India to overtake China in 2020: Swaminathan Aiyar

[badguy2000]

Don't fool yourself. The tendency is changing already. The 'hindu rate of growth', which allowed China to achieve its advantage in the first place, no longer exists.

You amuse me. China's GDP is 5 trillion dollars in 2009? And India's GDP is what it was in 2008? Hardy f^ckin har!

While China is continuously reevaluating its GDP in terms of the black market, India's black market, perhaps the world's largest given the extent of unrecorded transactions that transpire in this country, remains without the circumference of nominal GDP, but contributes to rising living standards and wages nevertheless.

Don't flatter or delude yourself. The trend is guaranteed to reverse. The laws of economic aggregates, diminishing marginal returns and capital flows say so.

China's nominal GDP in 2009 is about 5 trillion USD,almost equal to Japan's. it is very hard to tell who on earth is the second biggest economy beforel formal statistics data is reported.

CHina's nominal GDP in 2010 will be 5.5 trillion USD at least, the surely become the second biggest economy in the world.

During 2006-2009, CHina's nominal GDP rose from 2 trillion USD to 5 trillion USD,while India's nominal GDP rose from 0.8 trillion USD to 1.2 trillion USD.

During 2010-2015,CHina's nominal GDP could easily rise from 5 trillion to 10 trillion USD,while India's nominal GDP rises from 1.2 trillion GDP to 2 trillion USD at most.:twizt:

In fact, the economy gap between CHina and India is even wider than the nominal GDP data shows,because CHinese currency is undervalued sooooo much.

the yearly output of almost every industry sections in CHina ,such as electricity,steel, concrete ,autos,household appliance...etc , is about 10 time more than that in India's,while CHina's nominal GDP is only 4-5 time more than India's . that is to say,it means that every Chinese produces almost 10 times more industry products than every Indian,as for per capital industry production while CHina's nominal per GDP is only 3 times than India's.....don't you think that it is too odd?

As we know, the data of nominal GDP can be "cooked" ,but the data of industry output can not be "cooked".

 

[thakur_ritesh]

Well to being with we are all sitting here and we will see whether the prc crosses the 5t usd mark this fiscal or not, the figures should be out any time now. My take is the figure will hover between 4.8-4.9t usd even if the real growth is projected at 10% for the fiscal and the prc will put it just over the nominal gdp of japan to soothe a few egos.

Rockdog if you stretch your memory a little, you would do well to recall badguy claiming the prc had crossed the nominal gdp of japan sometime last year but when the prc came to know the basic calculations they had messed up with then not a word appeared from their end and badguy went mum on the matter. How much I wish idf was still around.
.
You guys are here and so am I, and sitting here I am telling you guys india’s nominal gdp by the end of this fiscal will be to the tune of 1.35-1.4t usd and not 1.2t usd as claimed by badguy, wait, we are just 4 months from these figures.

2015, india’s gdp would be between 2.2t usd to 2.5t usd. If one of the prc members want to save a copy of this post, do it right away so that it can be reproduced at the right time.

And badguy who told you industrial output cant be cooked up?

 

[Rage]

China's nominal GDP in 2009 is about 5 trillion USD,almost equal to Japan's. it is very hard to tell who on earth is the second biggest economy beforel formal statistics data is reported.

CHina's nominal GDP in 2010 will be 5.5 trillion USD at least, the surely become the second biggest economy in the world.

During 2006-2009, CHina's nominal GDP rose from 2 trillion USD to 5 trillion USD,while India's nominal GDP rose from 0.8 trillion USD to 1.2 trillion USD.

During 2010-2015,CHina's nominal GDP could easily rise from 5 trillion to 10 trillion USD,while India's nominal GDP rises from 1.2 trillion GDP to 2 trillion USD at most.:twizt:

In fact, the economy gap between CHina and India is even wider than the nominal GDP data shows,because CHinese currency is undervalued sooooo much.

the yearly output of almost every industry sections in CHina ,such as electricity,steel, concrete ,autos,household appliance...etc , is about 10 time more than that in India's,while CHina's nominal GDP is only 4-5 time more than India's . that is to say,it means that every Chinese produces almost 10 times more industry products than every Indian,as for per capital industry production while CHina's nominal per GDP is only 3 times than India's.....don't you think that it is too odd?

As we know, the data of nominal GDP can be "cooked" ,but the data of industry output can not be "cooked".

You're a riot han! China's GDP rose "from 2 trillion USD to 5 trillion USD in 2006-2009" largely helped by revaluations, and progressive inclusions of the black market, in its GDP. It did not 'rise', purely nominally, in those years.

Let me put this into perspective for you. For example, China's first national economy census in 2005 reassessed China's GDP growth in 2004 as 16.8 percent bigger than the previously announced figure of 13.7 trillion RMB (1.7 trillion USD). Already, that is a more than 1/6 increase in "valued GDP.

The following data will pertain:

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Note the findings by economist Dr. PhD. Carsten A. Holz:

The consideration, for instance, is to the tune of $280 billion.


Several local GDP revaluations occurred in Jan, 2006. Some were encouraging, others not. Zheijiang for instance, expanded at a higher growth rate than was previously witnessed, while Guangdong expanded slower than was previously estimated. The cumulative effect, however was to revise provincial GDP by 21.1%, an 11.8% higher sum provincial value in the secondary sector, and a 5.7% higher sum provincial value in the tertiary sector.

For the political angle: the revaluation came at a time when Chinese Communist leaders were promising more income to the rural masses, and when economists and businessmen were questioning the rather high ratio of investment in China to increases in GDP. Rather coincidential? I think not.

In large countries like China and India, rural economies are typically undervalued.

Again, in Dec. 2006, GDP was revised upwards.Two-thirds of that revision came from higher prices, and higher real exchange rates.

In 2007, revaluations claimed that 2006 GDP estimates were inconsistent. A revision engorged GDP by about 12%.

