On China’s currency peg and potential policy actions

A post by Edward Harrison

In reading Scott Sumner’s take on the China currency peg dilemma, I see that both he and Paul Krugman hit on the fundamental problem in the debate: reserves. Everyone is talking about the peg as if relaxing the peg will be the magic bullet to America’s current account problem. But this is clearly not the case.

If China were to unilaterally revalue it’s currency, the Chinese would start buying fewer dollars incrementally. Part of the benefits of revaluation would accrue to Chinese export competitors in Europe (principally Germany) and in Asia (depending on their currency policy response). As US economic policy would be unchanged, US imports would switch from China to its competitors without any benefit accruing to the US.

If the Chinese revalued, but then also bought euros, selling dollar assets, a Yuan revaluation would effectively be a US dollar depreciation against both the Yuan and the euro (not to mention against other Asian countries again depending on whether they move in concert with the Chinese). In this case, the US would be able to reduce its current account deficit. (**Note: I changed this section to more accurately reflect the mechanics.)

Either way, the policy aim appears to be to force the Chinese to effect a US dollar depreciation – and this is what has the Chinese so outraged.

The Wall Street Journal quotes China’s Premier Wen as saying:

“I can understand that some countries want to increase their share of exports,” Mr. Wen said, in an apparent reference to the Obama administration’s goal. “What I don’t understand is the practice of depreciating one’s own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one’s own exports,” he added. “This kind of practice I think is a kind of trade protectionism.”

It is not the peg that matters. This is the symptom.  It is China’s accumulation of reserves – it’s capital account surplus – which are at issue. Krugman has it right when he says:

…the right way to think about China’s exchange rate is, initially, not to think about the exchange rate. Instead, you should focus on China’s currency intervention, in which the government buys foreign assets and sells domestic assets, on a massive scale.

Ostensibly, this is the same issue the US should have with Japan since they also have been accumulating an enormous amount of US dollar reserves. But, no one is talking about this because the Japanese have a floating currency. In reality, what is at work here is a high savings rate – a high private sector balance – which is not met by an equivalent government sector deficit. The differential therefore shows up as a capital account deficit aka trade surplus.




Let me illustrate how this works across a number of countries using a chart I showed you when discussing the financial sector balances in Europe last week.



As you can see in the diagram, the Netherlands, Germany, Austria and Finland are the only countries depicted with capital account deficits. In each case, the countries have very large private balance surpluses (Finland to a lesser degree). Also, in each case, the government deficits are smaller than their private surplus. Hence, the capital account deficit.

However, if you look at Ireland, now in a depression, their huge private savings rate is more than offset by the budget deficit. Hence, the capital account surplus (trade deficit).

How do we resolve this problem? On some level, this is a political problem more than anything else.  Take Ireland, for example. Why shouldn’t they have high private sector savings? After all, they accumulated lots of private sector debts during the housing bubble. In their case, they cannot devalue because they are locked into the eurozone. The only way the Irish can run a trade surplus is through an internal devaluation aka an across the board wage and salary cut. This would make Irish exports more attractive, improving their trade balance and cutting their budget deficit.

But, that’s never going to happen in isolation. What will happen is the Irish will cut their budget deficit by cutting expenditure. This will precipitate a decrease in private savings and greater levels of debt distress along with the lower GDP the cuts entail.

So, what about the Chinese (or the Japanese) then? How do we get them to stop accumulating reserves. One way is to revalue their currency. But for fear of the repercussions in the domestic export economy, this is likely to happen slowly. Another way, would be to decrease stimulus, putting the government into a surplus position. In China’s case, this is promising. Signs of overheating are everywhere. The Chinese needs to reduce excess fixed capital investment. I am assuming this policy would reduce government support of export industries giving it a double effect on savings. Since exports are the issue abroad, that would make sense.

The last possibility then is to encourage less saving and more spending. However, this could prove a tough nut to crack as well. For one, Shang-Jin Wei, a Professor of Finance and Economics at Columbia University’s Business School, thinks the high savings rate has much to do with the one-child policy.

He writes:

There are approximately 122 boys born for every 100 girls today, a ratio that translates into cutting about one in five Chinese men out of the marriage market when this generation of children grows up…

“The increased pressure on the marriage market in China might induce men and parents with sons to do things to make themselves more competitive,” Wei says. “Increasing savings is one logical way to do that, to the extent that wealth helps to increase a man’s competitive edge. Parents increase household savings mostly by cutting down their own consumption.”

Wei worked with Xiaobo Zhang of the International Food Policy Research Institute in Washington, D.C., to see if his hypothesis held up, comparing savings data across regions and in households with sons versus those with daughters. “We find not only that households with sons save more than households with daughters in all regions,” Wei says, “but that households with sons tend to raise their savings rate if they also happen to live in a region with a more skewed sex ratio.”

