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Yuan Revaluation for China's Own Sake
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Nouriel Roubini has proven correct on global financial issues. He said in an interview on the sidelines of a symposium in Malaysia, that China needs to revalue its currency for its own sake. China will see a growth collapse in the next 2-3 years if it fails to do so. His point is that China can still maintain growth by shifting to domestic consumption and less infrastructure spending and exports. In his view growth should not be affected if China exports less and consumes more. He points to the decrease in consumption as a share of GDP from 45% to 36% in the last ten years- this ratio is 70% in the USA. A cheap yuan keeps foreign goods unaffordable and protects state owned companies which also get cheap credit, as keeping the yuan low requires China to keep interest rates artificially low. What this does is make a massive transfer of income from the household sector to the state owned companies, just at the time when China needs to do the very opposite of this. And compounding the problem is that the 25% of China's GDP that is made up of retained earnings of mostly state owned companies, goes into real estate and production facilities. See the link to David Barboza in the New York Times who points to the wasteful spending and real estate speculation by state owned companies. Roubini cites the automobile sector where capacity has doubled in the last year to 20 million, when the domestic market increased by 50% to 10 million vehicles. The stimulus only increased the effect of surplus capacity and misallocation of investment, with highways to nowhere and brand new airports that are three quarters empty. The Chinese leadership is beginning to grasp this, but the state owned companies and other interests who benefit fromm the old model, may make it difficult to reverse the trends. A lot is at stake in this, as it affects the U.S., as well as countries dependent on China's imports such as Australia, Canada, Brazil and Germany.
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Roubini on China, currency issues, and domestic consumption in China.
05/17/2010
By letting the yuan China can shift the benefits to households, who will have more purchasing power, and reverse the shift that has taken place in the last 10 years, with domestic consumption making up about 36% of GDP- down by about 10 points from ten years earlier. State owned companies gained at the expense of households, as did infrastructure spending, but it is leading to misallocation of investments and hurting households. As a result China will hit a growth wall in the next 2-3 years, says Roubini.
Grouped Articles
Wall Street Journal 10/04/2011
Europeâs Debt Crisis Is Casting a Shadow Over China
New York Times 05/17/2010
An Accord (and Lessons) to Remember
Wall Street Journal 09/21/2010
New York Times 09/30/2010
Yuan Revaluation for China's Own Sake
Wall Street Journal 10/02/2010
New York Times 09/25/2010
Krugman and Roubini on the misallocation of resources in China
10/02/2010
Linked Articles
Yuan Revaluation for China's Own Sake
Wall Street Journal 10/02/2010
New York Times 12/18/2011
Roubini and Barboza on China's misallocation of resources
08/01/2010
Linked Articles
Yuan Revaluation for China's Own Sake
Wall Street Journal 10/02/2010
Chinaâs Real Estate Boom and Conflicting Policy
New York Times 08/01/2010
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