices. This might be the real reason why China is so reticent to revalue its currency. The Americans might go crazy if the Chinese devalued, but if the inflation is high enough, they might have to do it, as it will severely erode their terms of trade and cause their tradeables sector to collapse.

Or the hard-line monetarists triumphing by fighting inflation and the result is riots as unemployment increases.

It could get very ugly.

This could be happening now in China, although this is the opposite of prevailing views. The consensus is that inflation is a couple per cent and even that is largely due to higher pork prices thanks to a lousy corn harvest.

However, economists such as those at Lombard Street in the UK, Jim Walker, Simon Hunt and the like try to figure out the changes quarter to quarter in Chinese nominal GDP which is reported only year on year. And they come up with giant double digit growth rates for the second half of last year.

Now this is complicated by the fact that the Chinese have revised up their GDP numbers and they put all the revisions into the final quarter of the year. But when these analysts try to adjust for that statistical screw up they still come up with giant nominal GDP increases. Lombard Street thinks it was twenty five per cent or so in the second half of last year. They think it was twenty per cent real and five per cent inflation.

Economies of any size never grow at a twenty per cent real rate. And Simon Hunt says if you look at proxies like power output and rail traffic you don’t get those kinds of numbers for real growth, which suggests that inflation must be higher than four or five per cent. In general, if a real GDP figure looks sus, the first figure you examine critically is the GDP deflator.

So some evidence suggests that China’s inflation could already be at a double digit level. It is hard to say. But if it is that high, then the resultant inflation will cause a real revaluation of the trade weighted exchange rate.

And more so if the dollar rallies. That could well crush the volume of exports and the profitability of the industrial tradeables sector. Exports are the only area where China makes any kind of money because they can sell these products for about 10 times what they obtain for a comparable product in the domestic economy (where profits are virtually nil). The export sector is a big contributor to overall super excessive fixed investment in China. Dollar appreaciation means foreign direct investment will go to zero net.

There will be strong forces for a reduction in fixed investment in this large sector. Hence, there is a good chance that even without monetary tightening by the Chinese authorities, the overall fixed investment boom in China will turn down.

Nobody is thinking about this scenario but it is a real possibility. And with fixed investment now at fifty per cent of GDP (which is unprecedented in any economy) and exports at more than thirty, we’re looking at ratios that have never been reached before on a combined basis. Before readers argue that China can support that level of investment, consider the views of Professor Yu Yongding, who some analysts believe is China’s best macroeconomist. As reported in the :

Yu, the recently retired director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, did not explicitly say I was barking mad. But his email continued: “When a country has an investment rate over 50 per cent [of] GDP and rising, you say this country is not suffering from overcapacity! … are you serious? ”To judge whether there is overcapacity you cannot just do a head account. With a 1.3 billion population and human greed, China’s needs are unlimited, you can say that China will never suffer from overcapacity!”

The email noted that, on my logic, no developing country could ever suffer from overcapacity until it became rich and that the world should never have suffered a Great Depression in 1929.

Since that salutary critique, Yu has elaborated further on his views.

He believes China is trapped in a cycle where constantly rising growth in investment is constantly increasing China’s supply, but consumption has conspicuously failed to grow fast enough to absorb it. And so China is forced to increase investment in order to provide enough demand to absorb the previous round of increased supply, thus creating ever-widening cycles of oversupply.

In this manner, the investment share of gross domestic product has increased from a quarter of GDP in 2001 to at least half. “There is sort of a chase – demand chasing supply and then more demand is needed to chase more supply,” he says. “This is of course an unsustainable process.”

From 2005 China’s overcapacity problem had been “concealed” by ever-increasing net exports – but that strategy was interrupted by the financial crisis. Then came last year’s globally unprecedented stimulus-investment binge, which might not have been so worrying if it were delivering things that people needed. But the Government’s hand in resource allocation has grown heavier since the crisis without reforms to make officials more responsible for what they spend.

“As a result of the institutional arrangements in China, local governments have an insatiable appetite for grandiose investment projects and sub-optimal allocation of resources,” as Yu previously said, in his Richard Snape lecture for the Productivity Commission in November.

So there are now airports without towns, highways and high-speed railways running parallel, and towns where peasants are building houses for no reason other than to tear them down again because they know that will earn them more compensation when the local government inevitably appropriates their land.