The effect is significant. The household savings rate in China rose from about 16 percent of disposable income in 1990 to over 30 percent today, which is much higher than most countries. About half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance. “It’s a very high ratio of savings to income,” Wei says. “The comparable savings rate in the United States would be 2 or 3 percent before the crisis, and about 6 percent since the crisis.”

Even those not competing in the marriage market must compete to buy housing and make other significant purchases, pushing up the savings rate for all households.

“While the conventional explanations for the high savings rate all play a role, they are not as important as people previously thought,” Wei says.

I am not sure what kinds of (gender-based) consumption incentives one could offer to induce more spending. But, the gender skew will be with us for some time. Chinese policy makers need to do anything they can to encourage greater spending. In particular, Chinese policy makers could think about incentives that increase the marginal propensity to spend in families with male children. In concert with a slow revaluation, this will certainly alleviate much of the trade imbalance now causing so much discussion.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. MyLessThanPrimeBeef

    Blissful polyandry is my solution to the problem of too many boys in China and a nice karmic counterpart to their blissful 5,000 years of polygamy.

    It’s also a nice way to respond to Dalai Lama: if you people can do it, we can too!

    1. MyLessThanPrimeBeef

      It’s also a nice and effective way to eradicate male chauvinism.

      I understand the capitalist bit about it’s glorious to get rich after Deng and all that, but I am sure, under socialism, it’s still desirable to have some kind of preferential, affirmative program to make up of years of gender inequality.

  2. Jesse

    “It is not the peg that matters. This is the symptom. It is China’s accumulation of reserves – it’s capital account surplus – which are at issue. Krugman has it right when he says:

    …the right way to think about China’s exchange rate is, initially, not to think about the exchange rate. Instead, you should focus on China’s currency intervention, in which the government buys foreign assets and sells domestic assets, on a massive scale.”

    I believe you have it backward and are taking Krugman out of context.

    The devaluation and peg came first. Over time, as China’s competitive devaluation and business friendly terms for manufacturing, most notably for Walmart suppliers, the reserves were accumulated as a consequence of the distorted balance of trade and the peg to the dollar.

    In a free flowing market, an artificial advantage would be nullified over time by currency effects; success breeds a stronger currency. The way to defeat this is to peg.

    Japan is a poor example. They may have a ‘free floating currency’ but they hard have open markets, they being pretty well locked up by the kereitsu and their distribution systems.

    The current account is the symptom, but the peg is a hard reality. If you remove the peg and the currency controls, then the upward strength in the yuan relative to the dollar would tend to follow.

    To say that it would solve nothing and that imports would just switch to Germany for example is odd to say the least.

    That would depend on how the euro/dollar relationship went, and the relative capabilities of each nation in production.

    But at the end of the day, pegs are artificial and difficult to maintain, and countries engage them in purposefully.

    I am afraid you article, while it contained grains of truth, was not illuminating for the average person.

    1. Edward Harrison Post author

      Jesse, I have taken Krugman out of context somewhat because he goes on to focus on the peg in the next paragraph. But, like Sumner, I am trying to start this from where we agree.

      That said, I immediately go into the discussion on japan for one simple reason: Japan has a free-floating exchange rate, yet has a large current account surplus with the U.S. You say Japan is a poor example? Fine, let’s insert Germany then, the same point holds: equating peg and current account balance is erroneous.

      It is not true at all that if you remove the peg and the currency controls, then the upward strength in the yuan relative to the dollar would tend to follow. This is a false statement. What is true is that we believe the Yuan would appreciate if we relaxed currency controls and allowed it to float.

      Again, the real problem is the differential between saving and investment as Sumner points out. This is true in China. it is true in Japan and it is also true in Germany. Your comments demonstrate you don’t appreciate this fact.

      1. Attitude_Check


        Explain to me how if China let the Yuan float, that the Yuan would not appreciate? What reasonably plausible explanation other than “no body really knows the future blah blah”

        If in reality the Yuan decreased in value, then the argument for the peg is a false one, and Chinese exports would increase. I don’t think the Chinese are knowingly PROPPING the Yaun.

    2. RPB

      Structurally it would be incredibly difficult for the US to just switch to Germany, at least in the short run. Germany and China do not specialize the manufacture of similar things. In all likelihood we would switch to another Asian nation with the same competitive as China. The big winners would be US allies in the area (S. Korea, Japan, Thailand, etc). Especially with regards to electronics/computing/textiles/plastics.

      Chinese Goods:

      German Goods:

      1. Edward Harrison Post author

        It’s not that specific goods or services that once came from China and delivered to the US now come from Germany. It’s that trade IN AGGREGATE moves away from China and toward other nations. Because of the exchange rate, individual companies making specific decisions would start switching trade relationships.

