Very interesting @johnauthers piece on the relative value of the Chinese currency and the rising Chinese and US imbalances – unlike in most other countries in which imbalances are generally contracting.

One point he makes with which I don't think...

I agree is when he says: “As China has had much higher inflation over the interim, this means the yuan is now much less competitive.” Actually China has had CPI inflation and PPI deflation, with the former driven largely by food shortages. Given that PPI deflation is what...
is most likely to be reflected in the cost structure for Chinese manufacturers, it seems to me that the differential between the appropriate US and Chinese prices indices would actually suggest that the RMB is more, not less, competitive than changes in the nominal...
exchange rate otherwise imply. Of course China imports a lot of food from the US, so the CPI index isn’t irrelevant, but the real change in the currency is probably more complicated than adjusting the nominal change by the CPI differential.

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More from @michaelxpettis

28 Sep
Perhaps we shouldn't be surprised. I didn't look at the full details of the restructuring, but from what I saw it seemed to me that all it really did was to postpone principle repayments for a few years. If Argentina simply had a temporary problem...

of matching up cashflows, this might make sense, but if Argentina's external debt was more than it's exports could support (and clearly it was, as @Brad_Setser has argued), it didn't help at all.

Anyone who studies the history of sovereign debt restructuring knows how...
this will probably turn out: For many years both sides will pretend that Argentina has a liquidity problem, not a solvency problem, during which time the economy will struggle as the debt gets regularly extended, until finally, once debt prices are low enough, Argentina...
Read 6 tweets
28 Sep
All this external debt is definitely storing up future trouble for developing countries, but not just for them. When developing countries borrow money from abroad and spend it domestically, part of it can flow abroad again in the form of rich...

people's profits, but most of it must go directly or indirectly to pay for imports from abroad.

This means that foreign borrowing by developing countries effectively transforms useless ex-ante savings into real global demand, something the world economy urgently...
needs. The problem is that once these countries can no longer borrow, and must begin to pay down the debt, what was once an addition to global demand becomes a subtraction from it: spending on real goods and services must be cut to fund increases in ex-ante savings.
Read 5 tweets
28 Sep
This article suggests that thanks to big data, Chinese exporters can redirect sales from foreign consumers to domestic consumers. It cites as an example a toothbrush manufacturer for whom exports now account for 60% of sales, down from 90%, after... bloomberg.com/news/articles/…
Alibaba data on what Chinese consumers want helped them to figure out how to sell more domestically. The article goes on cite to Bai Ming, deputy director of the Ministry of Commerce as saying: “Turning to the domestic market adds one more option for Chinese exporters. In...
the future, exporters can sell to the market that’s most favorable, which reduces risks.”

This kind of thinking represents a classic fallacy of composition that is far too common in most discussions of Chinese rebalancing. While it is true that certain individual...
Read 8 tweets
24 Sep
For years I have been arguing that as long as total foreign portfolio inflows were low, they wouldn’t matter much to Chinese financial stability, but as they rose they would become increasingly destabilizing. Although I still don’t think the total...

amount of inflows have yet reached a danger point, they have risen so dramatically in the past year that I expect that within a year or two they might become problematic.

It seems that Beijing is starting to recognize the risks. As this very good SCMP article...
puts it, “The rapid strengthening of the yuan exchange rate in recent weeks has triggered a debate in China about whether Beijing’s recent moves to open up its domestic financial markets to more foreign investment might have resulted in an unwelcome wave of...
Read 5 tweets
22 Sep
This is a little surreal. For years certain countries like Germany saw their productivity-adjusted wages decline dramatically relative to those of their trading partners – especially their EU trading partners in the period before the 2008-08 crisis.

They nonetheless refused any policy that might reduce or reverse the beggar-thy-neighbor impact of this relative wage decline, however, and ended up running huge surpluses as they exported their domestic demand deficiencies abroad.

Now that currency movements are forcing...
those income-distribution adjustments anyway (a stronger euro effectively transfers income from EU manufacturers to EU households), the EU is beginning to complain that other countries may also be implementing beggar-thy-neighbor policies.
Read 7 tweets
21 Sep
I don’t think the economic argument should be whether or not the US should “bring home” such things as apparel manufacturing. There is nothing wrong in itself with outsourcing the manufacturing of products that can be made more efficiently abroad.

The problem arises only when foreign workers – Chinese workers in this case – are paid a lower share of the revenues they generate than American workers.

When that happens, they are unable to replace American consumption with enough Chinese consumption to maintain or...
raise total global demand. In that case the rest of the world does not benefit from the outsourcing of manufacturing to China.

If Chinese workers were paid as much – relative to their much lower productivity, of course – as American workers, however, manufacturing that...
Read 5 tweets

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