Reducing investment and exports could create a severe recession in China. China has gone too far this time. They appear to be in a box that they and others don’t recognize. The “Black Swan” event this year, as far as China true believers are concerned, could well be a devaluation of the RMB. Were that to happen, the political consequences could be as significant as the economic.

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36 comments

  1. moshi

    The larger strategic objective for China is to internationalize the RMB to overcome the dollar trap, so they do not have to rely on the more limited mechanisms contemplated by this analysis. Swap lines have been established with key trading partners to populate the currency around the world and other mechanisms are being created to encourage its broader use in places like Hong Kong, ASEAN countries and the new free trade zone. Those efforts will be aided by an upward revaluation of the currency but undermined by a devaluation which penalizes early particpants in the programs. Recent steps to accelarate introduction these RMB programs are consistent with PRC authorities recognizing the issues described but using the internationalization tool as the principal policy response for now. Accordingly, upward revaluation is the far more likely next move.

    1. Marshall Auerback

      Moshi,
      There’s a very easy way for China to “overcome the dollar trap”. Import more and allow foreigners to accumulate RMB denominated financial claims. No big secret. The Americans have been doing it for the past 30 years. For whatever reason, Beijing refuses to do this and after reading Michael Pettis, I’m convinced that they feel they can’t right now. Additionally, the reality is that China is still largely an assembly nation rather than the manufacturing hub – a point which is often misunderstood. They are clearly moving into the next phase of industrial development to become full-blown manufacturers but are facing a relative shortage of low-price labour given they have exhausted the coastal region which gave them transport economies. Moving into the hinterland to maintain cheap labour will come at a cost.
      But they could have had this economic growth without exporting very much at all. They have a huge domestic market which they could have developed. They chose not to do this and embraced Asian style mercantilism instead. Understandable, given the historic success of other Asian countries in using this model (at least until the mid-1990s), but problematic today, as the analysis indicates.

      1. charcad

        they have exhausted the coastal region which gave them transport economies.

        Do you think the extra transport costs will really be significant? “Light industries” shipping products in outbound containers are the most likely to migrate into the interior hinterlands in search of cheap labor.

        All of these containers already have to travel some distance from a factory to port via rail or truck. The extra mileage cost is tiny relative to the value of product inside.

        Most importantly, extra mileage does not add extra handling, documentation & demurrage costs. This is where most intermodal “transport” costs accrue anyway. These charges are the same whether the “exporting” factory is 20, 200 or 2,000 miles away from the container sea port.

        China’s basic steel industry won’t move. It’s already sited close to ports to operate on imported coal and ore.

        1. MarcoPolo

          “The extra mileage cost is tiny relative to the value of product inside.”

          But margins are tiny and logistics are critical.

          1. charcad

            margins are tiny

            Razor thin. And they’ll stand the extra ton-miles in a container on a railroad far better than another 50 cents or $1 on the hourly worker wage.

            This labor arbitrage is what fostered the existing vast infrastructure of intermodal, truck, rail and container ship liner service between Chinese and US west coast container port facilities.

            Factories 200 miles of west of Shanghai manage the 6,960 miles (Great Circle) to Wal-Marts in Minneapolis, MN. I’m sure they can squeeze another 500-1000 miles from this system. Land is cheaper in the sticks, too.

            Back in 2008 “railroad infrastructure” was a prominent topic in Stimulus, Chinese style.

      2. MarcoPolo

         “But they could have had this economic growth without exporting very much at all. They have a huge domestic market which they could have developed. ”

        And any westerner who has been to China can only just salivate at the prospect of selling China.  Everything about the place is like contemplating stars.  But we’ve been too early. The barriers to entry are formidable and it’s not just the exchange rate. Currency controls, the peg itself, the forced savings and the utter lack of (intellectual) property rights are among more important.

        And their reliance on a 1960’s Japanese development model is not understandable to me.  It worked for Japan, Korea and Singapore. Others have tried with less success.  China is 10 times the size of Japan.  Stars!  Who in their right mind would think they could build an industrial economy of that size on the back of a US consumer?  Poor management.  

        Until we understand why the Chinese have made these decisions – and I for one don’t – I would suggest it isn’t a market for us.

        1. bob goodwin

          They tried to build a capitalist economy on top of a communist political system. Thus it is still very much central control of resources – at least at the top (i.e. infrastructure and finance). It should not be a mystery that misallocation of resources is happening. History rhymes.