        Let me give an example using one individual that helps conceptualize it. If the Yuan were higher relative to the Euro, I might stop buying tennis balls made in China and buy ones made in Taiwan, stop buying rollerblade with ball bearings made in Taiwan and start buying ones made with bearings from Germany. China and Germany are not competing directly for the same goods, but the aggregate effect of the exchange rate move shifts demand away fro,m China and toward Germany in this example.

        That said, it is not clear that minor changes in exchange rates have an effect on trade – especially in the short term. It takes time and large moves for the effect to be manifest.

        1. alex

          “it is not clear that minor changes in exchange rates have an effect on trade – especially in the short term. It takes time and large moves for the effect to be manifest.”

          If that were true, then China should have no qualms about a small currency revaluation :)

          As for “it takes time”, that’s always true. The J-curve effect that everybody talked about during the Reagan years is real.

          As for small moves have little effect, I’m of a split mind. Obviously small moves have a smaller effect than large moves (and small changes are harder to detect than large ones), but I wonder if there isn’t more to it. Manufacturing isn’t amenable to arbitrage of small differences due to the time lag and the need to make capital investments (although that’s less of an issue when there’s lots of underused capacity, like these days). I hate to fall back on “animal spirits” arguments as they can be used to explain anything, but that doesn’t always mean they’re unimportant. Business decisions often follow fashions as much as anything else, so “manufacturing is back” hype may be important. I think that confidence that the currency revaluation isn’t a temporary thing is necessary to get investors to notice and to make a commitment to further investment. Confidence that the revaluation will continue is most important.

          1. Edward Harrison Post author

            Alex, that makes a lot of sense. When you say: “If that were true, then China should have no qualms about a small currency revaluation,” I think that’s exactly right. So, the negotiating stance should be, “look we want a 9% move. how much are you willing to go?” 9% is not that small but you can expect to be beaten back to 5 or 7%. The question going in should be: what is an acceptable outcome. It’s probably around 4-5% per annum.

            As for the part on the J-curve, I agree again. This is yet another reason the 5% per annum is not a deal killer. China has said they are concerned about a sudden revaluation. If a small incremental one has no effect in the short term, and even a large one has little short-term effect because of the J-curve, then it makes sense that they should do this as it is in everyone’s best interest.

            As you say, confidence that the revaluation will continue will defuse this debate.

  3. lark

    Maybe my bad. Maybe I don’t understand what is going on.

    But I think your 2 options are not particularly relevant.

    China does not need to use its reserves to buy any other currency. It has a huge wad of reserves, and what it does with them is simply another problem entirely.

    The question is, does it continue to add to that pile of reserves.

    If it does not continue to add to that pile, that is equivalent to letting the yuan float, and removing the peg.

    China has those reserves because when Chinese exporters receive dollar payment, they must go to the central bank to get their yuan. That is the way they get paid. That transaction is where the peg happens. It has nothing whatsoever to do with the existing pile of reserves. You should carefully read Michael Pettis back entries, it is all explained there.

    China is outraged because they feel affronted at living in a world of many and complicated interest groups. They just need to get used to being a world power. The outrage is a sign that they have not fully left behind their isolated mind set.

    1. Edward Harrison Post author

      lark, I see the existing reserve pile as a sunk cost. When I speak of selling the dollar for euros, I am using poor phrasing which I will fix. What I mean to say is that the Chinese will buy more Euros incrementally due to their reduced current account deficit with the U.S.

    2. scraping_by

      You’re quite right about the currency, but it’s a rigged game because that’s the way they rigged it. The print their local currency to subsidize foreign exchange businesses. And, as a result, the build up foreign currency. The CIA Fact Book has China #1 by a long shot in foreign reserves and gold, most of it held by the government.

      To some extent, though, they ride the tiger. The only “asset” they export is human labor, and of the lowest quality, too. Unlike forests, which can be left to grow, or mineral deposits, which aren’t going anywhere, or farm fields, which improve from being left fallow, humans require constant inputs to keep from going bad. That would be famine or revolt. People find it hard to be banked.

      As long as they continue to gather foreign reserves, they have a basis for printing as much money as they want. Which leads to more projects that keep Chinese employed. They have no reason to change their policy, so we’re going to have to change ours. Make them a most unfavored nation. Crank up the tariffs. Turn out borders into borders once again.

  4. shargash

    For years the Chinese have tried to break into the market owned by the Japanese — first cheap, low-quality goods, then higher-ticket, higher-priced goods like cars & electronics. However, the Japanese have been manipulating their currency through absurdly low interest rates for decades. They’ve also arranged their economy so that the low interest rates don’t stimulate domestic demand, essentially giving them an export advantage without corresponding inflation at home.

    The reason we don’t talk about the Japan’s currency manipulation is not because the yen floats. It is because the Japanese are on the inside of the global economic game. This drives the Chinese nuts. We’ve been beating them up about the value of the RMB, while cozying up to Japan like they’re doing nothing at all about their currency.

