Friday, November 16, 2007

China is busted by the laws of economics

If you try to peg your currency to the dollar, then you give up control of your domestic money supply. For example, the Chinese have pegged their currency at an artificially low rate relative to the dollar to encourage exports. As a consequencec of the peg, the Chinese Central Bank has had to print money to give to Chinese exporters when they exchange their dollars for yuan. This has lead to domestic inflation that has been largely unreported.
Until recently, China had never participated in the careful price surveys needed to convert accurately its gross domestic product into PPP dollars. The World Bank's estimates based on summary data from the late 1980s probably overstated China's PPP gross domestic product even then. Up to now, the bank has revised its estimate very little. In the meantime, China has repeatedly raised the prices of food, housing, healthcare and a range of other non-traded goods and services. These reforms should have lowered the PPP adjustment, but the bank left it basically unchanged.
These new price data imply that the real exchange rate with China has fallen (the dollar has depreciated relative to the yuan) and that the Chinese economy is 40% smaller than we thought it was. Can anyone think of an incentive for the Chinese government to under-report inflation?

From the Financial Times via and kids prefer cheese.

1 comment:

  1. This answer will strike many readers of this blog as rather pedestrian and simple in its approach, but the Chicoms(Chinese Communists)in Beijing run a statist operation that is accountable to no-one to but central governing committee. All one needs to do is look back to the Soviet Union, the various Warsaw Pact nations (especially Romania and East Germany), North Korea and all of the bizarre African experiments with centrally planned economies. Have the laws of economics ever informed them of setting fiscal or monetary policy? The aforementioned examples all represent various degrees of this reality. Governments (especially commie-leftist ones) seldom know their limits and can't admit to being wrong on economic matters.

    An example of a greater extreme would be Zimbabwe, which recently ethnically cleansed its white population and illegally expropriated all white owned farms. These farms generated 38-40% of all exports and employed a huge chunk of the rural population. They were Zimbabwe goose laying the golden egg.

    Zimbabwe is currently facing 80% unemployment, something like 8,000% rate of inflation, and is on the brink of famine, yet the government in Harare behaves as if they have given their constituents a new lease on life instead of the reality of condemning their population to brutal misery.

    To make a long story short, these commie governments are accountable to no one but their own vision of how "things should be" and this twisted truth is why these governments engage is weird fiscal and monetary lies that eventually expose themselves.