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Thursday, July 17, 2003

Steven Roach Does Not agree With Sir Alan

As mentioned in the last post, not everybody shares Alan Greenspans view that a Chinese yuan revaluation is something that has got to happen, well, not yet, anyway.

A persistently weak global economy is now moving into a dangerous place -- the blame game. Temptations are rising to point the finger elsewhere rather than look in the mirror. Such sentiment is nearly unanimous in singling out a new scapegoat: a rapidly growing Chinese economy. I have picked this up in my recent travels to Japan, Europe, Australia, and around the United States. World opinion is becoming increasingly united in putting pressure on China to defuse this threat by revaluing its currency. In my view, that would be a serious mistake. The world has got the China story dead wrong.

The blaming of China goes something like this: With real GDP growth currently hovering near 1.5% in the industrial world, the ongoing vigor of the Chinese economy obviously sticks out -- industrial output up an astonishing 16.9% (y-o-y) in June with exports surging by 32.6%. China is certainly capturing market share in an otherwise sluggish world. The problem is China’s currency peg, goes the common complaint. Tied to the US dollar, it has been given a competitive boost by the greenback’s recent depreciation. And if I’m right and the dollar has a good deal further to go on the downside -- perhaps as much as 20% over the next couple of years -- then most believe that China’s current competitive advantage will become all the more powerful. In this context, the world is nearly unanimous in demanding that China revalue the renminbi in order to relieve a growing source of global tension.

............there is enormous confusion over the character of the so-called Chinese export threat. In my opinion, the world has formed an erroneous impression that newly emerging Chinese companies are capturing global market share with reckless abandon. In fact, nothing could be further from the truth. The real export dynamic in China comes far more from the conscious outsourcing strategies of Western multinationals than from the rapid growth of indigenous Chinese companies. In fact, China’s increasingly powerful export machine has the stamp of America, Europe, and Japan all over it. That’s been true over most of the past decade. Over the 1994 to mid-2003 interval, China’s exports basically tripled from US$121.0 billion to $365.4 billion. It turns out that “foreign-invested enterprises” (FIE) -- Chinese subsidiaries of global multinationals and joint ventures with industrial-world partners -- have accounted for fully 65% of the cumulative increase in total Chinese exports over that period. (Over the most recent 12-month interval, the FIE contribution to China’s 33% export surge was 62%). Not surprisingly, nearly two-thirds of China’s foreign-driven export dynamic since 1994 is traceable to the impact of multinationals alone.

This is hardly an example of China grabbing market share from the rest of the world. Instead, it is more a by-product of the struggle for competitive survival of high-cost producers in the industrial world. Last year, a record US$52.7 billion of foreign direct investment flowed into China, making the country the largest recipient of FDI in the world. This inflow did not occur under coercion -- it was entirely voluntary. A high-cost industrial world has made a conscious decision that it needs a Chinese-based outsourcing platform for its own competitive survival. A revaluation of the RMB would destabilize the very supply chain that has become so integral to new globalized production models. By putting pressure on the Chinese to change their currency regime, the industrial world is working at cross-purposes -- in effect, squandering the fruits of its own efforts. Fear of the so-called China threat completely misses this critical point. The power of the Chinese export machine is more traceable to “us” than it is to “them.”
Source: Morgan Stanley Global Economic Forum

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