    One of the triggers of the market upheavals in 2007 was when China started buying Yen. This caused the yen to surge, which in turn caused the US markets to shudder as the yen-dollar carry trade unwound suddenly. Plot a comparitive chart of the yen-dollar ratio vs the S&P 500 from 2005 through 2007 to see what I mean.

    Essentially, currency manipulation is the only way the Chinese are able to overcome Japanese currency manipulation. Do not expect the Chinese to unilaterally surrender the world market to Japan. There will either have to be a multi-lateral adjustment, or the Chinese will use their reserves to protect the RMB (or they won’t break the peg in the first place).

    The US, however, is mainly interested in preserving the status quo. The US isn’t going to be able to see this through Chinese eyes — the US never sees anything except through US eyes. Do not underestimate how many wars (shooting wars, not trade wars) have resulted because the established powers of the world weren’t able to accomodate up-and-coming powers. IMO, the US will continue to push all the blame on China while remaining obivious to the role played by itself and Japan (and the EU, for that matter). Everybody shares in the responsibility for the current unhealthy entanglements and trying to make the Chinese solely responsible isn’t going to go over well at Beijing at all.

    1. Richard Kline

      Shargash, I strongly agree with your comment here. And Ed, i’m with you on the substance and concept of your post. It drives me nuts, too, to keep hearing about ‘those nasty Chinese and their peg’ when the currency game is rigged to everyone else’s advantage. China intervenes because this is the only way for them to get in the game and protect their domestic economy at the same time. Yet we hear demands that they ‘surrender.’ That just doesn’t fly. If the peg is changed, any decrease in China’s _export_ surplus just flows to competitors: Thailand, Vietnam, Bangladesh, back up-tier to Korea and Mexico. It does nothing to change the fundamental imbalances in US economic policy about which the US appears willing to make no substantive concessions.

      To me, Japan is just as interventionary, just as distorted, but as you say they are insiders so we don’t hear a peep about this anymore. To the extent to which we have a budding trade war, something I rather doubt personally, it is the old, damaged insiders trying to gang up and force the bulk of ‘readjustments,’ i.e. loss of competitive advantage, upon one party, the newcomer. This really should be a ‘give to get’ kind of negotiation, something we pointedly aren’t having; negotiation, that is.

  5. ZA

    The Chinese wants a lower yuan. Japan wants a lower yen. The US wants a lower dollar. The EU wants a lower euro.

    Just admit it for what it is… a more polite, slow-motion version of Smoot-Hawley.

    I suggest we cut to the chase and mark ’em all zero, Smokey.

    1. Edward Harrison Post author

      exactly right ZA,

      what we are seeing here is a different form of the competitive currency devaluations we saw in the 1930s. I would add that I see zero interest rates as another form of this since lower rates generally translate into a depreciated currency.

      The question is why are we seeing this now more than ever. I think it’s because we are still in an economic malaise despite the measures already taken and politicians are now desperate to do anything to show they are working to solve this. Economic nationalism is back – and with a vengeance.

      1. Dave of Maryland

        The solution isn’t an international race to the bottom, but the erection of tariffs that go right to the ceiling & beyond. Countries should develop their home markets, which they won’t do if they’re chasing pots of gold at the end of some other country’s rainbow. No country can live without exports unless they’re willing to equitably distribute what they, themselves, produce, but that’s far too hard. Easier to cheat & steal from abroad. Frankly I tire of hearing that we could have happy days again if we could just somehow have more exports. That’s a loser’s game. Marx still stares us in the face.

      2. Attitude_Check

        Any country that doesn’t let it’s currency float should be booted from the WTO, and get penalizing tariffs on their exports – No exceptions.

    2. KD

      I second. Everybody now wants cheaper currencies. It seems like no one is out of subprime euphoria yet. If you set the exchange rates cheaper, you could get more by exporting. Somebody would absorb it. But there is no more “somebody” in the world.

    3. Adam

      While it’s certainly starting to look like a tariff war replay of the 1930’s it’s far more complicated than that.

      Everyone should read Michael Pettis lates article…

      He does a great job of explaining all of the global imbalances that need to be unwound. Of course as he points out in the end, those that have benefited from them have no interest in seeing them end, so we are not likely to get agreement to end them without a fight.

  6. Dave of Maryland

    Judging by what I saw in the Indian community in New York in the early 1990’s (I was an assistant to the King of Photographers & saw a lot of Indian weddings), a highly competitive marriage market results in delayed marriage. To late 20’s to mid 30’s & later. A competitive market also emphasizes educational degrees, where Ph.D’s come to dominate, and even cases of dual Ph.D’s, if you can imagine that. If the Chinese are anything like Indians in New York, the most sought after degrees will be in engineering & medicine.

    And it won’t just be the boys. Indian girls face the same competitive pressures. I know of several women who trained in medicine only to better qualify themselves as prospective brides. The day they got their degree was the day daddy put them on the marriage market. They never practiced.