          The good news for China (and we should want them to become prosperous rather than trigger a world wide depression and world wars) is that they have produced a meaningful (in total numbers, not percentage) middle class who can begin the process of correct allocation of resources.

          The inflation deflation debate is particularly interesting in China, as the inflation is asset based, and not labor or material based. Governments are typically forced to tighten in these situations, which would cause deflation. However if China has central controls, they could feel empowered to do targeted controls (for example execute speculators?). So inflation and devaluation is not out of the question.

  2. Nando

    My sense

    1. They will maintain the peg more or less (maybe move it few percent every time DC rattle the cage.)
    2. They will raise minimum wage
    3. They will recycle their dollar faster via hard investment (to maintain the peg) also absorbing rest of asia USD and exchanging it with RMB. This will lengthen the peg for a good while yet. They also increasing trade at tremendous rate with middle east, another dollar excess area.)
    4. since US is slowing import, that too buy time to sustain the peg longer.

    5. They will bet improving productivity will keep price competitive. (road, more car use, better ports/ship, spanking new/latest generation steel factories, etc). This on top of unused productivity.

    6. They will play with domestic cash supply via selling government asset. (specially in urban area)

    7. They got better oil price/energy price than anybody. This alone will sustain price advantage for some time.

    8. domestic consumption. (hey it works for vehicles sales, garment, home electronics, why not the rest?)

    9 improving government service, reducing health care cost alone will release massive saving into consumption.

    10. build more stuff. Can’t never build enough infrastructure. (school, university, airport, train, power generation….) who cares. build first, ask question later.

    changing peg? why? The basic scheme works. There are still latin america, rest of asia and saudi they can recycle their dollar and do trade with.

  3. nick

    I suppose anything is possible (limited nuclear war, the immimnent reversal of global warming, Dow 36,000, etc.) but, to me, the probability that China will devalue (other than to spoof speculators and then instantly revalue higher) is virutally nill.

    Think about it: All the US would have to do is take up Warren Buffett’s idea of import certificates and the currency issue would become moot.

    Come to think of it, it’s not a bad idea regardless of the PBC’s next move.

    Nick R

    1. joe

      And china will issue counter “import certificate for china”, which will have several times market value of US import certificates.

      not going to happen, sorry. In fact china can use that rule to wall off US companies from entering china in low end goods. By this time it is US companies that need China market more than US market. US consumer is tapped out. At high end market, china will simply play off US company against Europe and japanese. Japanese has cost/cultural advantage. Europe is more generous with tech transfer. So, US high end companies has nowhere to go. (boeing, GM, etc)

      1. MarcoPolo

        “Europe is more generous with tech transfer.” !!!!!!!!

        The only reason china has been so accomodating to the west is because this feudal economy which has never needed to industrialize has no technology. Europeans will get wise too.

      2. alex

        joe: “US companies that need China market more than US market.”

        Contradicted by the fact that China runs a trade sur with the US.

        “Europe is more generous with tech transfer.”

        Evidence please.

  4. Chad

    Devaluing their currency is an attempt to take a larger share of the global manufacturing pie. Why don’t they just impose a tariff on imports as well?

    Adam Smith determined over 200 years ago that the only way to lose via free trade between nations was to provide a subsidy to encourage exports. In those days, the nation proivding the subsidy would accumulate gold. Today, China collects credits at a Federal Reserve Bank.

    We have won on this deal, but at some point, you have to debate whether China won’t do something really stupid when they realize how much credits at a Federal Reserve Bank are actually worth.

  5. run75441

    It has been a bit since I have been in Shantou, Tianjin, or Beijing. I believe it was in Shantou where our Chinese plant escorts took us inside a WalMart. Tons of product, a clerk at every display counter of product, high prices even for us, and few customers.

    Consumption by who? The 10% of the population that may have the income to buy western and Chinese product at such high prices. Doubtful. I would still expect the mass of the Chinese population can not afford the product they are making and exporting.

    China does have a growing problem with the elderly and little means of supporting them in retirement. A population confined to one child per couple presents problems for a population to confined to the old customs. Couples born without a son will have difficulties in surviving. It may be that China can outgrown an aging population yet.

    1. ray l love

      I was surprised by your pessimism about Chinese consumers because I recently saw a PBS program about how much success Wal-Mart is having in China, so, here is a quote from a Wal-Mart statement, and a link:

      “Walmart International plans aggressive investment, particularly in growth markets such as China and Brazil.”