A revaluation in 2008 claimed that the Chinese economy was bigger by 4.4 percent than originally claimed. 'Rationalized' GDP rose from $3.251 trillion to $3.395 trillion.

To show you the periodicness of the revaluations, in April last year, the NBS bureau raised the growth estimate for 2007 to 11.9 percent from 11.4 percent, citing larger estimates for the contribution from "service industries such as telecommunications and retailing". In January this year, it raised the estimate again to 13 percent.

In Dec. 2009, China announced that its economy grew by 9.6% in 2008, instead of a previously announced 9%. That was a major pop, especially keeping in mind this was at a time when the world feared a total financial collapse. The reevaluations were largely based on "sudden, unexpected growth" in the services sector, primarily the unaccounted sector of the black market. The revision was to the tune of $205 billion.

China's spurt in 'nominal' growth has been due to frequent and periodic revisions, that have had an inflationary effect on nominal growth.

Such benchmark revisions have not taken place in India to date. For obvious reasons of admeasurment and valuation. China's first national census was undertaken only in 2004-5. When they do, and they will, for no countries' economic statistics are etched in stone, India's GDP "will have" expanded faster than present rates suggest.

China has two decades more of a headstart on economic growth than India does.

In the second decade of China's economic growth, between 1996-98, which is roughly where India is now, China's GDP expanded from $856 billion to $1,019 trillion at growth rates of slightly under 10 and 8 % (A subsequent evaluation, in 2005 no less, revised tertiary sector valuations in 2003 by 32% and GDP by 10%* ). :twizt:

[* The benchmark revision revised nominal values and real growth rates for the production approach in the calculation of GDP for 1993-2004, meaning that cumulative growth at the end of 2004, and therefore nominal GDP at the beginning of year 2005, was 19% higher than previously value, and the margin of growth between 2004 and 2009, lower than previously anticipated.]

Growth is inevitable, and revaluations too. And when they do occur, you'll be eating your nails.

 

[badguy2000]

well,
1. CHinese currency devalued 500%-600% during 1980-1995.

2. During 1995-2005, CHinese currency pegged USD

3. During 2005-2008, CHinese currency was appreciated about 25%.

4. Since 2008, CHinese currency has pegged USD again until now. but now ,most people still think that RMB was undervalued very much.

5.Chinese GDP in 1980 was only 340 billion RMB while CHinese GDP in 2009 is about 34 trillion RMB.
Even if the inflation is considered, CHinese real GDP is still 30-40 times more than that in 1980.
However, During the same time, because the shrewd change of exchange rate, Chinese nominal GDP(measued by USD) just rose from 28 billion USD to 5 trillion USD.


5. conclusion1: Chinese RMB"s appreciation during 2005-2008 was just a slim revision of artifical over-devaluing of RMB during 1980-1995. besides, the slim revision can not fully correct the "devaluing of Chinese RMB" completely.

6. Conclusion2: CHinese RMB is still undervalued very much.. CHinese economy power is much more than its nominal GDP shows.

 

[Rage]

well,
1. CHinese currency devalued 500%-600% during 1980-1995.

2. During 1995-2005, CHinese currency pegged USD

3. During 2005-2008, CHinese currency was appreciated about 25%.

4. Since 2008, CHinese currency has pegged USD again until now. but now ,most people still think that RMB was undervalued very much.

5.Chinese GDP in 1980 was only 340 billion RMB while CHinese GDP in 2009 is about 34 trillion RMB.
Even if the inflation is considered, CHinese real GDP is still 30-40 times more than that in 1980.
However, During the same time, because the shrewd change of exchange rate, Chinese nominal GDP(measued by USD) just rose from 28 billion USD to 5 trillion USD.


5. conclusion1: Chinese RMB"s appreciation during 2005-2008 was just a slim revision of artifical over-devaluing of RMB during 1980-1995. besides, the slim revision can not fully correct the "devaluing of Chinese RMB" completely.

6. Conclusion2: CHinese RMB is still devalued very much.. CHinese economy power is much more than its nominal GDP shows.

Are you even thinking straight? Before you launch on that diatribe, know that if China's currency weren't devalued, an export-oriented economy would not have expanded nominal GDP in those years at that rate. By revaluing the yuan, the dollar devalues further and faster, China loses its valuation of dollar reserves and its export competitiveness, as we saw with the example of steel pipes, declines. In its previous state, a revaluation of the yuan to reflect real exchange rates would have been debilitating for China by necessitating its reliance on domestic demand for GDP growth or employment generation or poverty reduction.

If the Chinese yuan were devalued, the resulting depreciation in the dollar would cause the nominal values of other GDP's to incline too. For the global economy does not operate in a vacuum, and everything else is measured in terms of dollars- including oil, service remunerations, prices of key commodities, metals etc. But if the same GDP was measured in Yuan (or Euros for instance), we might not have seen similar or even significant change (rather it may actually shrink, as US GDP contracts from being exposed to an appreciated Yuan). So the net gain, is only in terms of units of measure, and not in real significant terms. Real gain, in terms of real units of production, and nominal dollar increases thereof, only accrue due to progressive encroachments on the black or grey market, which is what has happened in China over the last seven years.

A yuan appreciation, and a subsequent dollar devaluation, would also impact the Chinese government's power to spend money on developmental goals, by devaluing and attenuating the rate of increase of forex reserves: critical, particularly in light of the fact that monetary and fiscal stimulii, propelling domestic demand contributed an incredible 12 percentage points to GDP growth this year, even while the current-account surplus almost halved to around 6% of GDP from 11% in 2007.

Experience also shows that a gradual rise encourages investors to bet on further appreciation; hot-money inflows then swell domestic liquidity. A large, one-off increase might work, as it would stem expectations of a further rise. But the sort of increase required—perhaps 25%—is politically unacceptable because it would put many exporters out of business overnight.