    Underneath all of this is, of course, dowry. One way or another, money is changing hands, and huge amounts are spent on the wedding itself. Especially in the case of single-child families, it’s not so much the bride & groom who get married, as the entire extended family of the groom marries the entire extended family of the bride. When things don’t work out – as they quite often don’t – the resulting divorce can be more like a feud, where one daddy fights for his son, while the other daddy fights for his daughter. I’ve seen this at first hand. You cannot imagine anything as vicious.

    So long as living standards were increasing, the inherent tensions in universal one-child families could be papered over. If times go bad, I would expect China’s one-child policy to collapse.

  7. Dan

    If the U.S. Govt. wants to boost exports it should stop selling T-bills. Exported dollars have to return somehow. The current account problem breaks down if those dollars have to purchase something tangible on the return trip; pegs have nothing to do with it. The U.S. Govt. really is in the driver’s seat here and there is no need to tell anyone else what to do.

    On the other hand if we continue a net issuance of t-bills, and those t-bills remain an acceptable investment, then someone will run a trade surplus and we will continue to run a trade deficit- until t-bills are no longer acceptable.

  8. don

    Accumulation of reserves beyond the need for reserves is currency manipulation, whether the exchange rate is pegged or not – in either case, the level of the currency is lower than it otherwise would have been. (btw, I thought Japan stopped intervening in the currency market in 2004, after accumulating some $2 trillion in reserves). As far as Germany and Japan and the current account surpluses go, there is absolutely nothing that says a CA surplus implies currency manipulation. Germany is absolutely not manipulating its currency. In fact, Trichet’s stubborness in keeping rates up at the start of the financial crisis put Europe at a decided trade disadvantage as the euro became very overvalued. You can have currency manipulation with a deficit or a surplus. For example, if BB starts buying euros, the U.S. trade balance would improve at Europe’s expense. This would be currency manipulation even if the U.S. trade balance stayed deeply in deficit. The equation is that the CA improves by the amount of the currency intervention.
    Much of Asia has little choice but to keep their currencies low to compete with China. Nor is China the only Asian country with outsized reserves – Malaysia, Singapore, Taiwan, Korea – all have outlandish reserve levels. The solution is to have a policy to discourage currency interventions by any country, not a policy to force China to de-peg its currency.
    Cessation of currency interventions would greatly reduce Asian trade surpluses and increase aggregate demand in ROW. If only China stopped intervening, it would run a smaller surplus. To claim that all of this surplus would simply be taken up by other non-U.S. producers sounds unlikely. In particular, although other Asian exporters may take much of it (owing to similarity of products), U.S. import-competing companies would probably get more than of it than German exporters.

    1. cas

      I am wondering why individual should be allowed to have ‘trade surpluses’ against individual who has ‘trade deficit’ within a country.

      1. alex

        Because people are not countries. You’re trying to reason by analogy, which is a classic fallacy. Moreover it’s a simplistic fallacy.

        People don’t issue their own currencies, and they don’t have macroeconomic policies. Countries don’t retire, and needn’t save for it (spare me the aging baby boomers line as proportionately the income shift is chicken feed compared to an individual retiring).

    2. alex

      don: “Accumulation of reserves beyond the need for reserves is currency manipulation”

      That’s it in a nutshell. And historically it’s always turned out badly. Keynes understood this with his Bancor proposal and its explicit mechanisms to balance trade and avoid excessive reserves. The fact that the US shot down that proposal at Bretton Woods ranks as one of the great short-sighted mistakes of our history.

      1. Edward Harrison Post author

        This points out the inherent instability in the post-Bretton Woods monetary system. At least, in Bretton Woods, the gold anchor served as a check on large current account imbalances. But, the flaw in the system has always been – and still is – the Triffin Dilemma.

        A national medium of exchange is ill-suited for the role of reserve currency simply because demand for it as reserve currency tends to cause chronic current account deficits. And while Bretton Woods held these in check to a degree, there is no check on this now. As always, in recession, the bickering then begins. Your point on the Bancor proposal demonstrates that what we need is a better monetary system.

      2. Edward Harrison Post author


        also see my posts on this using some ideas from Paul Davidson:


        He is the foremost expert pushing the Bancor line of argument as a principal cause of financial instability post-Bretton Woods. I had hoped the G-20 would take this issue up, especially since the Chinese are pushing in that direction. But, it is not getting any policy traction whatsoever.

        1. alex

          Thanks for the links. I think a variant of the Bancor would be a great idea, but like you I’m pessimistic of it getting any traction. Despite their talk about SDR’s I question China’s real interest in it (especially when it comes to the all important issue of discouraging excessive trade surpluses). It would be interesting to see what kind of a cow Wall St. would have over this too. What, no currency arbitrage, no cheap Chinese money for blowing housing bubbles? We might have to go back to the Dark Ages of making productive investments.

