Monday, February 14, 2005

Place your bets...

Steve Roach at Morgan Stanley:
Dr. Zhou Xiaochuan, Governor of the People's Bank of China and the one of the nation's leading macro thinkers, has put the Chinese currency issue to rest for the time being. “Now is not the time,” he said in an interview on the eve of the 5 February G-7 meeting in London when queried about China’s plans to adopt a more flexible foreign exchange regime. That puts an end to speculation of an imminent move and even draws into question my view that China is actively preparing to modify the decade-long peg between the renminbi and the dollar (see my 31 January dispatch, “An Unprepared World”). Governor Zhou qualified the concept of preparation for full RMB convertibility as one that “may take years to achieve.”

Roubini and Setser's new paper on Bretton Woods II and renminbi revaluation is summarized here, and an interesting dissenting view here.

Roubini and Setser have (kind of) gone out on a limb predicting things will become intolerable for the PRC government within 2 years. Others think things could continue as they are for another 5 years or more. That's the great thing about academia - (1) the amount of skin you have in the game is limited (no one will fire you for getting things wrong, and you won't have lost an investor or (shudder) your own account billions of dollars) and (2) you can waffle a bit in your predictions. This should not be taken as a criticism - predicting macro or FX movements is extremely hard, and the detailed analysis lays out all the assumptions for you to see. But, there is something very nice about being able to look at a trader's P/L (bottom line) to see if he really got it right or wrong! ;-)

An interesting factual question is raised by these analyses. To what extent are the BOJ and PBOC actually sterilizing currency flows? I suppose the BOJ can have it either way, since they are (a) facing deflation and (b) have such low domestic interest rates. The latest inflation report from China was rather benign, so if they are not sterilizing, and hence not building up unbalanced yuan obligations vs dollar assets, they should be able to continue for some time.

My previous thoughts are here, as well as elsewhere on this blog.


Anonymous said...

As aside on evolution:

Organisms evolve rather than parts of organisms, and they evolve in an ecosystem.


Anonymous said...

The problem is the domestic deficit and balance of payments deficit will worsen, and though Japan and even China may be able to buy dollars with the trade surplus each has there will be other surplus economies that will turn to other currencies. As long as there is not uniform return of surplus accounts to dollars the pressure on the dollar will grow.

Again, should I worry from a borad and narrow perspective? I think so, and do worry.

Anonymous said...

Steve -- alas, i do not have a nice acadamic job, nor do i have the balance sheet of a hedge fund (hard if you spent the 90s working for the government) or the mentality of a trader! I certainly feel like a decent fraction of my human capital hinges on this particular limb, though maybe laying out assumptions and scenarios that help others clarify their own thinking provides a bit of a hedge ...

appreciate your posts on the economics of science as well; it is something i discuss often with my father (a now-retired US born physical chemist). I suspect your three propositions are probably all true. financial returns to science in the US are reduced by access to a global supply pool, and that does influence career choices.

brad setser

Steve Hsu said...


Apologies - I seem to recall articles in which you were referred to as an Oxford don :-)

Your work with Nouriel is very nice, and you seem to be really digging into the issue at a quantitative level. I occasionally get passed reports from analysts at banks, consultancies, etc., but your stuff is better!

One funny thing about political decisions - it might be obvious to us what the PRC government should be doing (for their own good), but who knows if they will do it. Just imagine what the Bush administration's economic policies look like to the rest of the world!

Imagine that central committee members in China are ignorant of (admittedly subtle) issues like sterilization, money supply, capital controls, etc. (sort of the mirror image of Bushies and social security). You can imagine they might cling to the peg longer than is good for them. It has worked well for them so far...

Anonymous said...

Mistakes may be made; mistakes will be made, but I am well persuaded that there is no lack of competent advisory and administrative skill about the Chinese leadership. Nor is there failure to attend to advisors, though advice need not be followed.


Anonymous said...

For Mongolians, E Is for English, F Is for Future

ULAN BATOR, Mongolia - As she searched for the English words to name the razor-tooth fish swimming around her stomach on her faded blue and white T-shirt, 10-year-old Urantsetseg hardly seemed to embody an urgent new national policy.

"Father shark, mother shark, sister shark," she recited carefully as the winter light filled her classroom. Stumped by a smaller, worried-looking fish, she paused, frowning. Then she cried out, "Lunch!"

Even here on the edge of the nation's capital, in this settlement of dirt tracks, plank shanties and the circular felt yurts of herdsmen, the sounds of English can be heard from the youngest of students - part of a nationwide drive to make it the primary foreign language learned in Mongolia, a landlocked expanse of open steppe sandwiched between Russia and China. "We are looking at Singapore as a model," Tsakhia Elbegdorj, Mongolia's prime minister, said in an interview, his own American English honed in graduate school at Harvard. "We see English not only as a way of communicating, but as a way of opening windows on the wider world."

Its camel herders may not yet be referring to one another as "dude," but this Central Asian nation, thousands of miles from the nearest English-speaking country, is a reflection of the steady march of English as a world language. Fueled by the Internet, the growing dominance of American culture and the financial realities of globalization, English is taking hold in Asia, and elsewhere, just as it has in many European countries.

