At a glance(At least from exports) one could easily believe that the individual’s living conditions in China must be very good, at least fairly wealthy. I mean they export ALOT of stuff, so a quick assumption would be that they must also consume as much as well.
However there are some consequences to that style of capitalism that I myself am not aware of and am curious as to getting some more details on the living conditions of people of China. I watched Schiff’s excellent video blog today on Krugman and was able to pull some interesting information about China.
Keywords that struck at me were, the Chinese Government not permitting their own currency to strengthen, thus companies are finding it more profitable to export their goods rather then vend them domestically. This makes me think that individuals in China are not very poor at all, and that only major capitalists are the ones benefiting from their recent economic freedoms.
So I guess the most obvious consequence to China’s style of communism is not being allowed to decide for ones self what to consume and having various limitions in product selection. Take internet browsing for example, due to the Chinese governments fear of free information they have finally given Google the boot. Such activity comes at a great cost to the consumer, as now that entire product line is being removed from it’s domestic economy.
What are some other consequences often felt by the Chinese individual, and what is the relation/cause for this heavy exportation done in China, rather then domestic consumption?
I wouldn’t say that export- vs. consumption is the main problem for the Chinese. After all, strong exportsmean strong currency and of course, and hence strong imports too (BoP must balance). Thus, one way or another it all goes back to consumption.
What the artificial peg is doing is that it is artificially directing resources form internal production to export, i.e. crating unneeded investments which will need, sooner or later, to be liquidated.
Not sure what you mean. The more export and investment that results from the artificial peg is needed, or wanted, in the countries that import their products. All the peg really does is transfer the purchasing power away from the Chinese and to their importing countries, of which the US is extremely prominent. The productivity of the Chinese is what has subsidized the US bubble economy which is based on servicing instead on manufacturing.
And as Peter Schiff predicts, that will stop sooner or later and will cause the US economy to implode.
I find that argument faulty because it would be paramount to saying that by buying at McDonalds we transfer purchasing power to McDonalds. All we do is me maximize out utility by a transaction. Same with the Chinese. By exporting they show that they prefer US dollars to Chinese goods. They prefer import goods to Chinese goods. There’s no inherent unfairness here.
What is wrong with the RMB, is that it is a hidden tax on the Chinese domestic industry to subsidize exporters. In this sense without the peg there would be more internal production, and less export. The Americans do not gain anything form the peg. Without it they too would replace Chinese-made goods with domestic ones. All that would happen is that the structure of production would realign to more closely match preferences. The actual structure is not utility-maximizing. That’s all. But saying that the American bubble was made possible by the Chinese would seem to me short-sighted mercantilism.
I mean the recent U.S. trend in balance of trade being unsustainable is what he calls a bubble. That is not mercantilist. Mercantilist would be complaining about the trade deficit being too high because exports are better than imports.
That is true, but the undervalued rembibi does not, in itself, produce the trade deficit. American consumption is subsidized by East Asian governments. By holding vast reserves of US dollars, these governments allow the states to purchase much more abroad than they normally would.
Than, in the sense that it requires reserves build-up, an undervalued rembibi does promote the deficit. But in itself, it merely shuffles resources from internal market use to foreign market use.
If the peg would not be ‘market-driven’ (created by manipulating the supply form currency, hence producing massive reserves) but simply decreted (with the UN making it illegal worldwide to exchange at any value but at the pegged value) than it would not produce such trade balance problems (but would ‘just’ create an unsustainable export industry). In this sense one must see the difference between the peg itself and the reserves build-up.
Schiff seems to be making two separate points. That the renminbi peg is keeping Chinese from consuming is one. That China runs a short-sighted policy of propping up U.S. consumption is another.
Fully agreed (although perhaps that policy appears shortsighet to us, but the Chinese government might have other goals in mind).
It isn’t because it can’t. All that an undervalued currency can do is to tax domestic producers and subsidize exporters. Without this hidden tax, some of ’s export-oriented capital would reallocate to the internal marked, thus import goods would be replaced with Chinese goods. That’s all. It would not make Chinese consume more, just consume more Chinese goods and less imported goods. Only by seeing that this structure of production would be more in line with the preferences of consumers (both Chinese and American) could we say that the peg is making Chinese consume less. But we could say that of every price-deformation on a market-place, not just pegs.