Tag Archives: Davos

Unintended Consequences Of Yuan Revaluation

Our man with his ear to the ground moving and shaking the global elite at the World Economic Forum’s annual meeting in Davos sends word that amidst a general half-glass full/glass half empty sentiment towards China’s commitment to revaluing its currency, there is some concern that a revalued yuan against the dollar would be a mixed bag for U.S. firms. U.S. exporters would find their products becoming relatively cheaper in the Chinese market. In the other direction, American firms with Chinese operations would find their exports from China becoming relatively more expensive. Foreign-affiliates account for 54% of all China’s exports, according a finance ministry report last year. Against that, foreign affiliates would also be repatriating higher profits in dollar terms from their domestic Chinese sales, and their margins would be helped by getting cheaper raw materials when those are imported.

It is on the investment rather than trade account that a yuan revaluation may have the greatest unintended consequences. It would become more expensive for U.S. companies to invest in setting up Chinese operations, giving an advantage to those already there. It would also likely boost China’s outward foreign direct investment (FDI), as it lowers the cost to Chinese firms of buying overseas assets. This Bystander recalls that that is what happened in Japan after Washington arm-twisted Tokyo into allowing a 50% revaluation of the yen against the dollar in 1985-87. Japan’s overseas FDI went from barely $6 billion in 1984 to nearly $50 billion by 1990.

In China’s case, the drive overseas is led by the search for natural resources. Manufacturing accounts for less than 10% of Chinese firms’ FDI. Some labor-intensive manufacturers are looking abroad for cheaper labor in the face of rising wages at home; more than 700 Chinese companies had invested in operations in Vietnam as of last July, according to Vietnamese officials. That is a drop in the bucket of the country’s manufacturing cohort, and they are mostly small or low-value-added manufacturers from Guangdong and the provinces bordering Vietnam. Yet a rising yuan could sweep along more in their wake. If Japan’s experience were to be replicated (and Beijing has resisted such a rapid forced appreciation having seen the effect on Japan’s domestic economy), the bigger flood of Chinese firms looking beyond natural resources to invest in access to foreign markets, brands and technology would be likely to prove much more troublesome for Western competitors, and to expand trade friction into investment friction.

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Slowing China Growth Remains A Global Risk, WEF Says Again

The yearly Global Risk Report issued by the World Economic Forum ahead of its annual meeting in Davos (again) lists “China’s growth falling to less than 6%” as one of the key risks facing the world economy. The report doesn’t give a probability of that happening, beyond indicating it is unchanged from a year earlier, though it does lay out how it could occur:

[China’s growth] derives from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate. These can always carry the risk of a sharp and potentially recessionary correction.

Not an unconventional concern.

The report lists the drivers and developments to watch as follows, with a plus sign denoting drivers of increasing risk; minus signs drivers that reduce risk:

+ Excess ex-ante savings over-investments in China
+/- Chinese government’s ability to stabilize domestic demand in the wake of loss in export momentum
+/- Ability of Chinese government to maintain stable renminbi in the wake of high foreign reserve accumulation
+/- Ability of Chinese government to maintain political stability in the wake of sizable loss in growth momentum.

China’s growth falling to less than 6% has turned up in each of the five past Global Risk reports, a fact that the WEF acknowledges in its latest one:

The implication of a decline in China’s growth has been a constant since the first edition of the report. Thus far, this risk has not materialized but it is clearly one that would have considerable implications for China and also for the global economy.

Nor an unconventional analysis.

One other table that caught our eye in the report was a listing of stimulus packages for the energy sector. China has committed $46.8 billion for 2009-11, second only to the U.S.’s $66 billion, but way more than third placed Japan’s $8 billion. America’s money is going to clean energy generation; China’s to energy efficiency.

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