Those who see benefits also ignore the effect of the appreciation of the yuan on current oil markets. Revaluation would increase China’s oil demand and reduce world oil supply. If oil market fundamentals stay the same, a yuan revaluation would bring oil prices to new record heights. Bad for the energy-hungry Chinese economy, given that oil prices are measured, and set to be measured, in dollars for the forseeable future.

Once oil prices increase, countries that lobbied for or proposed the revaluation may regret their efforts as their higher oil import bills wipe out all export gains. In addition, their exports to poorer underdeveloped countries could also decline as these countries struggle to pay for the additional energy cost. Given the low price and income elasticities of the demand for oil, developing countries have no choice but to pay oil import bills at the expense of other imports from countries that lobbied for the revaluation of the yuan. Not to mention the political fallout of such a move with countries like Saudi Arabia and other countries of the GCC.

Conclusion 1: China's "500%-600%" devaluation of the yuan in 1980-95 was necessary for it to become export competitive in that era in the first place, and to enable it to achieve high rates of growth of both nominal and real GDP, and foreign institutional and infrastructural investment.

Conclusion 2: a revaluation of the yuan now would lead, not only to an artificial inflation of nominal Chinese GDP, it would erode its export competitiveness, decrease its real growth rates and foreign investments, offshore economic activity, particularly in light of fast-growing neighbouring economies, significantly erode into its foreign exchange reserves, and also lead to a nominal appreciation in the GDP's of other countries by depreciating the dollar.

 

[badguy2000]

Are you even thinking straight? Before you launch on that diatribe, know that if China's currency weren't devalued, an export-oriented economy would not have expanded nominal GDP in those years at that rate. By revaluing the yuan, the dollar devalues further and faster, China loses its valuation of dollar reserves and its export competitiveness, as we saw with the example of steel pipes, declines. In its previous state, a revaluation of the yuan to reflect real exchange rates would have been debilitating for China by necessitating its reliance on domestic demand for GDP growth or employment generation or poverty reduction.

If the Chinese yuan were devalued, the resulting depreciation in the dollar would cause the nominal values of other GDP's to incline too. For the global economy does not operate in a vacuum, and everything else is measured in terms of dollars- including oil, service remunerations, prices of key commodities, metals etc. But if the same GDP was measured in Yuan (or Euros for instance), we might not have seen similar or even significant change (rather it may actually shrink, as US GDP contracts from being exposed to an appreciated Yuan). So the net gain, is only in terms of units of measure, and not in real significant terms. Real gain, in terms of real units of production, and nominal dollar increases thereof, only accrue due to progressive encroachments on the black or grey market, which is what has happened in China over the last seven years.

A yuan appreciation, and a subsequent dollar devaluation, would also impact the Chinese government's power to spend money on developmental goals, by devaluing and attenuating the rate of increase of forex reserves: critical, particularly in light of the fact that monetary and fiscal stimulii, propelling domestic demand contributed an incredible 12 percentage points to GDP growth this year, even while the current-account surplus almost halved to around 6% of GDP from 11% in 2007.

Experience also shows that a gradual rise encourages investors to bet on further appreciation; hot-money inflows then swell domestic liquidity. A large, one-off increase might work, as it would stem expectations of a further rise. But the sort of increase required—perhaps 25%—is politically unacceptable because it would put many exporters out of business overnight.

Those who see benefits also ignore the effect of the appreciation of the yuan on current oil markets. Revaluation would increase China’s oil demand and reduce world oil supply. If oil market fundamentals stay the same, a yuan revaluation would bring oil prices to new record heights. Bad for the energy-hungry Chinese economy, given that oil prices are measured, and set to be measured, in dollars for the forseeable future.

Once oil prices increase, countries that lobbied for or proposed the revaluation may regret their efforts as their higher oil import bills wipe out all export gains. In addition, their exports to poorer underdeveloped countries could also decline as these countries struggle to pay for the additional energy cost. Given the low price and income elasticities of the demand for oil, developing countries have no choice but to pay oil import bills at the expense of other imports from countries that lobbied for the revaluation of the yuan. Not to mention the political fallout of such a move with countries like Saudi Arabia and other countries of the GCC.

Conclusion 1: China's "500%-600%" devaluation of the yuan in 1980-95 was necessary for it to become export competitive in that era in the first place, and to enable it to achieve high rates of growth of both nominal and real GDP, and foreign institutional and infrastructural investment.

Conclusion 2: a revaluation of the yuan now would lead, not only to an artificial inflation of nominal Chinese GDP, it would erode its export competitiveness, decrease its real growth rates and foreign investments, offshore economic activity, particularly in light of fast-growing neighbouring economies, significantly erode into its foreign exchange reserves, and also lead to a nominal appreciation in the GDP's of other countries by depreciating the dollar.

1. the trade balance is the most important indication whether one currency is undervalued or overvalued.
case is that CHina has global most trade surplus---yearly 200-300 billion USD,about 5% of it nominal GDP( CHinese GDP of 2009 should be 5 trillion USD or so).

2. the industry output is biggest in the world. it means that Chinese create most real material wealth in the world.


the nature of international trade is "Goods for Goods" while dollar is just the
intermediary between goods. why people stock dollars is not to use dollar, but for the goods that be bought by dollars.

without the support of real material wealth, USD is just a useless "IOU".

however, without the intermediary of dollars, real material goods can be used by people still.

 

[Rage]

1. the trade balance is the most important indication whether one currency is undervalued or overvalued.
case is that CHina has global most trade surplus---yearly 200-300 billion USD,about 5% of it nominal GDP( CHinese GDP of 2009 should be 5 trillion USD or so).

2. the industry output is biggest in the world. it means that Chinese create most real material wealth in the world.

the nature of international trade is "Goods for Goods" while dollar is just the
intermediary between goods. why people stock dollars is not to use dollar, but for the goods that be bought by dollars.

without the support of real material wealth, USD is just a useless "IOU".

however, without the intermediary of dollars, real material goods can be used by people still.