In South Korea, six private "English villages" are being established where paying students can have their passports stamped for intensive weeks of English-language immersion, taught by native speakers from all over the English-speaking world. The most ambitious village, an $85 million English town near Seoul, will have Western architecture and signs, and a resident population of English-speaking foreigners.

In Iraq, where Arabic and Kurdish are to be the official languages, a movement is growing to add English, a neutral link for a nation split along ethnic lines. Iraqi Kurdistan has had an explosion in English-language studies, fueled partly by an affinity for Britain and the United States, and partly by the knowledge that neighboring Turkey may soon join the European Union, a group where English is emerging as the dominant language.

In Chile, the government has embarked on a national program to teach English in all elementary and high schools. The goal is to make the nation of 15 million people bilingual within a generation. The models are the Netherlands and the Nordic nations, which have achieved proficiency in English since World War II.

The rush toward English in Mongolia has not been without its bumps. After taking office after elections here last June, Mr. Elbegdorj shocked Mongolians by announcing that the nation of 2.8 million would become bilingual, with English as the second language. For Mongolians still debating whether to jettison the Cyrillic alphabet imposed by Stalin in 1941, that was too much, too fast. Later, on his bilingual English-Mongolian Web site, the prime minister lowered his sights and fine-tuned his program, developing a national curriculum devised to make English replace Russian in September as the primary foreign language taught here.

Still, as fast as Mr. Elbegdorj wants the Mongolian government to proceed, the state is merely catching up with the private sector.

"This building is three times the size of our old building," Doloonjin Orgilmaa, director general of Santis Educational Services, said, showing a visitor around her three-story English school that opened here in November near Mongolia's Sports Palace. This Mongolian-American venture, which was the first private English school when it started in 1999, now faces competition from all sides.

With schools easing the way, English is penetrating Ulan Bator through the electronic media: bilingual Mongolian Web sites, cellphones with bilingual text messaging, cable television packages with English-language news and movie channels, and radio stations that broadcast Voice of America and the BBC on FM frequencies. At Mongolian International University, all classes are in English. English is so popular that Mormon missionaries here offer free lessons to attract potential converts.

Increased international tourism and a growing number of resident foreigners explain some developments, like the two English-language newspapers here and the growing numbers of bilingual store signs and restaurant menus. During the first eight months of 2004, international tourist arrivals here were up 54 percent; visits by Americans doubled to nearly 9,000, helped by popular Mongolian movies like "The Story of the Weeping Camel." Foreign arrivals increased across the board, with the exception of Russians, whose visits declined by 9.5 percent. That reflects a wider decline here of Russia's influence and the Russian language. Until the collapse of the Soviet Union, Russian was universally taught in Mongolia and was required for admission to universities.

"Russia is going downhill very fast," said Tom Dyer, 28, an Australian teacher at the Lotus Children's Center, the orphanage where Urantsetseg was describing the shark family.

Russia, leery of immigration from Asia, has imposed visa requirements on Mongolians. China has not. Today, it is hard to find a Mongolian under 40 who speaks better than broken Russian. Within a decade, Mongolia is expected to convert its written language to the Roman alphabet from Cyrillic characters. "Everyone knows that Russian was the official foreign language here," T. Layton Croft, Mongolia's representative for The Asia Foundation, said in an interview. "So by announcing that English is the official foreign language, it is yet another step in a way of consolidating Mongolia's independence, autonomy and identity."

So far, Beijing has adopted a laissez-faire stance toward Mongolia's flirtation with English, even though China is now the country's leading source of foreign investment, trade and tourism. Such a stance is easy to maintain because Chinese-language studies also are undergoing a boom here.

For a trading people known for straddling the East-West Silk Road, Mongolians have long been linguists, often learning multiple languages. But for many of Mongolia's young people, English is viewed as hip and universal.

"Chinese is very boring," Anuudari Batzaya, a fashionably dressed 10-year-old, said in the Santis language lab, pausing an interactive computer program that intoned in crisp British vowels: "When he lands in London, he'll claim his baggage, and go through customs."

Stopped on a sidewalk on a snowy afternoon here, Amarsanaa Bazargarid, a 20-year-old management student at Mongolian Technical University, said optimistically: "I'd like English be our official second language. Mongolians would be comfortable in any country. Russian was our second official language, but it wasn't very useful."

With official encouragement, the American Embassy, the British Embassy, and a private Swiss group have all opened English-language reading rooms here in the past 18 months.

"If there is a shortcut to development, it is English; parents understand that, kids understand that," Munh-Orgil Tsend, Mongolia's foreign minister, said in an interview, speaking American English, also honed at Harvard. "We want to come up with solid, workable, financially backable plan to introduce English from early level all the way up to highest level."

After trying in the 1990's to retrain about half of Mongolia's 1,400 Russian-language teachers to teach English, Mongolia now is embarking on a program to attract hundreds of qualified teachers from around the world to teach here.