      1. run75441

        rl:

        I was in the store but once so maybe I hit a bad day and it was also a singular observation. This was on the product and not the food side, which was busy. Knowing what the plants pay their employees, the products offered were expensive in relation to their salary.

        It has been 4 years since I have spent much time in China along my usual route. It could be that things have changed for many of its workers also. I do believe the problems for China will revolve around creating a Middle Class with the ability to consume the product China is making.

  6. bob

    If they did this the upper members of Chinese society get a huge paper windfall too. All of their USD denominated assets get a corresponding kick up.

    I saw a report on Bloomberg by a Chinese expat RE agent working in LA. The Chinese are buying here. In typical RE agent spin, they are only buying the highest end properties in the best locations.

    Everything they do seems to benefit the upper end of chinese society. It’s almost as though they are planning on leaving at some point.

    Not that different from the US.

  7. john

    Power concentrates: economics distribute. Neither can live without the other but they have opposite aggregate tendencies.

    In the US and China both, power has become too concentrated. In the US it is the corporate sector (which is in a sort of condo arrangement with the government that the Supreme Court recently ratified) that sponges the wealth of the country into massive concentrations that it then tries to find productive use for in “investments”. In China it is the state itself that indulges this fiction of “investment”.

    The Chinese state and the US corporate sector have both created wealth concentrations that flatter the power of those who benefit but rob the real economies of both countries of demand. Power has overstepped its bounds in the economy, “investment” has become either hoarding or gambling as finance has lost all touch with the real economy and profits so raised are looting pure and simple.

    In the same way that the Cold War made the US and USSR perverse militarist twins, the post Cold War “free trade” economy has made the US and China perverse twins in impoverishing overworked populations.

  8. ray l love

    I do not fully understand the Chinese economy, or any other for that matter, but I do know this: It is necessary to separate the MNC ‘platform’ economy from the Chinese economy to understand much of anything that matters (see link below). It is the mostly the MNC economy that assembles imported components, and this gives misleading import and export stats, but it is the Chinese economy that now produces more autos than what US auto producers do, and it is the Chinese economy that produces more concrete than any other economy and energy plants etc..
    Once this separation is established it becomes easier to understand the importance of the recently ratified ASEAN trade agreement. This agreement applies to what ‘was’ 13% of global trade although thousands of trade barriers were relinquished as part of this agreement. And this arrangement is between China and the ASEAN group, but, whether the the MNC platform economy will be allowed access to the ASEAN markets, well, it seems very likely that Chinese officials will have the most influence over that. This in part due to China’s regional influence, and in part due to their large contribution to the ASEAN+3 emergency fund. This position being strengthened somewhat by the IMF’s failing reputation in the region.
    So, I doubt that over-capacity is a factor. It is also difficult for me to accept that inflation might become a serious concern when about half of China’s population exists as a type of labor reserve outside the workforce. Wage-inflation being the cyclical driver of any consequence in regards to inflation, it seems unlikely with China’s record on poverty reduction. It is conveniently ignored by US economists that if China’s poverty reduction numbers are removed from the global poverty equation, global poverty is worsening. So why this successful trend in China would not continue as needed to add workers is a dubious contention. Why, for instance, would transporting people from rural areas to urban areas be restricted by the amount of distance? If the Chinese were to stand idly by and allow a worker shortage to drive wage-inflation it would be unlike what they have done in the past, so short of some sabotage of their transportation system — I doubt that wage-inflation is likely.


    (this links to an excellent article by an Aussie named Brenda Rosser)

    1. charcad

      Ray,

      Very good.

      It is also difficult for me to accept that inflation might become a serious concern when about half of China’s population exists as a type of labor reserve outside the workforce.

      At least 20% (300 million) are still on the land. In the US less than 1% list agriculture as a primary occupation. Less than 2% live on a farm.

      This comparison illusrates how little mechanization has been applied in China. There is plenty of room for consolidating tiny fields into larger ones and applying more machinery to raise farmer productivity while freeing up 100 million more workers.

