The impact of China's currency manipulation on emerging economies

The Times points to a recent IMF working paper which suggests that the era of high current account surplus driven external imbalance of the Chinese economy may be coming to an end. The IMF estimates that China's current account surplus, which topped 10% of GDP in 2007, had  shrunk to about 2.8% in 2011 and is estimated to decline to 2.3% in 2012, the smallest since 2001. 

Apart from rising labour costs and the natural shift upwards in the manufacturing value chain, the appreciation of the renminbi over the past decade too has been a contributory factor. Since June 2005, but for period of nearly two years during the 2008 financial crisis, China has allowed the remnminbi to trade in a daily band of 0.5% against the dollar. Since mid-April, 2012, it widened the band and now allws the renminbi to fluctuate up or down in value by as much as 1 percent against a fixed benchmark with the dollar during daily trading. But the central bank continues to set the benchmark for each day’s trading of the renminbi, and it has shown virtually no change this year.

The FT has an excellent interactive graphic that traces the change in the value of renminbi since 2000. It uses four distinct ranges, beginning with before China's WTO entry (January 2000), its first depeg from US dollar (June 2005), its second de-peg from US dollar after re-pegging it during the 2008 crisis (may 2010), and March 2012. The graphic below shows that the renminbi's nominal and real (inflation-adjusted) trade-weighted exchange rates (REER) relative to its major trading partners have appreciated. Further, this appreciation has been higher since June 2005.

However, this appreciation conceals variations. The renminbi has risen steadily against the US dollar, British Sterling, and Japanese Yen over the past decade, but its real appreciation against other currencies from the euro to Brazilian real has been far milder. Accounting for different inflation rates, in real terms while the renminbi has risen by 29% since 2000 against the US dollar, it has actually depreciated against all others - 0.7% against the Euro, 45% against the Brazilian Real, and 30% against the Indian Rupee.

This is also a reflection of the fact that the dollar itself has depreciated against the other major currencies during this period. Therefore, there may be a strong case now for many developing economies that, despite China's exchange rate flexibility since 2005, they are bearing the brunt of China's currency manipulation.  

In particular, India has been amongst the worst affected by China's currency manipulation. In real terms, the renminbi has depreciated by 30% since January 2000. In fact, despite, the rupee's significant depreciation against the dollar, the real rupee-renminbi exchange rate has held steady. In fact, but for India's much higher inflation rate, since 2005, the exchange rate between the two currencies has hardly budged.

In keeping with the trend with others, the renminbi has appreciated in real terms over the past one year. However, it may be premature to consider this as a decisive shift in China's exchange rate policy since this period also conicided with higher than normal inflation in China.

These trends are yet another reason for India to rally other developing countries around an agenda that focuses on China's currency manipulation and its beggar-thy-neighbour impact on other emerging economies. Apart from its substantive nature, this can also add a strategic dimension to India's foreign policy.    

Global poverty rates are down

Tim Taylor points to a briefing note by Shaohua Chen and Martin Ravallion which indicates progress in global poverty reduction. The graphic captures the decline in poverty levels during the 1981-2008 period.

Looking back to the early 1980s, East Asia was the region with the highest incidence of poverty in the world, with 77% living below $1.25 a day in 1981. By 2008 this had fallen to 14%. In China alone, 662 million fewer people living in poverty by the $1.25 standard... In 2008, 13% (173 million people) of China’s population still lived below $1.25 a day. In the developing world outside China, the $1.25 poverty rate has fallen from 41% to 25% over 1981-2008, though not enough to bring down the total number of poor, which was around 1.1 billion in both 1981 and 2008... The $1.25 a day poverty rate has fallen in South Asia from 61% to 36% between 1981 and 2008. The proportion of poor is lower now in South Asia than any time since 1981.

But on the $2 a day basis, 70.9% of South Asia's population were living below the poverty line, down only marginallty from the 87.2% in 1981. On both poverty counts, a much greater proportion of Chinese were living below the poverty line in 1981. However, as the graphics below indicate, on both poverty standards, by the beginning of 1990s, China had overtaken India.




India's poverty rate reduction has been far slower than China's, reflective of the trickle-down, redistribution-driven economic growth strategy pursued by it.

India Vs China - Labour Productivity

Ejaz Ghani's graphic clearly illustrates the much higher service sector labour productivity of India compared to China's similar advantage in the manufacturing sector over the 1991-2005 period.



He draws attention to the challenge for both countries to catch up in their weaker sectors,

"Services are more skill intensive compared to manufacturing, and so it creates fewer jobs. India now needs to develop its manufacturing sector to create jobs for the millions of additional workers who will join the labour force every year for the next two decades. China, on the other hand, needs to develop services and go up the value chain, from less skill-intensive to more skill-intensive activities. Developing services will enable China to avoid the inevitable middle-income trap, which is more difficult to avoid if it just relies on manufacturing as a source of growth."

India Vs China - Coal Production

The increase in coal production is truly stunning. And this does not take into account the imports. The sheer ability to quickly ramp up production a few times over is the most amazing thing about China's top-down economic growth story.

India Vs China - the role of urbanization

The Economist points out that in 2011 China's urban population surpassed its rural population. This stands out in stark contrast to 1980, when less than a fifth of its population lived in cities, a smaller proportion than India, whose urban population share in 2011 was just above 30%.



The rapid pace of urbanization, especially manufacturing led urbanization (where factories are located in cities or its urban agglomerations), has been the primary driving force behind China's spectacular economic growth of the past three decades. In fact, it is no coincidence that China's pace of urbanization picked up sharply since 1995 (as observed from the graphic). This coincided with a rapid spurt in the economic growth.

In contrast, India's urban population has grown slowly, a reflection of its rural-centric growth strategy. State and central governments in India will have to redress this skewedness in priorities in order to push the economy into a sustainably higher growth trajectory.

India Vs China graph of the day!

Fascinating graphic that shows the number of years that have elapsed since China passed the development milestones that India has now reached.

How much difference does two decades make - India Vs China?

The graphics below highlight China's spectacular growth over the past two decades with respect to India. Given the fact that the major share of this explosive growth took place in the last eight years, it is truly an awesome story!

The global share of India and China's manufactured exports were more or less the same in 1985.



Fast forward to 2008, and China has raced away spectacularly in every manufacturing sector.



(HT: Will India overtake China in the next decade?)

China Vs India - India in China's worldview!

NYT has an article that explores the apparent lack of interest in India among Chinese opinion makers. It points to the coverage of each other in the two countries leading newspapers as evidence of the Indo-Sino interest disparity.

"The People’s Daily, the Chinese Communist Party’s house organ, had only 24 articles mentioning India on its English-language Web site in the first seven months of this year, according to the Factiva database. By contrast, The Times of India, the country’s largest circulation English-language newspaper, had 57 articles mentioning China — in July alone."

China Vs India on demographic dividend

The one area where India scores decisively over China - being on the right side of the long-term demographic profile. Its working population is estimated to keep growing well past 2050. This larger labour supply can be a major source of growth for India's economy.



In contrast, for China, the largest segment of population is in the 35-44 age group and the younger people form a much smaller share of the total population than India.



On the same issue, in a recent Vox post, Shekhar Aiyar and Ashoka Mody used state-level data from India, and found that its demographic dividend has "played a key role in India's accelerating growth since the 1980s and will add 2% to annual income growth for the next two decades".