July 22, 2005


China Unpegs Itself (PAUL KRUGMAN, 7/22/05, NY Times)

Capital usually flows from mature, developed economies to less-developed economies on their way up. For example, a lot of America's growth in the 19th century was financed by investors from Britain, which was already industrialized.

A decade ago, before the world financial crisis of 1997-1998, capital movements seemed to fit the historic pattern, as funds flowed from Japan and Western nations to "emerging markets" in Asia and Latin America. But these days things are running in reverse: capital is flowing out of emerging markets, especially China, and into the United States.

This uphill flow isn't the result of private-sector decisions; it's the result of official policy. To keep China's currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds.

One way to grasp how weird this policy is would be to think about what a comparable policy would look like in the United States, scaled up to match the size of our economy. It's as if last year the U.S. government invested $1 trillion of taxpayers' money in low-interest Japanese bonds, and this year looks set to invest an additional $1.5 trillion the same way.

No, it's as if we did exactly what Mr. Krugman himself has described, Stopping the Bum's Rush (Paul Krugman, 1/04/05, The New York Times)
[T]he bonds in the Social Security trust fund are obligations of the federal government's general fund, the budget outside Social Security. They have the same status as U.S. bonds owned by Japanese pension funds and the government of China. The general fund is legally obliged to pay the interest and principal on those bonds, and Social Security is legally obliged to pay full benefits as long as there is money in the trust fund.

If Chinese or Japanese bonds were worth anything we'd buy them instead.

India pops the champagne (Indrajit Basu, 7/23/05, Asia Times)

Even as the rupee soared to a six-year high to close at 43.25 to the dollar within an hour of the announcement of the yuan revaluation on Thursday, Indian exporters are popping their bubbly as the move will mean higher prices for Chinese exports, and thus more volumes for Indian ones. Over the past few years, while Indian exporters have been fighting hard to break into global markets for low-cost and labor-intensive manufactured products, they kept losing out to China, due to the major disadvantage of a rising rupee against the dollar as the yuan was kept artificially weak. This meant that to stay competitive, Indian exporters had to steadily squeeze their margins.

According to Research and Information System for Developing Countries (RIS), an India-based think-tank on global issues, since most of the Asian currencies have in the past few months appreciated much higher then the yuan (the rupee has appreciated by over 10%), it could be safely expected that the "natural" exchange rate of the yuan is much higher than the present valuation. RIS believes that even if the currency float is managed and violent movements are restricted - since China's central bank has restricted the daily movement within 0.3% - gradually the yuan will tend to move toward the natural exchange rate.

In fact, Indian exports have already started gaining. US retailers, including Wal-Mart Stores Inc, Gap Inc and Chico's FAS Inc had of late started increasing purchases of inexpensive clothing and jewelry from India in anticipation of rising costs that would result when China, their biggest offshore supplier, revalued its currency.

Quoting Ken Mark, managing director of the Martello Group in London, Ontario, Bloomberg reported that retailers who bought about $65 billion in Chinese goods last year were turning to India because the anticipated yuan revaluation might increase their costs by 10% over two years. Currently, Wal-Mart sources goods worth $2 billion - including indirect sourcing - a year from India, while its procurement from China exceeds $18 billion each year, out of which direct sourcing is about $9 billion.

Posted by Orrin Judd at July 22, 2005 6:44 AM

So how do we interpret China's action in a way that signifies they're about to invade Taiwan?

Posted by: b at July 22, 2005 10:03 AM

Uh, why must we?

Posted by: Scott Ferguson at July 22, 2005 10:05 AM

Scott: That's the problem with the internet--I was trying to make a joke. Based on the fact that a lot of people seem to interpret everything based on the idea that China is about to invade Taiwan. Perhaps only the voices in my head are in on it, but I betcha that a fairly quick look around at other blogs would quickly reveal already immensely long threads discussing this...

Posted by: b at July 22, 2005 10:10 AM

Your humor is stunningly subtle. Say hi to the voices in your head for me. :)

Posted by: Scott Ferguson at July 22, 2005 10:17 AM

perhaps people interpret all things prc through the prism of a taiwan invasion, because the prc itself has said it is going to take taiwan by force, and is pouring much effort and money into preparing for it. that doesn't mean everything the prc does is in fact related to the invasion, but it does explain why people are analysing the way they are.

Posted by: cjm at July 22, 2005 10:49 AM

b. I got it.