  9. rp

    “What I don’t understand is the practice of depreciating one’s own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one’s own exports,” he added. “This kind of practice I think is a kind of trade protectionism.”

    Comical, given that is precisely what China does.

  10. RPB

    According to my Chinese coworkers, one of the main reasons why the savings rate in China is so high is that the husband’s family is expected to provide a domicile as a precondition to marriage. The cultural nuance is so strong that in many cases couples will remain unmarried if the man’s family cannot provide a residence.

    This would supplement the study’s findings and the competitive sexual advantage the male’s would receive in increased savings. This would be especially true given was statistically significant evidence of a higher savings rate in regions with a higher male/female ratio.

  11. Ming

    Ed, I really like your posts, but on this issue you are incorrect.

    What is needed is not simply that China export less so others can export more, what is needed is that other countries and companies figure out what the chinese want and provide a service or product that is not easily produced or operated by the present infrastucture in China…in other words a search for real competitive advantage. In this way, balance of trade naturally starts to equalizes, with rising prosperity in both countries.

    But what is that product(s) or serivce(s) they would want? We need to remember that for the majority of people, they only earn only $1/hr…(perhaps this is the root of the problem why chinese prefer to save than to spend….perhaps Walmart and other manufacturing out-sourcing companies need to think about this). When just 20 years ago, many people were poor and marginally hungry, and you have a cultural memory of turbulence and trouble in your country(and China has had mnore than its fair share), the people will be naturally inclined to save for the up coming rainy months that must come. If you want to draw out chinese savings, you will have to produce some goods and services that will give people a greater sense of security for their future.

    1. Edward Harrison Post author

      Ming, thanks for your comments and criticism. The part about (economic) security is important.

      You make a fair point about Western companies catering to the needs of a customer base. I am sure some of the political pressure in the U.S. has to do with increasing U.S. exports to China. But, more of it has to do with decreasing imports. So, if Chinese consumers buy more, they would be buying more from domestic producers rather than more from importers.

    2. Hal Horvath

      Have you an idea of the scale of pirating of U.S. films and software in China, of the value? This would be a useful number: what is the value of U.S. products that Chinese want and simply steal currently?

    3. alex

      Ming: “What is needed is not simply that China export less so others can export more, what is needed is that other countries and companies figure out what the chinese want and provide a service or product that is not easily produced or operated by the present infrastucture in China…in other words a search for real competitive advantage.”

      That’s an old excuse and doesn’t wash. There is very little that can be produced in the US that can’t be produced in China and vica versa. That’s especially true as “American” MNC’s happily move their production and increasingly even their R&D to China, often with explicit “encouragement” from the Chinese government. Therefore it’s mostly an issue of price, and Chinese currency manipulation rigs that game. Not to mention other factors. China for example still has high tariffs on many things like car parts (25% IIRC). If the US had tariffs like that we’d get outrage both from China and our own “free traders”. Chinese infrastructure projects also routinely demand a high percentage of domestic content (typ. 80%?). When that was suggested in the US it brought outrage from our right-thinking “free traders”.

      This sort of government manipulation makes a mockery of any notion of comparative advantage. If comparative advantage held then China would tend to export labor intensive products to the US and the US would tend to export capital intensive products to China (e.g. semiconductors). Instead we have “American” MNC’s moving semiconductor fabs to China.

      The search for a “magic product” that can only come from America is a fool’s errand and distracts from the all important price issue.

      “why chinese prefer to save than to spend … just 20 years ago, many people were poor and marginally hungry … people will be naturally inclined to save for the up coming rainy months that must come.”

      I don’t complain about the high Chinese savings rate – for better of worse that should be a domestic issue. Nor do I subscribe to the Bernanke “savings glut” theory of trade imbalance. The problem for the US is not that Chinese people save a lot, but that the PBoC buys trillions in foreign reserves (mostly USD). The trade imbalance is driven by explicit Chinese government policy, not the Chinese people’s propensity to save.

    4. Attitude_Check

      If china let the Yuan float – and rise in value, they would have more to spend. That is the EXACTLY the point.

  12. fjf

    At its root this is not an economic problem. It is a problem arising from the human interpretation of the quality called time and the manner in which we apportion responsibilty across time periods.

    Some 50 years ago China was an agrarian economy and its peasants were dying from famine. How did they move from that position to their current one in which it is claimed they threaten the economic stabilty of the west?

    Starving peasants are not renowed for their abilty to accumulate and preserve capital.

    I would argue for an historical process in which foreign capital flowed into China in search of higher returns. This capital flow was based on two visions of the future: 1) Entry into the domestic Chinese market to benefit from the transition as starving peasants became proto-consumers 2) Use of China as a manufacturing platform for re-export to the west.

