One argument we have made, which some readers find difficult to accept, is that China’s keeping its currency, the renminbi, at artificially cheap levels is tantamount to an across-the-board export subsidy (the proof that the RMB is artificially cheap comes via the fact that China has had to engage in massive dollar purchases to keep the RMB pegged at its target level. It’s hard to track Chinese purchase directly from monthly Treasury International Capital reports, since the Chinese execute many of their dollar purchases through London. And I would take the latest Goldman assertion on the value of the RMB with a fistful of salt. Goldman was also calling the euro a buy at 1.50).
Now one of the reason that export subsidies and tariffs are considered to be a Bad Thing among Respectable Economists is that they lead to inefficient producers, ones that are dependent on government protection and cannot compete without official support.
That appears to be the case with a fair number of Chinese exporters, per the report of a state news agency. I only have a short Bloomberg report on the release, which came out on Xinhua; I was unable to find it on the English version of the paper.
From Bloomberg (hat tip reader Michael):
The profits of China’s makers of household appliances, automobiles and cell phones may plunge by between 30 percent and 50 percent if the Chinese currency were to strengthen by 3 percent, according to a state media report.
Small and medium-size exporters with low price-negotiating powers will face losses and may even go out of business, according to the Xinhua News Agency’s Economic Information Daily newspaper, citing the results of a “stress test.”
“The ultimate result of a currency that strengthens too quickly and by too much may be the irreversible damage to our economic structure, rather than improving our economic structure,” the report said.
Yves here. A 30% to 50% fall in profits on a mere 3% rise in the RMB (already an admission that they compete only on price), says their margins are unhealthy even with the benefit of a cheap RMB. Margins that thin will not support needed reinvestment in the business (nominal depreciation is often too low to cover needed reinvestment) nor allow the business to have much in the way of buffers for any kind of shocks.