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This post was edited by abramicus at 2015-10-19 01:48|
The next FIVE YEAR PLAN is about to be announced. This is a very important document that spells out the limits of what the Chinese leadership may or may not do to the economy. It can set China back on the road to growth and stability, or continue the present trend of anti-production, and therefore anti-investment, policies driven by the single factor of the OVERVALUATION OF THE YUAN EXCHANGE RATE.
Stability of the economy is not synonymous with stability of the overvalued exchange rate. On the contrary, with the continued overvaluation of the Yuan, the trend of disinvestment, closing down of manufacturing, and rising unemployment would be inevitable. This suicide policy must be stopped.
It is nice to have domestic consumption replace foreign consumption of Chinese products, but this is beneficial only if production exceeds consumption. If China needs to import foreign oil and raw materials to produce the things that the Chinse consumers buy, then China needs to have production exceeed domestic consumption by at least that same amount in dollar terms, because such imports are still being paid in dollars. Only the country that can print dollars is not subject to this constraint, and to apply Western models on China without the same conditions being met in China is not only silly, it is malicious and destructive to China's economy. Thus, the so-called "overcapacity" is not surplus capacity, but simply idled manufacturing that cannot sell its excess products to the world, because of the overvaluation of the Yuan imposed as a given, not as a necessity, on the entire Chinese community, from above.
CAPITAL ACCOUNT SURPLUS, i.e., in the form of debt owed by China to these foreign lenders, is not the same as foreign direct investment, when foreign currencies are given to China to import necessary materials, technology, and expertise, with a return that depends on the profitability of their investment. Capital Account Surplus is a euphemism for "FOREIGN-CURRENCY-DENOMINATED DEBT" payable with interest, regardless of the viability of the investment using it. How saddling the entire Chiense community with debt denominated in dollars can be good for China defies all reason. It is poison wrapped in a candy wrapper. For an economist to propose such a ridiculous idea as a goal of China is not just a silly mistake, it is treason.
SERVICE driven economy is another out of context concept. It would be nice IF CHINA DOES NOT NEED PRODUCTS AT ALL. Service without production is equivalent to doing laundering until there are no pants or shirts left to launder. Or, to cooking until there is no food left in the refrigerator to cook. How service can "REPLACE PRODUCTION" defies all reason. For an economist to hamstrung his own country to a service model at the expense of production, again, is not a silly mistake. It is treason.
We have established as a fact of life, without economic embellishments, that production must exceed consumption, with the surplus exported in order that CURRENT ACCOUNT SURPLUS can be used to pay for any CAPITAL ACCOUNT GROWTH, with export revenues in dollars always exceeding import expenses and acquired foreign debts in dollars. We have also established that consumption exceeding production is not sustainable. It requires the country doing that to be able to print dollars and exchange its dollars for foreign imports all the time. China is not that country. Thus, the model of the Consumption Driven, Service Dominated, Debt accumulating (Capital Account Surplus) Economy is not applicable to China, not even if the IMF were to use China as a reserve currency for its SDRs which account for no more than 4% of the total reserve currencies of the world. Using the hope of IMF acceptance of the Yuan as one of its reserve currencies does not make the Yuan an international reserve currency. Bernanke told reporters that it will make no difference to the economy of China or the world, and that it is a "token" achievement. This model will work only if China can import using Yuans for ALL OF HER NEEDS IN IMPORTS, and the only way China can do this, is if China can impose regime change on any country that refuses to accept her Yuans, by having a global military network to effect this, which China does not have, and will not have for a long time, if ever.
The Deng Model of production exceeding consumption, of FDI instead of foreign-currency-debts, is possible only if the Renminbi Exchange Rate is not overvalued, like it is today. He kicked start the China Miracle by devaluing the Yuan from 5.80 to 6.37 in one stroke in 1993, and followed it through with the Yuan floating to 8.00. China does not need to devalue the Yuan to 8.00. But neither does China need to waste its hard-earned dollar reserves in buying back Yuans in order to keep the Yuan exchange rate at the present 6.35 yuan/dollar rate. What is the correct Yuan exchange rate? This is not a theoretical question requiring months of data analysis. This is an empirical question that can be answered in one week, by allowing the Yuan to float without PBOC intervention, and let the market forces of supply and demand set the Yuan. It will most certainly float to 6.50 if not lower to 6.80, and then, if the PBOC wants to stabilize the exchange rate in order to remove the exchange rate risk from all international transactions, and ONLY THEN, impose a trading band of 2% around that market-determined Yuan exchange rate. That should be the only legitimate role of the PBOC, to stabiize the Yuan exchange rate, but not to set it way above the market rate, while costing the people of Chna more than half a trillion dollars in purchases of the Yuan and another half a trillion dollars in forfeited export revenues due to the overpricing of Chinese products abroad, plus several trillion Yuans of lost domestic consumption of China-made products due to overpricing of Chinese products at home when compared to foreign imports. All these extra roles of the PBOC are illegitimate and destructive of the economy that it is supposed to protect.
So, we shall see if the lessons of the past year have been incorporated into the next 5-year plan, of if the same mistakes will be institutionalized, and the Golden Goose of Chinese Manufacturing will be strangled to death, and the spine of its national productive capacity, the SOEs, will be hacked out and sold to its foreign competitors.