    Where did the capital come from? How about the coffers of GE, GM, Microsoft, NCR, IBM, Cummins. Just go down the list of the S&P 500; they are all in China. What spurred demand for Chinese product? How about that small firm in Bentonville which went to each of its US suppliers and demanded they shave their prices lest their supply contract would be terminated and re-sourced from China. You run a small business and you get that kind of demand what do you do? You re-source your inputs from China and give Wal-Mart what it wants before one of your competitors follows this action plan and pushes you out of the market.

    What we are really talking about is the success of capitalism and the failure of the US to adapt to this success. Let us put in place a public policy where all of our domestic employers move jobs offshore. Let this process continue for 30 years. Let us observe the growth of a society in which income growth has been stagnant for 30 years. The only way to goose this economy and give it the appearance of life was through an infusion of cheap credit. We know how that turned out.

    Will the US contemplate its own inability to successfully adapt to a rapidly changing environment? Will it contemplate decades years of policy failure as a contributing factor in the current dilemma? Heck no.

    1. Mickey Marzick in Akron, Ohio


      If anything, “capitalism” is now obsolete. The Chinese experiment proves this. Knowing full well that “communism” could only be built when a scarcity of goods and services no longer existed, the Chinese determined that their country was still too poor to “experiment” any further. The Great Leap forward had proven disappointing and costly. Recalling Marx’s dictum in The German Ideology about how “all the old rot” would reappear in such circumstances and having watched it play out in the Soviet Union when the economy failed to deliver, a solution had to be found. The capitalists wouldn’t overproduce and undermine the very rationale – scarcity – for capitalism, at least not knowingly. Into the breach stepped Deng Ziaopeng with the two cat theory of development – it didn’t matter what color the cat was so long as it caught the mouse! For the experiment to work though a number of condtions had to obtain:

      1) Where to find the most advanced capitalist country with which to conduct the experiment. The most likely candidate was the United States. It had the best of everything [1980?] and its penchant for consumption was legendary. But how to fund such consumption?

      2) Knowing the propensity of the Chinese peasant to save for a rainy day combined with the suppression of wages, there would be a huge dung pile of cash that would have to be recycled. But since the capitalists wouldn’t knowingly overproduce to eliminate “scarcity” the experiment could not take place in the West.

      3) Induce the capitalists to relocate plant, equipment, and technology to the Middle Kingdom to take advantage of the seemingly inexhaustible supply of cheap labor and lack of any environmental regulations. The capitalist devils wouldn’t be able to resist the opportunities to exploit such idyllic conditions for capital accumulation. The wizards of high finance on Wall Street would see the monies to be made from ramping up the offshore production lines in the PRC and turning on the credit spigot onshore in the USA, especially since it was funded by the Chinese to be begin with – free money so to speak! Yes the costs would be high, but after 30-odd years of Maoism such costs would pale in significance if the experiment proved true. Think longterm… the concept of time conditioned by CENTURIES of Taoism, Buddhism, and Confucianism.

      The game was on. Could production outstrip consumption? Or would scarcity always prevail and make the world safe for capitalism? Well for 30 years no one had an answer. But in 2007 the answer fell out of the sky. In spite of the valiant efforts of most Americans, it became apparent that they could NOT consume all the goods and services now produced by the capitalist forces of production worldwide, even with abundant credit! Production had outstripped consumption with room to spare. Conditions in Western Europe and Japan weren’t much further behind in this respect either. But the purpose of the exercise had been learned – at least by the Chinese elites. CAPITALISM WAS SUPERFLUOUS! It had undermined its raison d’etre – SCARCITY. Now it was only a question of preventing the capitalists from reinstituting/reimposing an artificial “scarcity” to keep the game going. If you’re still with me, deleveraging and austerity are the means with which to achieve the latter.

      Deng’s two cat theory no longer matters either because the capitalist mouse is now trapped between them. Slashing productive capacity to induce “scarcity” would be nothing short of barbarism, revealing to all that capitalism is about profits first, not human needs… MARKET TOTALITARIANISM! But to move forward would acknowledge the obsolescence of capitalism. Convincing Americans to think outside the capitalist box would prove the most difficult task. Even now they’re more interested in resuscitating Lazurus, missing the whole purpose of the experiment to begin with! Silly Americans… they just don’t get it!

      1. alex

        I agree with you about overall Chinese strategy but saying that “‘capitalism’ is now obsolete” is overdoing it. There has never been a developed economy that had Libertopian free market capitalism. The most bizarre hypocrisy on that count is the talk of 19th century Britain as the birthplace of free trading, free market capitalism. Right, but by an interesting coincidence they also had an empire that covered 1/4 of the globe.