Unless you can:

a) magically rid international commodity fluctuations with the dollar
b) rid the world of its dependence on the dollar
c) diversify your forex holdings rapidly, to the extent that it is primarily non-dollar bullion or another commodity or currency
d) manipulate exchange rate valuations, export competitiveness - domestic and international, domestic liquidity, institutional investment flows, energy demand (rapidly diversify away from oil, so that coal or nuclear or wind energy is your primary source of economic propulsion)

you cannot and will not make more than marginal appreciations in the value of the yuan.

Because, China's currency is unofficially pegged to the dollar, and China has such vast holdings of dollar-bound (treasury bills) forex reserves, and because China is so dependent on oil, and will remain so for the foreseeable future, a significant appreciation of the yuan, and a subsequent devaluation of the dollar will impact China far greater than you tend to imagine.

You may revalue the yuan retrospectively, which will lead to nothing other than a retrospective inflation of nominal GDP, not to anything significant or tangible.

Marginal revaluations, as I've said, also leads investors to speculate on further appreciation, causing hot-money inflows to swell domestic liquidity.

China has not had to deal with this yet, but a previous tackling of the problem in Korea have shown that the "excess liquidity trap" is a burden. Some of the measures to discourage inflows have taken the form of making previous measures to discourage outflows more symmetric, while others have taken the form of reinstating much reduced or eliminated restrictions. These limits on capital inflows can be quite effective, but they set back the development of financial markets, reduce the rate of employment growth (eventually lead to un-employment) and clash with ambitions for internationalized currencies in the region.

The excess liquidity trap also has three dimensions:

- China is concerned that excess domestic liquidity will cause economic overheating, but it is afraid to raise interest rates and tighten monetary policy more aggressively for fear that it would slow employment growth, generate additional non-performing loans in the banking system and attract additional liquidity from abroad.

- China cannot continue to sterilize large amounts of excess liquidity in the banking system indefinitely without risking a qualitative deterioration of the balance sheet of the central bank, the People's Bank of China (PBoC), a decline in the profitability of banks (if reserve requirements are raised too high) or other monetary problems.

- It is difficult to protect the value of China's huge foreign exchange reserves against US dollar decline precisely because the reserves are so huge and because the dollar's share in those reserves is so large and is projected to remain so.

2008 saw the increase in China's consumer price index (CPI) reach a worrying 8% year-on-year. For most of the period between 1998 and the early 2007's, China's CPI was low or negative. Unlike inflation of the early 90's, which was then fueled by an overheated economy (rapid domestic demand growth fueled by excessive credit expansion), the recent inflation cycle was mainly ignited by incidental domestic supply-side factors in the food sector (mainly pigs and poultry), reinforced by a sharp global price increase for imported oil, coal, soybeans and other grains and metals. The combined effect was to drive up the inflationary price of many food items (especially pork, poultry, eggs, vegetable oil and dairy products).

CPI inflation received an extra jolt in the early months of 2008 as a result of an unusually severe winter storms that disrupted transportation and power supplies in the country's south. The non-food CPI remained surprisingly modest and stable , but the producer price index (PPI) - a contributor to CPI inflation in the longer term - rose sharply in those months, to 8.2% in May.

Unless China is willing to brace massive turbulent social unrest, in the form of spiralling inflation and capital outflows leading to decreased liquidity and employment, a substantial nominal revaluation of the yuan is unlikely. Do I need to tell you of the linkages between exchange rates, purchasing power parity, inflation and interest rates? Or that a lower nominal exchange rate (an increase in the valuation of the yuan) necessitates a decrease in the interest rates, offshoring foreign investments to other more lucrative destinations (as the rate of return on capital falls), leading to a glut in money supply (as the rate of borrowing decreases), and by the relationship between money and prices, lead to a higher (spiralling) rate of inflation.

As long as the chinese central bank keeps interest rates artificially high, to encourage foreign institutional investors via the rate of return on capital, and all other factors apply, a revaluation of the yuan (affecting nominal exchange rates and the nominal value of the currency) is not likely.

Additionally, the increase in GDP growth from 10.1% in 2004 to 11.9% in 2007 was almost entirely due to increases in net external demand, not domestic demand. Monetary expansion in 2007 was moderate; it was not a primary cause of either CPI or PPI inflation. A revaluation of the yuan would shift economic growth dependency to domestic consumption, rather than external demand- a factor that is concomitant with significant erosion in the growth rates given that China is the world's 'factory'.

Those advocates, such as you, who are touting a revaluation of the RMB by 15% or 40% are really asking China to adjust upwards its domestic price level by 15% or 40%. But why not just recommend to Chinese policy-makers 15% or 40% inflation? We can see immediately the difficulties in engineering inflation as high as 15% to 40% in China. Structural inflation, which accommodates domestic price level changes, works through individual markets with much less shocks to society than sudden and large exchange rate changes. On the other hand, monetarily-induced inflation, carries the risk of decreased export competitiveness, large societal upheavals, eroded savings and fiscal contraction.

2. the industry output is biggest in the world. it means that Chinese create most real material wealth in the world.

You're smokin' a pipe dream! In dollar terms, the US's industrial output As of Dec. 31, 2009, US industrial output is $2.7 trillion and is more than China AND Japan combined. Consider this in llight of the fact that US is coming off its worst industrial recession since WWII, has registered stellar economic growth in core sectors in the last quarter of 2009: my november figures indicate construction activity rose 1.6%, materials rose 1.3%, non-industrial supplies increased 1.0%, business equipment rose 0.4%, final products rose 0.4%, and consumer products increased 0.3%; By group, mining activity increased 2.1% and manufacturing rose 1.1%; however, utilities sector activity fell 1.8%; and is operating at 99.4 percent of its 2002 average.
Industrial Production and Capacity Utilization


As to the second part of your argument, which is:

the nature of international trade is "Goods for Goods" while dollar is just the
intermediary between goods. why people stock dollars is not to use dollar, but for the goods that be bought by dollars.

without the support of real material wealth, USD is just a useless "IOU".

however, without the intermediary of dollars, real material goods can be used by people still.

