"The whole tirade is mercantilist, hypocritical, short-sighted demagoguery."
This is a reaction to yesterday's post in one of my forums. Actually, the last sentence of a long message which was considerably milder to begin with, but got really intense towards the end... The first sentence read "Although interesting I cannot agree with your post." Halfway through it was "Pin(n)ing low growth or poverty to China’s peg would be madness." and in the end, I was a shortsighted, hypocritical, mercantilist demagogue!
But that's typical of the intense reactions generated by this topic. Mine was intense as well, I admit. But my intensity could be a geyser to the response's volcano. Pretty much like Stephen Roach wanting to "take a baseball bat to" Paul Krugman. And that has been said as well...
My critic, Merlin from Albania, says
"Let’s look at the undervalued rembibi for what it is: a tax on internal producers in China and a subsidy to export-oriented industries. So, by keeping a pegged currency, China is diverting resources from internal production to export. That’s all. It is not getting richer, rather poorer that it would be without the peg."
How true! But only if China had a domestic market for all that it produces. It obviously doesn't and thus, when China exports, it gains a market. Also, when it subsidizes exports, it does so not at the cost of it's own populace(since it imports wages when it exports goods), but at the cost of it's clients' populace. A weak currency increases the price of imports and increases the realization from exports. For a nation running a trade surplus, the latter is always larger than the former resulting in a net benefit. In addition, the jobs created for export production would not exist without exports, if the domestic market isn't large enough. So how do weak currency driven exports make China poorer?
Merlin then goes on to say,
"The latest financial crisis was “made in the USA” not at all in China, although should the rembibi be floated tomorrow there would be a shift in resources form export to internal production world-wide. Whether that would be considered a ‘crisis’ depends on how much undervalued is the rembibi right now. I myself do not thing that any country on earth could ever come close to undervaluing its currency so much as to induce anything more than a minor readjustment on the world economy. Yet the important thing to see here is that those who fearing a crisis should advocate the strengthening of the peg, not its abolition."
Well, yes the crisis was made in the US. It wouldn't have been possible without the rampant de-regulation of financial intermediaries. Cheap goods from China and misguided monetary policy only provided the required environment. And I haven't said anything to the contrary in yesterday's note as well. But saying that the Renmimbi (Yuan) isn't undervalued is just refusing to acknowledge that the mountain of FX Reserves held by China exists. Would the Yuan be traded at the same rate today if the Chinese Government hadn't intervened in the market and amassed it's FX Reserves? Obviously not. As for the extent of the undervaluation, I don't think any one person can judge the right value. Hence, the demand for free market pricing and abolition of the peg. The one part I didn't get (well, there are other parts too) was how can the purported fear of a crisis result in the advocacy of a strong peg? Anyone?
It was at this point that the comment's credibility really started crumbling. As I said earlier, there were other parts that I didn't get and most of them came after this point.
The comment is an example of how divisive this topic has become. There is logic at one end and abuse at the other. Those who support China's currency manipulation have been, so far, more abusive than logical. Merlin from Albania calls me a mercantilist, even though all I ask is for Chinese protectionism to end. These "proponents of free trade" support a Government's right to intervene in a market, but condemn another Government for asking it not to. How the logic pans out in their heads eludes me.
As for being a demagogue who, according to H L Mencken, is "one who will preach doctrines he knows to be untrue to men he knows to be idiots", even in the unlikely event of me saying what I believe to be untrue, I'm sorry Merlin, but I haven't come across any other idiots.