      1. ray l love

        charcad,
        Thanks for the compliment.
        Back in the 1980s I spent about 5 months in Central America and I have always had a lingering doubt about how the World Bank standards for poverty are compiled. I was sort of a vagabond and so I had the good fortune of staying with different families, and, in a few instances, I even stayed in peasant environs.
        For me, it seems suspect that people who rely heavily on barter are being routinely categorized as poverty stricken when it is obvious that the worst poverty exists among the urban poor; and, in some cases those being claimed as part of the success rate for poverty reduction are in fact much worse off than the rural poor who are in many cases satisfied with their circumstances.
        Anyway, I don’t know how much of this ‘convenience’ counting takes place in China but I thought that I should at least add that ‘things are not always what they seem’. This though is not meant in regards to what you said, I think your numbers are in fact conservative if anything, I just want to be sure that I am not taken as an advocate of the ‘demographic dividend’, considering that I am new to this site.

  9. Well, well, I am not sure that all major countries can devalue their countries at the same time sic!…that’s enough to exclude a RMB devaluation which has to me zero probability to occur.

  10. There is fierce resistance within factions of the CCP to fully privatize the countryside. It’s a safety net now, in that rural areas can reabsorb unemployed migrants during recessions. Without that net, 2008 would have seen large scale social crisis in China.

    The professor is right in that overcapacity has nothing to do with human need. It’s a systemic trait of capitalism, a profit based system, which is not organized around human need.

  11. jdmckay

    I think your post is highly speculative at best, and IMO more likely misleading by a light year.

    commenters:
    – ray l love @ February 18, 2010 at 1:17 pm
    – moshi @ February 18, 2010 at 6:21 am

    … touch on the basics.

    1. ray l love

      jdmckay,
      It is delusional to think that a ‘completely’ unsupported claim regarding “basics” — should be taken seriously. It is you that lacks the basics, those of decorum regarding a forum such as this one, and, ignorant cheap-shots are well short of compelling.

      1. jdmckay

        It is delusional to think that a ‘completely’ unsupported claim regarding “basics” — should be taken seriously. It is you that lacks the basics,

        The “basics” to which I refer are reasons why author’s assertion (China to devalue) is as I said (rubbish).

        Moshi most certainly hit on very fundamental basics, as Renminbi use/partnerships/swaps is expanding. And it’s expanding in large part because China is building & delivering a lot of hi tech & quality “stuff” a whole lot of the world wants right now, and doing so for far less than US.

        They’ve go major energy projects (a lot of clean coal) going on all over Asia, and a lot of this their are helping to finance themselves. We see a few US headlines here & there of Indonesia/Viet Nam and a couple others becoming wary of Chinese expansion, but other than Murdoch’s increasingly politicized sect. A of WSJ, this does not reflect reality.

        China is training 10’s of 1000’s of local workers thoughout the region on these projects, and it’s no small affair. I know people working on them. I talk to them. And through last decade of mostly bad econ information this side of the pond, I’ve learned to dig and trust my own eyes and ears.

        Long & short: it’s simply not in China’s interest to devalue.

        I do business there. Our small group has had a number of parts (all engineered materials to high specs) manufactured there for 5+ years now… relatively low quantities, suffieciently low that competing US companies wouldn’t give us time of day (not enough volume for them).

        Our Chinese product has gotten better over this time… improving regularly. Stress testing, engineering, everything… first rate. Over this time, through about 7 design revisions on some carbon fabbed stuff, never single item (out of 15k +) arrived below spec.

        I travel there about twice p/yr for since 2k, usually when we have a production run revision. I don’t know it all about China, that’s for sure. But I know when I hear red herrings from spreadsheet jockeys whose view does not expand beyond US borders, spreading poop based on mis-conceptions based on assumptions w/no grounding in fact.

        Author repeatedly referrs to China’s “overcapacity”, as do so many US/British commenters. This term is a gross over generalization. I could break it down, but briefly: yes, they’ve done too much housing. But they’ve also put the brakes on that over last year, and I never see that talked about here.

        Beyond that, rate of increasing labor wage there along w/increased skill level portends well for their utilizing that housing capacity, and it’s not that far off.

        But “over capacity” misses the mark entirely wrt all the higher tech stuff they’re doing. It’s not just clean coal (although that’s a lot): they are developing (and it’s close) a nuke generating industry. Their engineered materials are now 2nd to none, and service they provide in making them dwarfs what’s done here both in flexibilty, custom designs (eg: design of materials themselves, in plastics/carbon and a whole lot of alloys).

        I’m a customer for this stuff… I know it, I know what we need, and I evaluate availability world wide regularly. Reading most any US econ stuff in last year, one would never know there are 1000’s of little guys like us getting really top product from China. And doing so for a price that allows us to compete. And doing so because stuff we need we just can’t get on US shores.

