送交者: 老中一号 于 2005-6-25, 00:51:22:
COMMENTARY
China's Yuan Is Overvalued
By WEIJIAN SHAN
June 23, 2005
The U.S. has intensified its pressure on China over the yuan, with Treasury Secretary John Snow warning Beijing to revalue before October or risk being labeled a "currency manipulator" -- a designation that could lead to the imposition of retaliatory trade barriers.
This pressure all hinges on the argument that the Chinese currency is artificially undervalued, thus giving Chinese exports an unfair advantage and robbing America of many jobs. That's a view widely shared in the financial markets. Forward contracts for the yuan trade at a premium over the current spot exchange rate, reflecting the general expectation of a revaluation. And foreign capital has been flooding into China in anticipation of this, putting significant upward pressure on the money supply and property market. Given Beijing's healthy foreign-exchange reserves, and the consistent current- and capital-account surpluses of recent years, perhaps it's understandable that the market should believe a freely convertible yuan would rise in value against the dollar.
But that overlooks the fact that while the yuan is already convertible on the current account (albeit at a fixed rate set by China's central bank), the capital account remains heavily controlled. Traders can freely convert yuan into dollars and vice versa; while Chinese and foreign tourists can, by and large, buy and sell yuan for their travel needs. Foreign companies operating in China can also repatriate dividends largely without restrictions, by selling yuan for foreign currency. But all capital-account transactions must be cleared with the State Administration of Foreign Exchange. While there are few controls on inward foreign direct investment and repatriation of capital earned through properly registered foreign direct investments, foreigners face extensive restrictions on investing in China's domestic capital markets. Most crucially, Chinese citizens are also heavily restricted from investing abroad.
Such capital controls are not unusual. Many countries had capital controls at one stage or another in their economic development. Britain didn't remove all foreign-exchange controls until 1979. South Korea only partially lifted its capital controls in 1996. Taiwan still restricts foreign investment in its stock market. India and Malaysia also maintain tight capital controls.
Like it or not, capital controls are absolutely necessary for China at this stage in its economic development. That's because the country's economic development is, to an almost unprecedented extent, driven by rapid capital formation or fixed asset investments (FAI). FAI accounted for 45% of China's gross domestic product in 2004, a far higher percentage than any other major country has ever experienced during its economic development. For instance, the FAI to GDP ratio in the U.S. never rose much higher than 20%, even during the peak period of its industrialization between 1889-1913, and the post World War II reconstruction phase of 1946-55. In Japan, the highest the ratio ever reached was about 32% in the 1960s and 1970s. In Germany, it only reached about 21% during the heavy investment periods from 1891-1913 and again from 1952-58.
The reason why China is able to invest so much more is because, in addition to the inflow of foreign direct investment, it enjoys a very high savings rate of 43% of income in 2004. And because of the controls on the country's capital account, Chinese savers have little choice but to invest their money at home, instead of seeking higher returns overseas.
By almost all measures, Beijing's economic growth is inefficient and wasteful. Data show that it takes an average of $5-7 in investments to produce every dollar's worth of GDP in China, as opposed to an average of $1-2 dollars in most developed countries. Much more energy and other types of resources are also consumed to produce the same amount of GDP as in other countries. Beijing's FAI is largely financed by bank loans, and the amount of bad loans in its banking system is a good indicator of the inefficient use of capital. An inefficient economy can still produce high growth rates if you throw enough capital at it, as China does. But only because the capital is prevented from seeking more productive uses overseas by the existence of capital controls.
China's unique growth model relying on FAI or capacity expansion produces two pronounced effects for the world economy. On the one hand, it creates insatiable demand pushing up world-wide prices for the raw materials and commodities of which China is a net importer. On the other hand, relentless capacity expansion leads to overcapacity which depresses the prices of finished products, of which China is a net exporter. In this way, China in effect subsidizes the rest of the world by buying dear and selling cheap. However, this biflation, or the combination of the inflation of prices of raw materials and the deflation of prices of finished products, squeezes the cash-flow and profitability of Chinese producers. Therefore, China's growth has historically produced low corporate profits and returns on capital in general. Whereas in any other country, the stock market generally performs in tandem with the economy, Chinese stocks have historically generated exceedingly low or negative returns for investors in spite of sustained economic growth. Companies also see their stocks trade at a substantial premium on domestic stock exchanges to overseas markets, indicating that the return on capital in China is at a discount to that outside the country.
If China were to lift its capital controls and allow the yuan to become freely convertible, the price differentials between the Chinese and overseas stock markets would be likely to disappear because of arbitrage by investors. The resulting outward capital flow would likely cause the yuan to devalue, rather than revalue -- as many American political leaders seem to hope. Without capital controls, China's economic growth would stall because the major engine of its growth, FAI, would run out of fuel as capital becomes more scarce. And, given Beijing's growing economic importance, a stalled Chinese economy would have a devastating effect on the global economy.
If, on the other hand, China decides -- perhaps in response to the pressure from Washington -- to revalue the yuan, it will have to maintain or perhaps even "manipulate" its capital controls in order to maintain the present upward pressure on the yuan. Any flotation of the yuan would also have to be under the current regime of foreign-exchange control, including capital controls. While such a strategy does bring certain benefits, such as allowing the central bank to bring the growth of money supply and the overheated economy under better control, it is also likely to be highly disruptive to trade and investment, and consequently to China's economic growth because Beijing's dependency on trade is almost twice as high as the U.S. or Japan measured by trade volume as a percentage of GDP. Whereas traders and investors can generally hedge against currency volatility or risks with a fully convertible currency, they cannot do so efficiently and at low cost when the currency is subject to capital controls because of the absence of a real market in the currency.
Of course, China could instead decide to repeg the yuan at a higher level against the dollar. But a modest revaluation would only encourage more speculative inflow of capitals, exacerbating the pressure on China's money supply, because once moved, the peg would lose its credibility and become subject to more ferocious speculative attacks. The political pressure will not let up either. If however China repegs sharply, its economy will significantly slow down with major consequences for global growth.
That leaves China with only one option if it does decide to bow to pressure to change its exchange rate -- letting the yuan float within a managed band against a basket of currencies under the current foreign-exchange regime of continued convertibility on the current account but capital account controls. Floating the yuan within a band against a basket of convertible currencies offers the advantage of trade and investment stability as traders and investors will be able to hedge their currency risks to the extent the market knows what the basket is. But it doesn't mean the yuan will necessarily rise in value against the dollar, especially given the greenback's recent strength.
However there is little economic rationale for China to revalue its currency or to move its peg to the dollar since the yuan is not fundamentally undervalued if real market forces are brought to bear. The currency peg has worked well for China in the past decade. It has also served the world economy -- including the U.S. -- well by maintaining economic stability and subsidizing high levels of American consumption, through China's heavy investments in U.S. government securities.
In the long run, the best course would be for China to gradually open up its capital account. But it will do so slowly for fear that the inefficiencies in its economy would stifle economic growth if it was forced to freely compete for capital against more efficient economies. That's why Zhou Xiaochuan, governor of the People's Bank of China, is right to say that China must first reform its banking system to make its economy more efficient before lifting foreign-exchange controls. Only then can China increase the rate of return on capital and make Chinese growth more balanced, as opposed to being so heavily reliant on FIA. And that, in turn, will create the conditions for the yuan to become fully convertible.
Mr. Shan is a partner of Newbridge Capital, a private equity firm