William Cline and John Williamson of the Peterson Institute have updated their estimates of ‘fundamental equilibrium exchange rates’: an exceptionally valuable cheat sheet for working out which currencies are over and under valued. (In fact they have not updated the FEERs, just their estimates of over and under valuation). Read more
The renminbi is 17 per cent undervalued against the dollar while the yen is 8 per cent overvalued…
William Cline and John Williamson at the Peterson Institute for International Economics have done a service to the currency wars debate by releasing an update to their estimates of fundamental equilibrium exchange rates (FEERs) for various countries against the dollar in a very interesting policy brief. Read more
South Korea, holder of the world’s fifth-biggest foreign exchange reserves, is considering expanding its small holdings of gold to diversify its dollar-heavy portfolio.
Such a move could prove significant to the international gold market as Seoul currently only holds about 14 tonnes of the lustrous metal, equal to just 0.2 per cent of its $290bn reserves at current prices. By contrast, Italy and France each hold just under 2,500 tonnes of gold, amounting to more than 65 per cent of their reserves. Read more
The short answer, according to SocGen research, is no, in spite of very significant wage increases so far this year (Foxconn, and others following) in export sectors such as advanced electronics and autos:
The price of labour is picking up dramatically in the coastal provinces. Multinational companies have extended wage gains of 25-30 per cent so far this year, whilst municipalities have extended minimum wage increases of between 5 and 25 per cent.
So why no impact? First, “as China moves rapidly up the value chain”, the increasing value of the goods produced makes the cost of labour proportionately lower. So margins can accommodate the increase. Unit labour costs – which show wages as a proportion of the item’s value – are rising, but at a decreasing rate since 2009.
Second, inflation is affected less by wage increases because there has been an offsetting fall in distribution costs – SocGen explains that the Baltic Dry Index, a proxy for distribution costs, has fallen 75 per cent in the past year.
To explain US import price inflation, SocGen’s model finds Read more
Fiscal austerity is needed; monetary tightening might be needed sooner than thought; and capital controls won’t work in the medium-term. Cheerful prognosis courtesy of the Bank for International Settlements, which has just released its Annual Report.
Chapter one is candid on the threats: “The combination of remaining vulnerabilities in the financial system and the side effects of ongoing intensive care threaten to send the patient into relapse and to undermine reform efforts.”
Stimulus is dead, long live austerity, says the Bank. In line with the G20: “The limits to fiscal stimulus have been reached in a number of countries. Immediate, front-loaded fiscal consolidation is required in several industrial countries.” The policy is not without its risks, of course: Read more
Four things have struck me at today’s high-level meeting on the international monetary system, organised by the International Monetary Fund and Swiss National Bank.
The battle over exchange rates between Beijing and Washington is warming up nicely after a few years’ hiatus, only with a bit more urgency this time. Today’s hearing at the House Ways and Means committee canvassed proposals for what to do about it. Interestingly, there was more consensus among the experts testifying than previously that China holding down the renminbi was a serious problem. But the solutions all seemed less than forceful: call China a currency manipulator, go to the IMF, go to the WTO.
The more confrontational solutions, like imposing anti-subsidy duties to combat currency undervaluation, didn’t get much support. Sandy Levin, the Michigan Democrat who currently chairs the committee, has a reputation as a sceptic of free-trade purists, but he sounded pretty cautious about anything that might touch off a direct confrontation. Read more
Current US monetary policy is likely to prove excessively inflationary for China and Hong Kong, but both countries are ‘stuck’ with the effects of Fed policy as they have pegged their currencies to the dollar.
So says Janet Yellen, San Francisco Fed chief: Read more