        There’s nothing all that new about the Chinese approach. Back in what Europeans call the Middle Ages much of China’s world beating industry was state owned. Chinese mercantilism (for the purpose of hoarding silver) helped launch the Opium Wars (not to excuse Western imperialism). China, Britain, etc. also had policies prohibiting the export of know-how in silk and firearms manufacturing (watch out for Byzantine monasteries and larcenous American visitors). America and many others had high tariffs during their periods of industrial development. Spain lost its industry and economic power because they figured all they needed was that gold they stole from the Americas, and neglected any real economic development.

        The only thing I see that’s new is American MNC’s so happily giving away American know-how for short term gain, which is significant. But basically trade wars and intertwined government and private enterprise are very old stories.

        1. Mickey Marzick in Akron, Ohio


          I didn’t mean for this to be taken so seriously. It just occurred to me that few people considered just what Deng meant when he used the word ‘MOUSE’. Most assumed he meant ‘the capitalist road’. But what if he meant ‘the capitalist mode of production’? And whatever he really meant is only of interest to those more interested in the trees and not the forest.

          But the experiment proved true – that capitalism is obsolete? It’s not really a question of scarcity, but rather the misallocation and distortions that result from such a misperception. It’s just a question of finding a means of exchange designed to meet human needs – not profits.

          1. Mickey Marzick in Akron, Ohio


            By the way I concur with your historical analysis about so-called free market capitalism, especially laissez-faire England. But too many Americnas have free-market utopian anarchism [FMUA] genetically imprinted on their brains…

            And to take Marx a bit further, the material forces of production are now sufficient to eliminate scarcity. What is lacking are the intellectual, spiritual, and moral values to get US from here to there.

    2. alex

      fjf: “Where did the capital come from? How about the coffers of GE, GM, Microsoft, NCR, IBM, Cummins. Just go down the list of the S&P 500; they are all in China.”

      Actually capital, as in money, flows (in aggregate) in the other direction – from China to the US. Hence China has a capital account deficit (money flowing out) and the US has a capital account surplus (money flowing in – the mirror of our current account deficit). That’s not how it’s “supposed” to work according to conventional economic theory, and has been described as “water flowing uphill”. Nevertheless it’s been working that way for years, and sure doesn’t bolster conventional trade theory.

      OTOH I agree with you about the effect of “American” MNC’s on Chinese trade. About half of our Chinese imports are intra-company transfers of MNC’s. What we export to China isn’t money in aggregate but know-how and market share. What’s missing from conventional trade theory is a recognition of how important those things are. Conventional trade theory assumes that comparative advantages are fixed, and doesn’t even acknowledge the existence of MNC’s. But what happens when those MNC’s export the know-how that’s part of our comparative advantage? (see the latest outrage at http://www.nytimes.com/2010/03/18/business/global/18research.html ).

      1. Skippy

        It just makes me crazy!

        How long has the US been trying to crack the China nut, look at all the shoes we could sell…billions or short term stock upside with magic wage deflation and only for a small currency exchange price, and now after getting our ass handed to us…we cry foul?

        We, not them, applied the fulcrum. Yet we after years of junkets thinking we could roll them over or bend them to our will, we lament our state.

        Skippy…25 years of knowing snake oil puravors of ill repute running over there to make a futune…bah!

        1. alex

          Who is this “we” you speak of? American MNC’s and finance have done very nicely. The Dr. Pinto in the article I linked to may extol the virtues of Chinese engineers making 1/5 to 1/10 what American engineers do, but I doubt he’s taking a pay cut when he makes his temporary move to China.

          By the time that China happily sucks up Applied Materials expertise (whose development was so heavily assisted by US taxpayers) Dr. Pinto will have cashed out his stock options.

          “We, not them, applied the fulcrum.”

          It takes two to tango but assuredly without American help it wouldn’t have happened. I agree with you about the snake oil sold to the average American about it.

      2. fjf


        Agreed that today the capital flows are the reverse of what they were 30 odd years ago. I was attempting to make the point that the Chinese “take-off” was funded by foreign capital (provided by MNCs).
        China offered a policy of accomodation but they were also astute enough to demand technology transfer as a condition for market entry.

        Congress may bleat and put on a stage show but I cannot see US MNCs being forced to accept modifications to their transfer pricing arrangements such their margins would suffer. The Chinese have better representation in Washington than any American; they have the MNC lobbyists acting on their behalf. You cannot take 30 plus years of industrial development and move the resulting production lines eleswhere overnight. What is more remarkable is that this analysis surfaces in the comments section of a blog, not on the pages of the WSJ or NYT. If you don’t know where you are going how will you decide when you get there?

  13. SDRE

    Thank you for the post. Could you clarify one thing? You say that in order to change the imbalance, the government should decrease government stimulus. It looks to me like this would decrease government spending, and thus put the government into surplus, thus increasing the trade surplus and aggravating the situation according to your own argument. How does putting the government into surplus stop them from accumulating reserves? Is your argument simply that decreasing government (stimulus) spending would result in a proportionally greater decrease private savings through the negative effect on exports?

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