        Trip I made in early ’09, they had test sections on freeways north of Beijing that were wind capture devices from passing cars. Much of this was planned/designed/managed at Beijing Univ., and it so happens I have relationships w/people on faculty there. I was told there were 700+ various wind capture projects, all similarly innovative, throughout the industrial region.

        Break neck speed, they are doing this is engaged, focused, smart, education, well engineered fashion. All the while, here, we are in utter gridlock w/no progress being made in any of these innovative energy spheres… period.

        I see stuff like this everywhere in China… they are doing what we should be doing, and doing it like their life depends on it.

        So again, this whole “overcapacity” jargon is entirely insufficient to paint an accurate picture of what’s going on in Chinese economic/industrial development.

        those of decorum regarding a forum such as this one, and, ignorant cheap-shots are well short of compelling.

        Sorry you see it that way.

        You said in your post @ February 18, 2010 at 1:17 pm that…
        * “I do not fully understand the Chinese economy”…

        then proceed to make some cogent/relevant comments. In particular, your ASEAN reference (as Moshi made) and assertion challenging the “overcapacity” claim of author… those most certainly are basics.

        There is huge move from US econ talking heads attempting to demonize China’s peg as major cause of our problems here, while what’s caused our financial mess has gone largely unaddressed.

        This post is more of the same. It is, as I said, highly speculative. And I emphasize highly.

        1. ray l love

          jdmckay,
          I took your …”touch on the basics”, to mean that my comment was lacking ‘basics’. I stand corrected. I am sorry, and I hope you understand that blogging has made me a little too quick to react due to the frequency of uninformed responses that I receive. After reading your second comment I suspect that you will empathize.

        2. charles

          “Trip I made in early ‘09, they had test sections on freeways north of Beijing that were wind capture devices from passing cars. Much of this was planned/designed/managed at Beijing Univ., and it so happens I have relationships w/people on faculty there. I was told there were 700+ various wind capture projects, all similarly innovative, throughout the industrial region.”

          By breaking the forward movement of air particles along the highway, these turbines are going to INCREASE the drag on cars and trucks on the road that will then consume more fuel. I am ready to bet that this is a negative EROEI source of Energy when this effect is taken into account.
          This is not an example of Chinese ingenuity, but actually very illustrative of the problem that China is facing today : Good investment opportunities are already gone, only low or even negative return “opportunities” remain. These kind of investments exists only because of negative real rates in China (Chinese depositors receive practically nothing on their deposits and Inflation is far above zero). A Chinese company that can buy foreign machine tool with extremely cheap capital, pays practically no local tax or dividend and underpays its employees will surely be competitive, even in quite sophisticated industries, but it remains a value destroyer. Persistently negative real rates lead naturally to a depreciation of the currency, hence Mr Auerback’s call may not be that absurd.

          1. jdmckay

            By breaking the forward movement of air particles along the highway, these turbines are going to INCREASE the drag on cars and trucks on the road that will then consume more fuel.

            Interesting hypothesis Charles. Care to share you calculations w/me?

            I am ready to bet that this is a negative EROEI source of Energy when this effect is taken into account.

            Good. How much you ready to bet?

            This is not an example of Chinese ingenuity, but actually very illustrative of the problem that China is facing today : Good investment opportunities are already gone, only low or even negative return “opportunities” remain.

            Well, we’re all entitled to an opinion I guess.

            My opinion is that you’re making up stuff to justify the popular “let’s blame China” meme around here. That you can, in one sentence, not only dismiss the effort but recharactarize it consistent w/well promulgated beliefs that such efforts are “negative return opportunities”…

            well, that’s pretty easy and convenient. How American of you!!!

            But I’m willing to be persuaded. Calculations please?

          2. ray l love

            charles,

            Does it not also seem possible that the “real rates” that you refer to, have also lead to the Chinese now having the 3 largest banks in the world. I think US econoegos are having a difficult time seeing the advantages of a banking system that is subordinate to national interests. But then a good many of these econoegos did not seem to notice, until recently, that in this country, the tail was wagging the dog, either?

  12. abraham

    no chance of china devalue its currency
    the important part is that the chinese are calling the shots, they win because their strategies are better than us and other countries. all the experts sems to have opinions but they theorise but not base on eality. they project theories based on western concepts not from chinese concepts

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