Unfortunately, in the forum of public policy debate, rates, especially nominal rates are thought to be the most important factors affecting trade imbalances and competitiveness, which is a misunderstanding in both theory and practice. The implication is that as long as China maintains free trade, China’s nominal exchange rate will always be consistent with the PPP exchange rate based on tradable goods because of the possibility of market arbitrage. But that is nonsensical because they are not based on a PPP exchange rate derived from buying a bundle of goods that also includes non-tradable goods.

Japan allowed its currency to appreciate steadily and significantly for many years during the 1990s, with little effect on reducing or eliminating Japan’s then large current account surplus. What Japan got from the appreciation of the yen was little more than a decade of deflation. If Japan had held its nominal exchange rate constant throughout the 1990s, it would most likely have faced limited inflation during that period. But, too great an appreciation of the yen ultimately eliminated the necessity for inflation (even though inflation occurred) and even required some deflation to compensate the excessive appreciation of the yen.

Moreover, sustained current account imbalances, which are fundamentally about surpluses or deficits of capital, about savings and investment gaps, and about consumption and saving behaviors, have very little to do with the level of the nominal exchange rate.

You, a banker, have a tendency to simplify way too much.

You may also want to read this abstract:

"Based on whether the Chinese and the U.S. interest rates and exchange rate agreeing with covered interest rate parity theory or not, granger causality test and co-integration test were utilized to analyze Chinese and the U.S. interest rates and exchange rate from the perspectives of the relation and the transmission mechanism of them. The research found that, without regard to institution and economic environment factors, the interest rate parity theory was nearly tenable; when the effects of the institution and economic environment factors was comparatively strong, interest rates of China and the USA influenced each other directly. Otherwise, they influenced each other by exchange rate. Finally, conclusions and policy suggestions were pointed out."

Digital Library

You may also want to read the following:

A rapid rise in current account surplus and associated reserves build-up pose mounting challenges for the Chinese central bank to keep its currency undervalued.

The basic premise of an undervalued currency is that the concerned monetary authority has to intervene in the foreign exchange market to postpone current consumption and to delay inflation. The challenge for the People's Bank of China (PBoC) is to sterilise the incipient increase in domestic money supply resulting from the large-scale purchase of foreign exchange. If it does not, the excess liquidity in the financial system eventually leads to inflation and currency appreciation.

However, there is a limit to sterilisation. Following the collapse in interest rates in the US, the domestic short-term interest rate in China has begun to exceed the US rates. As a result, the spread between the cost of issuing sterilisation bills and the returns on foreign assets is increasing. The PBoC now relies more on upward adjustment of bank reserves requirement than of central bank bills, thereby shifting part of the sterilisation cost from the central bank to commercial banks.

But there is no easy way out. Interest rates in China have to be kept low to avert capital flows (to avoid further sterilisation). Low lending rates and low or negative returns from savings rates are propping up asset prices.

LESSONS FROM HISTORY

The values of exchange rates are not always determined by economic forces alone. History is full of such examples. Faced with sheer competition from Japan to a large extent and a hefty current account deficit in 1985 the US signed the Plaza Accord with Japan, West Germany, France and the UK that deliberately devalued the dollar's exchange rate. Many analysts believe that a super-strong Japanese currency is largely responsible for halting its unprecedented economic expansion since the 1950s. Apart from Japan, the European experience could be another lesson for China as far as exchange rate determination is concerned. Faced with huge trade deficits and runaway inflation, partly due to the Vietnam War, the Nixon administration unilaterally cancelled the direct convertibility of the dollar to gold, which essentially ended the Bretton Woods system of international financial exchange. Europe's rather forced graduation from fixed to flexible exchange rates came at a high price.

Within one or two years, its unit labour costs rose from 60 per cent of the US level to over 110 per cent, and many experts believe that this virtually ended Europe's miracle. Today, China faces similar pressure from the West. China has not yet been officially accused of being a currency manipulator by the US, but the trade lobbyists in Washington want retaliatory penalties against China. Nevertheless, on currency issues Beijing's biggest collateral is none other than the Sino-US mutual economic dependence. China is America's largest foreign creditor, holding more than $800 billion of US government debt.

THREAT TO EAST ASIA

Apart from the trans-Atlantic economies, China's exchange rate policy is a major worry for its East Asian neighbours. Though China faces less political pressure from them, its pegged exchange rate threatens the sustainability of the East Asian production network.

The net effects of its labour and financial markets dynamics could lead to the upward revaluation of the renminbi, but the process could be much less steady than what the US and other industrialised economies are demanding. Nevertheless, if China's exchange rate is to be determined by factors other than economic forces, its three-decade economic march could face a major setback.

The very essence of Lenin's economic and political philosophy might have faded away, if not been buried, following the fall of the Berlin Wall in the 1990s, but his observations about currency are very much alive today.

(The author is a Research Associate at the Institute of South Asian Studies, National University of Singapore. [email protected])

The Hindu Business Line : The renminbi challenge

And this rather simplistic report:

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Additionally, PPP analyses differ on the extent of undervaluation of the yuan based on the method of economics used: by as much as 0-40%. Estimates by Jarvis & McKay, for example, show that the yuan is infact at purchasing power parity. There is also significant disagreement on the extent of undervaluation of the yuan: with figures ranging from 40% (U.S. National Association of Manufacturers, as is their interest) to 14% (Japan's Ministry of Finance) making the political dictum all the more problematic.

