The People’s Bank of China “manages” the value of the yuan on the foreign exchange market by forcing domestic banks and companies to “surrender” much of the foreign currency that they take in through exports. They are given yuan in return and the People’s Bank of China accumulates about $1 billion a day through this process. The result is that there’s a larger supply of yuan, thus an artificially lower value compared to foreign currencies. Normally a high demand for exports causes the value of a country’s currency to go up as foreigners buy the currency to buy goods. A lower exchange rate means exports are cheaper, which is the rationale behind the managed exchange rate (though it makes imported goods more expensive). For a more detailed explanation, see James Fallows’s The $1.4 Trillion Dollar Question.
The yuan was pegged at about 8.3 per US dollar until it was allowed to gradually appreciate beginning in the second half of 2005. It now stands at 6.84 yuan to the dollar, after its value depreciated relative to the dollar for the first time briefly last fall, when the Lehman Brothers, AIG, and Fannie Mae troubles caused the dollar to rise and most currencies of developing economies to fall. Economists say that the value of the yuan, if allowed to float freely, would be around 5.5 yuan to the dollar.
(from FT.com)
While there may be disagreement on floating versus managed exchange rates, what effect the undervalued yuan has, and how much China should influence the dollar-yuan exchange, there are a few common points between the two countries. Both governments are implementing huge economic stimulus spending, including funds to expand infrastructure and to alleviate unemployment and falling demand.
And both are pursuing more wide reaching stimulus programs and health care reform. Some are even calling the U.S. bailout “socialism with American characteristics.”
Prime Minister Wen Jiabao is in Europe for the World Economic forum and visits with leaders in several countries. The article sites the dour mood during this year’s Lunar New Year holiday. Government estimates show that of the roughly “130 million Chinese migrants who crossed provincial lines for work, 20 percent to 30 percent will find themselves jobless after the holiday.”
Layoffs are up and salary raises and bonuses are vanishing. Recent and soon-to-be college graduates are having a difficult time finding jobs.
This may be exacerbating a recent trend of a growing divide between rural and urban incomes.
“City dwellers earned an average annual income of 15,800 yuan ($2,300) a year in 2008... The average rural income was 4,700 yuan (about $690),” which is a ratio of 3.36 to 1. I’d imagine it’s much lower than that in the United States.
And that is a drastic change in the last several decades. Only 30 years ago, China had one of the most equal income distributions of any country, and now it’s one of the most unequal countries in the world. I happened to read a 2002 speech by Nicholas Lardy, an American economist and an expert on China, and it had some relevant points on the potential crisis posed by high levels of inequality during an economic downturn.
“[since the 1980s] China has grown very rapidly and done all of these other things which are fairly positive, inequality has increased at an unprecedented rate. In fact I do not think one can find a society, perhaps with the exception of wars or natural disasters, which has had such a rapid deterioration in income distribution in a twenty-year period.”
…
One of the reasons inequality has been manageable to date is that even the poorest members of Chinese society have much higher incomes today than they did twenty years ago. Relatively speaking they have fallen further behind. But in absolute terms they have done, with very few exceptions, extremely well. Their absolute living standard has gone up enormously… But if economic growth were to slow down, that whole equation would change dramatically. Then you might have a situation in which as inequality gets worse, the people at the bottom of the income distribution might be experiencing an actual decline in their real living standards, rather than an increase. And I think that would be much, much more difficult for the regime to manage. So I think maintaining a robust economic growth and delivering rising living standards is a precondition for maintaining political stability.”
How the economic crisis affects political stability in China and what domestic policy changes come out of it will all be interesting developments to watch. The government has already promised to provide nearly universal health care coverage within three years, not to mention large investments in transportation and education. The health care program was conceived, in part, to induce more consumer spending. Savings rates are really high, around 40%, because of the lack of pensions and private health care insurance. Another way to look at it – in China, 35% of the economy is consumer spending, compared to 70% in the United States, so the high savings rate is limiting domestic demand and the consumer driven growth that is needed to replace the slowing demand for the country’s exports and maintain the high levels of growth of recent years.
The economic crisis in the United States also presents a unique opportunity to transform domestic policy in areas such as health care, education, financial regulation, and levels of saving and investment. For an excellent overview of opportunities for fundamental reforms in our country, see David Leonhardt’s essay in the New York Times Magazine.
Finally, the country that invented tea now has more than 350 Starbucks stores and is growing a new coffee for the chain, the first Chinese coffee to be sold by Starbucks. Green tea frappuccinos, by the way, are one of the more popular Starbucks drinks in China. Otherwise, the stores and their menus seem to be the same as those in the States.
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