"I need 2,000 English teachers," said Puntsag Tsagaan, Mongolia's minister of education, culture and science. Mr. Tsagaan, a graduate of a Soviet university, laboriously explained in English that Mongolia hoped to attract English teachers, not only from Britain and North America, but from India, Singapore and Malaysia. Getting visas for teachers, a cumbersome process, will be streamlined, he said.

Mr. Tsagaan spins an optimistic vision of Mongolia's bilingual future if he can lure English teachers. "If we combine our academic knowledge with the English language, we can do outsourcing here, just like Bangalore," he said.


Anonymous said...


I have little idea about the Chinese leadership, though they seem to take good advice. I recall reading in Joe Stiglitz's book (Globalization and its discontents), how at the onset of marketization (early 80s) and asked for advice from international economists (including himself). Interestingly, their approach of starting market reforms gradually (where surplus produce were allowed to be sold at market price) made good economic sense: it is all in the margin! The results speak for themselves. Russsia, on the other hand....

A side note (a follow-up on a recent India article you brought our attention to). In contrast, China..... oh well..

I think it shows how much harder it is to get things done in a pluralistic democracy; a relatively enlightened one-party rule can do a much better job.

India's creaking infrastructure
By Kunal Kumar Kundu

MUMBAI - The world's biggest passenger plane ever built, the Airbus A380, has rolled out of the Airbus Industries factory in Toulose, France. The plane will transform the aviation business, just the way the B-747 did some 35 years ago. With a range of over 14,000-16,000 kilometers, operating non-stop, the 73-meter long, 24-meter high, twin-deck, four-aisle 555-seater will have 49% more space and 35% more seats than the 747. The new plane will also pose a significant impact on airport infrastructure: it will need new flexible aerobridges and services such as nose-in guidance systems. Just the kind of things from which India's airports are light years away.
On the other hand, China's extraordinary emphasis on investment in infrastructure has translated into a $1.4 trillion gross domestic product (GDP), almost thrice that of India. Among the world's top 30 ports, as many as six are Chinese, apart from Hong Kong. One in every five containers handled globally is moved through a Chinese port. China's national rail network expanded from 22,900 km in 1952 to 70,100 km in 2001. With an additional annual average of 30,000 km of highways in country and township levels, its road network has expanded from 260,000 km in 1978 to 956,000 km in 2001.

China has also emerged as the world's fastest-growing air-freight market. Beijing has just completed a new $1.9 billion air terminal. Its capacity is set to increase from 27 million to 48 million passengers a year. During 1996-2000, China invested $8 billion in airport construction. In 2000 alone, airport investment aggregated $2.4 billion for Shanghai, Beijing and Guangzhou.


Anonymous said...

Interesting comments for us to think through, MFA. I rather take delight in the development of China and India, Brazil and South Africa. How could we not take such delight? But, there is so much to be learned.


Anonymous said...

Sorry, I mean to post a portion of the Mongolia article, but the critter got away :)


Anonymous said...

South Korea's 'Sea Women' Trap Prey and Turn Tables

UDO, South Korea - On a cold, rainy morning, the sea women of this islet donned their black wetsuits, strapped on their goggles and swam out into the waves.

Over several hours, they dove to reach the sea bottom, holding their breath for about a minute before bobbing up to the surface. Sometimes, several dove in unison, their flippers jutting out together for a split second, looking like synchronized swimmers.

That illusion lasted until they resurfaced, one clutching an octopus, another a sea urchin, and until a closer look at the sunburned, leathery faces behind the goggles revealed women in their 50's, 60's and older.

The sea women here and on larger Cheju Island, off the southern coast of South Korea, are among the world's most skillful and toughest natural divers. Year round, they plumb the sea bottom with no scuba gear, in one- or two-minute dives that mix dexterity, desire and death.

'Every time I go in,' said Yang Jung Sun, 75, 'I feel as if I am going to the other side of the world. When I see something I could sell, I push myself in toward it.

'When I get out of breath, I push myself out of the water. It is all black in front of me. My lungs are throbbing. At that moment I feel I am dead.


Anonymous said...

steve --

research associate at my old oxford college is not quite "don" -- I spent some time there finishing up a book on emerging market crises, and the little center there is both generous with titles and needs all the plugs it can get. alas, in the press, it usually gets reduced (inaccurately) to oxford economist ... I should have a more permanent position soon though.

thanks for the compliment though. I too have access to the work of various i-banks; nouriel and i aim to be competitive in quality, but a bit more provocative. I am not sure we consistently succeed -- though on some issues, i think we do. the i-banks analysis of the TIC data is a bit thin in my view. on the other hand, they do some things very well that nouriel and I do not do!

as for China -- you are right. the chinese leadership is loath to change something that has worked well. that said, i suspect they are increasingly realizing that the costs of the status quo are rising -- at some point, watching your reserves grow ceases to be fun, and the challenge of managing the resulting currency mismatch/ sterilization becomes a real concern. There is a bit economics literature on "exiting" from overvalued exchange rate pegs; china will get to write the book on exiting from an undervalued peg -- usually, it is pretty easy, but in China's case, the transition costs are very real (we know a bit about transition from overvalued pegs to managed floats in presence of currency mismatches from the emerging market crises of the past decade. now we get to see the process work in the opposite way)

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