From China: A Balance Sheet by the US-based think tanks Institute for International Economics and the Center for Strategic and International Studies, released April 11, 2006:
China is large enough and competitive enough to cause economic problems for the United States, but it has neither derailed our economy nor been the chief cause of our difficulties, any more than were Japan in the 1980s or other Asian countries in the early 1990s. All of these trends would be well underway with or without China. Indeed, China has seized much more of the US market from other countries than from domestic US production. None of China's gains have precluded the United States from achieving rapid economic growth, job creation, and indeed the attainment of virtually full employment, in the late 1990s and again today. Technology development and factors other than international competition have been much more important in limiting real wage gains and worsening US income distribution in recent years.
China's adverse effects on the US economy must also be set against the incontrovertible economic benefits China brings. Because of China's low-cost, high-quality production and its rapidly growing market for US exports, the United States is on balance about US$70 billion per year richer as a result of trade with China. China's exports to the United States and its investments in American financial assets help restrain US inflation and interest rates, and thus permit faster economic growth and more job creation.
From the UBS Asian Focus report "An Unwelcome Gift" by Jonathan Anderson, April 11, 2006:
From a domestic point of view, [China's] sharply rising [trade] surplus of the last two years has not been a sign of economic strength – rather, it's been a symptom of weakness at home, with slowing domestic demand and rising excess production capacity. And from an international perspective, the last thing China really needs is a further increase in its trade imbalance.
So what's going on? After all, we've been forecasting a continued fall in the trade balance. Is domestic spending weakening again? Or have we miscalculated supply pressures?
We don't think the demand side is the problem. Just two weeks ago we put out an exhaustive review of the January/February economic data, and concluded that the expenditure recovery is solid; so far, key data points like implied materials consumption, credit and investment data all point to steady momentum.
Instead, we suspect we're still seeing the tail end of rising excess supply pressures, particularly in the metals sector, where import growth has yet to come on line. And based on current trends, this could keep the trade surplus much higher than expected for another quarter or two to come. If so, then it's not the end of the world for our China call; as long as the demand side is strong, we should soon see the numbers turning around. But in the meantime, it could make life more difficult for Chinese policymakers (and for the US administration).
From the Morgan Stanley report "Understanding the Chinese Consumer" by Stephen Roach, April 13, 2006:
China's national saving rate is close to 50% and its household sector saves about 30% out of current income. On this basis, China has, by far, the highest saving propensity of any major economy in the world. Yet the Gallup Poll shows consumers are overwhelmingly dissatisfied with their saving positions. The explanation for this apparent contradiction gets right to the heart of one of China's most vexing problems: The transition from a state-owned to a market-supported economy has led to a wholesale dismantling of the cradle-to-grave socialist support system ? With headcount reductions in state-owned enterprises exceeding 60 million workers since 1997 alone, job and income insecurity has become deeply embedded in the Chinese psyche as reforms continue apace ? Until China makes meaningful progress in establishing a safety net and in uncovering new sources of job creation, I suspect dissatisfaction over saving will remain unusually high. That, alone, makes it very difficult for China to shift to a consumer-led growth model.
From the China section of Deutsche Bank's Asia Economics Monthly by Jun Ma, March 9, 2006:
We expect RMB appreciation to continue at the accelerated pace seen in February. In February the pace of RMB appreciation accelerated to an annualized 4%, significantly faster than the annualized rate of only 1.2% in the previous seven months. We believe this development – largely as we had expected – reflects a growing consensus in Beijing that the country's trade balance has become unsustainably large, the July appreciation of the RMB (by 2.1%) has not done much harm to the economy, and more visible efforts are needed to help the US administration to deal with pressures from the US legislature. The three events in April – another US treasury review of the Chinese currency regime, the G8 meeting, and President Hu Jintao's visit to the US – are likely to keep RMB appreciation at the current (February) pace in the coming two months. With a few months' faster crawling of the currency but not visible negative impact on employment and the overall economy, we expect policy makers to feel more confident in continuing this pace of the RMB move for the remainder of this year. We maintain our call of a cumulative 4% strengthening of the RMB this year.
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