 

[badguy2000]

Unless you can:

a) magically rid international commodity fluctuations with the dollar
b) rid the world of its dependence on the dollar
c) diversify your forex holdings rapidly, to the extent that it is primarily non-dollar bullion or another commodity or currency
d) manipulate exchange rate valuations, export competitiveness - domestic and international, domestic liquidity, institutional investment flows, energy demand (rapidly diversify away from oil, so that coal or nuclear or wind energy is your primary source of economic propulsion)

you cannot and will not make more than marginal appreciations in the value of the yuan.

Because, China's currency is unofficially pegged to the dollar, and China has such vast holdings of dollar-bound (treasury bills) forex reserves, and because China is so dependent on oil, and will remain so for the foreseeable future, a significant appreciation of the yuan, and a subsequent devaluation of the dollar will impact China far greater than you tend to imagine.

You may revalue the yuan retrospectively, which will lead to nothing other than a retrospective inflation of nominal GDP, not to anything significant or tangible.

Marginal revaluations, as I've said, also leads investors to speculate on further appreciation, causing hot-money inflows to swell domestic liquidity.

China has not had to deal with this yet, but a previous tackling of the problem in Korea have shown that the "excess liquidity trap" is a burden. Some of the measures to discourage inflows have taken the form of making previous measures to discourage outflows more symmetric, while others have taken the form of reinstating much reduced or eliminated restrictions. These limits on capital inflows can be quite effective, but they set back the development of financial markets, reduce the rate of employment growth (eventually lead to un-employment) and clash with ambitions for internationalized currencies in the region.

The excess liquidity trap also has three dimensions:

- China is concerned that excess domestic liquidity will cause economic overheating, but it is afraid to raise interest rates and tighten monetary policy more aggressively for fear that it would slow employment growth, generate additional non-performing loans in the banking system and attract additional liquidity from abroad.

- China cannot continue to sterilize large amounts of excess liquidity in the banking system indefinitely without risking a qualitative deterioration of the balance sheet of the central bank, the People's Bank of China (PBoC), a decline in the profitability of banks (if reserve requirements are raised too high) or other monetary problems.

- It is difficult to protect the value of China's huge foreign exchange reserves against US dollar decline precisely because the reserves are so huge and because the dollar's share in those reserves is so large and is projected to remain so.

2008 saw the increase in China's consumer price index (CPI) reach a worrying 8% year-on-year. For most of the period between 1998 and the early 2007's, China's CPI was low or negative. Unlike inflation of the early 90's, which was then fueled by an overheated economy (rapid domestic demand growth fueled by excessive credit expansion), the recent inflation cycle was mainly ignited by incidental domestic supply-side factors in the food sector (mainly pigs and poultry), reinforced by a sharp global price increase for imported oil, coal, soybeans and other grains and metals. The combined effect was to drive up the inflationary price of many food items (especially pork, poultry, eggs, vegetable oil and dairy products).

CPI inflation received an extra jolt in the early months of 2008 as a result of an unusually severe winter storms that disrupted transportation and power supplies in the country's south. The non-food CPI remained surprisingly modest and stable , but the producer price index (PPI) - a contributor to CPI inflation in the longer term - rose sharply in those months, to 8.2% in May.

Unless China is willing to brace massive turbulent social unrest, in the form of spiralling inflation and capital outflows leading to decreased liquidity and employment, a substantial nominal revaluation of the yuan is unlikely. Do I need to tell you of the linkages between exchange rates, purchasing power parity, inflation and interest rates? Or that a lower nominal exchange rate (an increase in the valuation of the yuan) necessitates a decrease in the interest rates, offshoring foreign investments to other more lucrative destinations (as the rate of return on capital falls), leading to a glut in money supply (as the rate of borrowing decreases), and by the relationship between money and prices, lead to a higher (spiralling) rate of inflation.

As long as the chinese central bank keeps interest rates artificially high, to encourage foreign institutional investors via the rate of return on capital, and all other factors apply, a revaluation of the yuan (affecting nominal exchange rates and the nominal value of the currency) is not likely.

Additionally, the increase in GDP growth from 10.1% in 2004 to 11.9% in 2007 was almost entirely due to increases in net external demand, not domestic demand. Monetary expansion in 2007 was moderate; it was not a primary cause of either CPI or PPI inflation. A revaluation of the yuan would shift economic growth dependency to domestic consumption, rather than external demand- a factor that is concomitant with significant erosion in the growth rates given that China is the world's 'factory'.

Those advocates, such as you, who are touting a revaluation of the RMB by 15% or 40% are really asking China to adjust upwards its domestic price level by 15% or 40%. But why not just recommend to Chinese policy-makers 15% or 40% inflation? We can see immediately the difficulties in engineering inflation as high as 15% to 40% in China. Structural inflation, which accommodates domestic price level changes, works through individual markets with much less shocks to society than sudden and large exchange rate changes. On the other hand, monetarily-induced inflation, carries the risk of decreased export competitiveness, large societal upheavals, eroded savings and fiscal contraction.



You're smokin' a pipe dream! In dollar terms, the US's industrial output As of Dec. 31, 2009, US industrial output is $2.7 trillion and is more than China AND Japan combined. Consider this in llight of the fact that US is coming off its worst industrial recession since WWII, has registered stellar economic growth in core sectors in the last quarter of 2009: my november figures indicate construction activity rose 1.6%, materials rose 1.3%, non-industrial supplies increased 1.0%, business equipment rose 0.4%, final products rose 0.4%, and consumer products increased 0.3%; By group, mining activity increased 2.1% and manufacturing rose 1.1%; however, utilities sector activity fell 1.8%; and is operating at 99.4 percent of its 2002 average.
Industrial Production and Capacity Utilization


As to the second part of your argument, which is:




Unfortunately, in the forum of public policy debate, rates, especially nominal rates are thought to be the most important factors affecting trade imbalances and competitiveness, which is a misunderstanding in both theory and practice. The implication is that as long as China maintains free trade, China’s nominal exchange rate will always be consistent with the PPP exchange rate based on tradable goods because of the possibility of market arbitrage. But that is nonsensical because they are not based on a PPP exchange rate derived from buying a bundle of goods that also includes non-tradable goods.

