Tag Archives: consumer

Is China really the currency manipulator Trump says it is?

A great analysis of Trump’s accusation that China is a currency manipulator has just been published by the Timothy Taylor (aka the Conversable Economist: http://conversableeconomist.blogspot.com/2019/08/china-and-currency-manipulation.html).

He shows how changes in China’s currency vs US dollar do not match up with rises and falls in China’s trade surplus with the US, which is at the core of Trump’s accusation.

The chart below, which maps the yuan/US dollar exchange rate over the past 30 years, tells much of the story.

china exchange rate

As Taylor explains, up to around 1995, the Chinese Government set an official exchange rate. The value of the yuan plunged that year when the official rate was unified with the much weaker market-set rate.

Between 1996 and 2005, the exchange rate barely budged because the Bank of China held it fixed.

From mid-2005 the yuan gradually strengthened, from about 8.2 yuan to the dollar to reach 6.8 yuan to the dollar by mid-2008.

Since then it has been held within the 6 to 7 yuan/dollar band by the Chinese central bank.

Match this up against China’s trade balance.

Chinese exports surged in the early 2000s after the country joined the World Trade Organisation in 2001 (see chart below). China’s trade surplus reached a high of 10 per cent of GDP in 2007 before declining to less than 2 per cent by 2011 and less than 1 per cent last year.

china trade balance

Note how, in the early 2000s, will China’s trade surplus surged, the yuan/dollar exchange rate did not budge, and has stayed within the 6 to 7 yuan/dollar band for the past decade, even as the trade surplus has plunged.

As Taylor argues, especially since 2011 there is no evidence to no support Trump’s complaint that China has been using a weak exchange rate to power its trade surpluses.

In fact, China’s trade is close to balance at the moment. The IMF reckons it had a surplus of just 0.4 per cent in 2018, and thinks it is headed to a trade deficit in the next few years.

Given Trump’s “America First” (read, ‘bugger the rest of you’) focus, it is unsurprising that US Treasury’s gripe is primarily that, regardless of its overall trade balance, China is running a hefty trade surplus with the US.

But this has little to do with the currency and almost everything to do with the American consumer who has, like much of the rest of the world, become addicted to the flood of cheap clothes, toys, footwear, electronics and other goods coming out of China.

By hiking the tariffs on Chinese imports, Trump is imposing a tax on American households by increasing the cost of the Made in China goods they purchase.

He is also distorting global production chains.

Neither will necessarily be very good for the American economy, which is already slowing under the pressure.

Own goals don’t come much bigger.

 

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ABS to give full reckoning of household wealth

There are plenty of reasons why households tighten their belts or splurge out on an overseas holiday.

But until now, the National Accounts have only shone a light on part of the picture – income – when it comes to explaining spending and saving behaviour.

That will change from next month when, for the first time, the National Accounts will include a quarterly report on the Household Balance Sheet that incorporates the effect of house prices, shares, superannuation and other assets as well as income on household net worth.

This is of more than just academic interest.

As the Australian Bureau of Statistics itself has pointed out, non-financial assets are a huge piece of the puzzle when it comes to evaluating real household worth, because they are about two-thirds larger than the value of financial assets.

As the ABS coyly admitted, this was “a significant data gap”.

In an explanatory note announcing the change, the Australian Bureau of Statistics has presented an analysis of how household net worth plunged when the global financial crisis hit hard in the second half of 2008.

Between March 2008 and June 2009, it plunged from around $6 trillion to close to $5 trillion, with much of the decline stemming from falls in the value of land, shares and superannuation accounts rather than cuts to income.

The ABS has prepared a Household Balance Sheet chart that demonstrates how these losses will be captured by the new analysis (see below).

Household Balance Sheet

It shows the balance of household net savings and other measures of real net wealth plunged from around $200 billion in late 2007 to almost negative $500 billion in the December quarter of 2008.

As the ABS notes, “much of the decline in household net worth in December 2008 is explained by large real holding losses on land and financial assets”. That is, the plunge in house and share prices (and the flow on effect to superannuation accounts) sent household net worth into a tailspin.

Importantly, these “paper” losses had immediate effects on behaviour. Households tightened their belts, cutting back on spending and increasing saving.

This change in behaviour, along with a recovery in house prices, helped to quickly send the household balance sheet back into positive territory.

Since the plunge in the balance sheet in late 2008, there have been two other periods in which it has fallen into negative territory before recovering – early-to-mid 2010 and mid-2011.

What may concern policymakers and businesses that depend on households to spend, is that the ABS chart shows the Household Balance Sheet has again turned down and is close to zero.

Strengthening housing and share markets might turn that around, but elevated unemployment and flat real income growth won’t provide much support.

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