Greenspan's Wrong. Productivity Won't Move Yuan (but slight rise coming)

[papau]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mukherjee&sid=asv1yBSMGHnk

Greenspan's Wrong. Productivity Won't Move Yuan (up - as per Balassa-Samuelson hypothesis) : Andy Mukherjee
March 4 (Bloomberg) -- <snip>Here's how the Balassa-Samuelson hypothesis is supposed to work in China. As workers in export-oriented factories become more productive, they'll take home bigger paychecks. Their spending power will raise incomes for property brokers, pet salon owners and other people who don't normally export their services.

Unless the yuan is allowed to appreciate, the extra purchasing power will push up prices of goods. Higher inflation will force workers in export-oriented factories to demand even higher wages, eroding China's competitiveness in overseas markets.

<snip>

In reality, the Balassa-Samuelson hypothesis hasn't worked in China, according to Kwan Chi Hung, a senior fellow at the Research Institute of Economy, Trade and Industry in Japan.

<snip>
``Continued expansion in capacity and excess labor could continue to press prices down and prevent Balassa-Samuelson effects from taking place'' in China, the International Monetary Fund said in a study last year.


Balassa-Samuelson is too far out in China's future for investors to worry about now, says Standard Chartered's Piron, who expects Beijing will widen the trading band for yuan by 2.5 percent in the third quarter of this year.

There are two real issues. Will a small appreciation in the yuan this year be seen by speculators as a signal to increase their bets on a further rise in the currency? And, will China have the confidence to open the floodgates by even that much before it's able to tackle its $400 billion bad loan problem?


British economist John Maynard Keynes used to say that in the long run we'll all be dead. Unfortunately, Balassa-Samuelson will come true for China, only in the long run. When that happens, the yuan's market rate will reflect its purchasing power. If that day were today, the yuan would be worth 1.8 to the dollar, 4.6 times higher than the market exchange rate, according to World Bank statistics on purchasing power parity. <snip>

[54anickel]

1. Greenspin's a wacko. For China to even come close to full employment

will take decades. They've got plenty of problems of their own with the bad loans left to bail out and the over capacity created in a few sectors thanks to speculation and uncontrolled growth resulting in duplication of effort in a couple of key industries.

When China finally does let their currency rise, Japan will have less need to intervene in the currency markets. Then who's going to buy our debt regardless of the rate of return? We would need to make our debt more attractive to investors and that means higher interest rates. What will those higher rates do to our fragile, debt based domestic economy?