Japan allowed its currency to appreciate steadily and significantly for many years during the 1990s, with little effect on reducing or eliminating Japan’s then large current account surplus. What Japan got from the appreciation of the yen was little more than a decade of deflation. If Japan had held its nominal exchange rate constant throughout the 1990s, it would most likely have faced limited inflation during that period. But, too great an appreciation of the yen ultimately eliminated the necessity for inflation (even though inflation occurred) and even required some deflation to compensate the excessive appreciation of the yen.

Moreover, sustained current account imbalances, which are fundamentally about surpluses or deficits of capital, about savings and investment gaps, and about consumption and saving behaviors, have very little to do with the level of the nominal exchange rate.

You, a banker, have a tendency to simplify way too much.

You may also want to read this abstract:

"Based on whether the Chinese and the U.S. interest rates and exchange rate agreeing with covered interest rate parity theory or not, granger causality test and co-integration test were utilized to analyze Chinese and the U.S. interest rates and exchange rate from the perspectives of the relation and the transmission mechanism of them. The research found that, without regard to institution and economic environment factors, the interest rate parity theory was nearly tenable; when the effects of the institution and economic environment factors was comparatively strong, interest rates of China and the USA influenced each other directly. Otherwise, they influenced each other by exchange rate. Finally, conclusions and policy suggestions were pointed out."

Digital Library

You may also want to read the following:


The Hindu Business Line : The renminbi challenge

And this rather simplistic report:

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Additionally, PPP analyses differ on the extent of undervaluation of the yuan based on the method of economics used: by as much as 0-40%. Estimates by Jarvis & McKay, for example, show that the yuan is infact at purchasing power parity. There is also significant disagreement on the extent of undervaluation of the yuan: with figures ranging from 40% (U.S. National Association of Manufacturers, as is their interest) to 14% (Japan's Ministry of Finance) making the political dictum all the more problematic.

your long reply shoud have be appreciated...however...

1. USA's GDP is about 13 trillion USD(2008),only about 20% of which is "the second industry section"(manufcturing,mining and construction).
China's GDP is about 4.5 trillion USD(2008),about 45-50% of which is "the second industry section"(manufacturing, mining and construction).
So, if measured by "market exchange rate", in 2008, USA's industry output was just slimly more than CHina's .
In 2009, even measued by "market exchage rate",USA's industry output "is to be surpassed by China's" in 2009 ,according to UK's finacial times
????????????? ?????? - FT???


2. if measued by the real wealth-creating activity(quantity) , CHina's industry output should be much more than USA's.
in fact, you easily find that the productions of Chinese any industry seciton is more than USA"s, except a few such as aircrafts and high-end weapons.

guy , "second industry seciton(manufacturing,mining and construction" and "primary industry section(agriculture)" are the real wealth-creating section.
people's food, dress, commodities,accomodations,communications are all produced by those sections. "the third industry section(service)" can not direct create wealth,and just is a way of real weath redistribution.



CHina's

 

[Rage]

your long reply shoud have be appreciated...however...

1. USA's GDP is about 13 trillion USD(2008),only about 20% of which is "the second industry section"(manufcturing,mining and construction).
China's GDP is about 4.5 trillion USD(2008),about 45-50% of which is "the second industry section"(manufacturing, mining and construction).
So, if measured by "market exchange rate", in 2008, USA's industry output was just slimly more than CHina's .
In 2009, even measued by "market exchage rate",USA's industry output "is to be surpassed by China's" in 2009 ,according to UK's finacial times
????????????? ?????? - FT???


2. if measued by the real wealth-creating activity(quantity) , CHina's industry output should be much more than USA's.
in fact, you easily find that the productions of Chinese any industry seciton is more than USA"s, except a few such as aircrafts and high-end weapons.

guy , "second industry seciton(manufacturing,mining and construction" and "primary industry section(agriculture)" are the real wealth-creating section.
people's food, dress, commodities,accomodations,communications are all produced by those sections. "the third industry section(service)" can not direct create wealth,and just is a way of real weath redistribution.



CHina's

Good God! What is it with you sinos and your purposefully detractive estimates? US GDP as of 2008 was an average $14.44 trillion.

https://www.cia.gov/library/publications/the-world-factbook/geos/us.html


US GDP in 2009 actually shrunk in the first four months of 2009 by 6.2%, as it braced for the worst economic recession it faced since WW2. A recession that is now over. A fact demonstrated by the fact that it expanded 2.2% in the last quarter of this fiscal.

U.S. Gross Domestic Product GDP Forecast

guy , "second industry seciton(manufacturing,mining and construction" and "primary industry section(agriculture)" are the real wealth-creating section.
people's food, dress, commodities,accomodations,communications are all produced by those sections. "the third industry section(service)" can not direct create wealth,and just is a way of real weath redistribution.

You have weird conceptions about "wealth" and its attributes. Here, for your benefit, is its definition:

Wealth can be categorized into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of posited income; and the capital wealth of income producing assets, including real estate, land, capital infrastructure, resources, stocks, and bonds.

Physical capital, as it has come to be known, consisting of both the natural capital (raw materials from nature) and the infrastructural capital (facilitating technology), is not the only focus of the analysis of wealth. Wealth also includes services, and the means to deliver them, as well as the benefits and enrichment they bring.

All advanced economies have moved from a trend of primary to secondary to tertiary sector economies. It is simply the natural progression, since services create more value added, per unit of input. That is also a guage of China's status as an economy: China is a mid-level, industrialized economy; while India is an incipient, industrializing economy.

Adam Smith, in his seminal work The Wealth of Nations, described wealth as "the annual produce of the land and labour of the society". This "produce" is, at its simplest, that which satisfies human needs and wants of utility.