Scott mustn't be a regular around here because compared to some, your humor is as broad as "The Three Stooges."

The meaning of oj's one or two word posts often doesn't kick in until quite a bit later -- sometimes minutes, sometimes hours and sometimes days... and even then I can't be sure I fully understand them all.

Another thing I don't understand is why people think China is bent on upsetting the apple cart of their newfound wealth by making a move on Taiwan? What could they possibly gain by such a foolish move?

Pretty soon all the old guard in power will be gone and China can throw off the remnants of Communism and begin the long road of modernizing. That should take up their energies for generations to come. Taiwan will return to the fold peacefully when conditions are right.

Posted by: erp at July 22, 2005 11:13 AM


The question isn't what China would gain, but what the nomenklatura would gain, particularly those in the politburo. Consider a possible pair of reports that might be delivered to the politburo in the future:

A) If we invade Taiwan, it is likely to fail with heavy losses and bring down the government within six months. However, until then we can expect nationalistic fervor to prevent any change of government. There is also the slim possibility of the loss leading to sufficient xenophobic bitterness and fear of invasion to sustain the PRC for several years.

B) The riots and civil unrest are getting out of control. Defections from provincial governments and the PLA are preventing us from getting ahead of the curve. Once our loss of control becomes obvious, in no more than a few weeks, the government will collapse.

Now, as a member of the politburo, faced with these two reports, do you invade Taiwan or not?

The point is one can envision plausible scenarios where the worst case from an invasion of Taiwan is no worse than the expected result from not invading and the best case is quite a bit better. For a group of people sufficiently amoral, the choice would then be obvious.

Posted by: Annoying Old Guy at July 22, 2005 2:00 PM

AOG I hope neither scenario is presented as a solution to internal strife and that saner heads will prevail and prevent decisions that would at best be an iffy short term gain and at worst a complete disaster with unpredictable consequences.

Maybe a crazy proposal like invading Taiwan would be enough to cause the people to rise up and oust the old boys. I don't think the army will shoot at the protesters this time.

Posted by: erp at July 22, 2005 5:16 PM

Why would they invade Taiwan? They invaded Tibet. These people have issues.

Posted by: Vea Victis at July 22, 2005 5:48 PM

China invaded Tibet many, many years ago when it was a different world. Those same issues don't exist today.

Posted by: erp at July 22, 2005 6:51 PM

Tibet was a hideous, backward theocracy that deserved the PRC takeover. It was also part of historical China.

Taiwan is a modern, forward-looking, capitalist state with free and democratic elections. The distinction is rather stark.

If we don't help Taiwan defend itself against PRC aggression, then we are little more than France with worse food and wine, and uglier women.

Posted by: bart at July 22, 2005 8:25 PM

The Tibetans don't think so.

Posted by: oj at July 22, 2005 8:33 PM

People who fly planes into the World Trade Center think that they are doing the Lord's work too.

What the backward(illiteracy at about 100%, zero technology), insular and xenophobic(they murdered foreigners on sight) Tibetans with their completely priest-ridden(1/4 of the male population wearing saffron robes at any given time) and decrepit(the striking thing about a Tibetan art exhibit is that the newer stuff is poorer quality remakes of the older stuff), worthless pseudo-culture think is of no moment to me. It is simply not worth the perspiration off of my genitalia to help preserve it.

Explain the drum at the Potlapa Palace that is made from human skin if you would please.

Posted by: bart at July 23, 2005 4:37 AM


Not yours, but the rest of ours.

Posted by: oj at July 23, 2005 8:41 AM

Outside of you and Richard Gere, nobody in the US is going to war to save Tibet. And you won't participate in a war which requires you to drive somewhere, or go to another time zone, let alone halfway around the world to a desolate place at 18,000 feet elevation.

Posted by: bart at July 23, 2005 12:31 PM

They'll have to withdraw their troops as the PRC crumbles.

Posted by: oj at July 23, 2005 2:21 PM

I agree with you that soon the PRC will dissolve into civil war. It always has.

However, Tibet is so small in terms of population that one of the winning warlords will simply incorporate it into his empire.

The dissolution of China into warring regions is not a good thing for the world, the US and especially for the Chinese people who will be the victims of the ensuing brutality. Gangster-led autocracies are not known for stability or commercial success.

Posted by: bart at July 23, 2005 4:52 PM

Tibetans think they're Tibetan, so they will be.

Posted by: oj at July 23, 2005 5:24 PM