An aside: Some of the wealthiest people in the world are Bill Gates, Warren Buffett, Lawrence Ellison. All pioneers and practitioners of a service-based industry.

In 2009, even measued by "market exchage rate",USA's industry output "is to be surpassed by China's" in 2009 ,according to UK's finacial times
????????????? ?????? - FT???

Yet, here we are, in 2010. And measured by "market exchage rate", which is the official way to measure industry valuations, in dollar terms, and in the background of a marginally appreciating yuan, and an engorgement and periodic revisions of China's retrospective "nominal" GDP, we are still not here.

At the end of 2009 (as of September 17 2009), China's GDP composition by sector was 48.6% for industry. For industry, 48.6% of a $4.6 trillion economy is an industrial sectore valuation of $2.235 trillion.

As of September 17, 2009, the US industrial GDP composition by sector was 19.2%. 19.2% of a $14.4 trillion economy is $2.764 trillion. The difference, in industrial composition alone, is about $530 billion.

2. if measued by the real wealth-creating activity(quantity) , CHina's industry output should be much more than USA's.
in fact, you easily find that the productions of Chinese any industry seciton is more than USA"s, except a few such as aircrafts and high-end weapons.

Infact, measured by the wealth-creating activity(quantity), India's industrial output is significantly more than it is projected- some would estimate 0.3 - 2 times as much. Given the carelessness and profligacy in admeasurment and valuation.

Whadda ya say to that?


See this dated, but valid, thesis for example:

JSTOR: An Error Occurred Setting Your User Cookie

And the following estimates of the value of black market cement in India, as a key, sample commoditiy- as far back as 1961–82:

SpringerLink - Journal Article

Need I say, that with economic liberalization and rapid economic growth, and an unprecedented construction boom, that value has increased manifold?


How do you measure "real wealth creating activity"? By what? PPP? What basket of goods? Read above in my post for a demonstrated proof of how a different basket of goods leads to significant aberrations in the extent of the undervaluation of the yuan-from 0 to 40%. So, what is the real value of goods?


Until 2004 China's surplus was relatively modest, but it soared over the next several years. The main reason for the bigger trade surplus was a sharp slowdown in the annual real growth rate in imports, from more than 30% in early 2004 to less than 15% in 2007-08. The entire increase in China's trade surplus since 2004 has come from trade in heavy industrial materials and equipment. China used to import increasing amounts of steel, aluminium, chemicals and machinery, but import growth collapsed after 2004 when the government started to tighten fiscal policy, causing a sharp slowdown in construction, one of the biggest importers of machinery and materials. At the same time, China continued to invest in metals and equipment, shoring up excess capacity that offset the need to import during the subsequent boom, but did not create export competitiveness in the sectoral phase of the intermediary sector where these goods are put to use- namely in the manufacture of heavy industrial, and/or capital equipment.

in fact, you easily find that the productions of Chinese any industry seciton is more than USA"s, except a few such as aircrafts and high-end weapons.

That is utter fallacy on your part. Even today, the United States produces most of its sophisticated/high-end/however-you-may-choose-to-describe-it consumer goods, the vast majority of its capital equipment (and second only to Germany in terms of exported value of), automotive equipment and industrial supplies and materials.

Its imports from the Pacific Rim remain, predominantly, consumer durables, clothing and apparel, consumer electronics, foods feed and beverages and other goods (primarily low-tech household items, stationery staples, toys, games and sporting goods, etc.)

The September-October 2009 coverage for increase in exports and imports of consumer, capital and primary goods and services as a sample is here:

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

So, if measured by "market exchange rate", in 2008, USA's industry output was just slimly more than CHina's .

So you agree that US industrial output was still "slimly more" than China's. Good. I love it when I make my detractors eat their words.

For a banker, your knowledge of economics is zip.

Now, shut up and learn when to accept defeat when you've been licked.

 

[badguy2000]

it is always a entertaiment for me to read such a odd news in india's medias.

 

[S.A.T.A]

Commy xxxxxx are the most entertaining by any stretch.Ive heard the Avatar has precipitated a new national crisis there,Mr Aiyar is wrong for sheer stupidity xxxxxx will never be overtaken by anyone..period

 

[kuku]

What can you do, times are different and people are strange.

In terms of economy, one thing remains true no graph goes up forever. There will be a time when PRC's growth rate will stop climbing up at the current speed and there will also be a time when their economy will start contracting, only to rise up again. Its growth rate will become slow as it develops more and India will match and overtake that growth rate as the potential of growth will be there, at current rate of education and its buildup India will be the largest english speaking (even if as a second language) nation in the world, radical islam seems to be getting stronger and stronger in Af-Pak, dont know about secret gas deposits.

It really should not matter to us if we are above PRC or below it, they wont ever come around helping us and we sure as the sky is up wont go helping them, what should bother us is the state of our nation, and as of now it needs improvement, enough said.

The biggest irony i see in my nation is that till now the little economic progress has happened within a absolute socialist system which is the most repulsive system as far as entrepreneurship growth goes, and that is quite an achievement.

 

[nimo_cn]

Time flies, doesn't it?

Going through this 10 years old thread makes me recall the old days when I was a student and came here to practise my English skills. It's hard to believe that I have been here for more than a decade.

A lot have changed, for both China and India. I am not sure if every member who ever posted his comment here is still with us, but it is gonna be interesting to see them share their new thoughts regarding this old topic.

 

[brational]

Time flies, doesn't it?

Going through this 10 years old thread makes me recall the old days when I was a student and came here to practise my English skills. It's hard to believe that I have been here for more than a decade.

A lot have changed, for both China and India. I am not sure if every member who ever posted his comment here is still with us, but it is gonna be interesting to see them share their new thoughts regarding this old topic.

Yes, a lot have changed but China is still the creator and Supplier of Viruses and the bully in the region.