主题：【人民币走向】投机而不是生产力增长使人民币升值 -- 西风陶陶

Greenspan's Wrong. Productivity Won't Move Yuan: Andy Mukherjee

March 4 (Bloomberg) -- Alan Greenspan says it's ``fairly reasonable'' to expect the Chinese yuan to rise from its current value of 8.3 to the dollar, driven by the ``sheer basic underlying momentum of productivity.''

The chairman of U.S. Federal Reserve is right in predicting a stronger yuan, which has been pegged to the U.S. dollar for the past nine years and is blamed by some U.S. lawmakers for causing American workers to lose jobs.

He's wrong about what will cause the yuan to move.

Productivity gains have little to do with Chinese Premier Wen Jiabao's promise this week of a market-based exchange rate system. The real reason why it's reasonable to expect a stronger yuan is the force of self-fulfilling speculation, an issue that Greenspan is refusing to address at any length except for saying it's an ``interesting question.''

The theory that undervalued exchange rates rise toward their real purchasing power through productivity gains has been verified in multiple countries in the 40 years since economists Paul Samuelson and Bela Balassa proposed it. The deficiency lies in applying the theory to China, where wage growth may lag productivity gains for a long time to come.

The Hypothesis

Here's how the Balassa-Samuelson hypothesis is supposed to work in China. As workers in export-oriented factories become more productive, they'll take home bigger paychecks. Their spending power will raise incomes for property brokers, pet salon owners and other people who don't normally export their services.

Unless the yuan is allowed to appreciate, the extra purchasing power will push up prices of goods. Higher inflation will force workers in export-oriented factories to demand even higher wages, eroding China's competitiveness in overseas markets.

Production of goods in China may ``move to other low cost producers, probably in East Asia, the Philippines, Vietnam, probably Latin America,'' Greenspan said at Stanford University's economic summit last week.

In reality, the Balassa-Samuelson hypothesis hasn't worked in China, according to Kwan Chi Hung, a senior fellow at the Research Institute of Economy, Trade and Industry in Japan.

Surplus Workers

``Rising productivity in the tradable goods sector has not been translated into a significant increase in real wages,'' Kwan said in a research paper. ``This can be attributed to the existence of several hundred million excess laborers in the countryside.''

Wage growth in China's industries has been capped by job seekers migrating from poor western parts to more affluent coastal cities in eastern China and unprofitable state companies firing millions of workers. That explains why prices in urban areas fell from their year-ago levels for 14 straight months until November 2002, and even now are rising no faster than 3.1 percent.

Even with 10 percent annual economic growth, it will be a long time before China can find jobs for its surplus workers.

``Continued expansion in capacity and excess labor could continue to press prices down and prevent Balassa-Samuelson effects from taking place'' in China, the International Monetary Fund said in a study last year.

`Error'

Then what makes a stronger yuan a ``reasonable'' expectation? The sheer weight of speculation.

Technically, China should be insulated from currency speculation because of its controls on foreign capital entering the country, and domestic capital leaving it.

In reality, Chinese residents, betting on the yuan to appreciate, are bringing their overseas funds back into the country, says Claudio Piron, Standard Chartered Bank's currency strategist in Singapore.

China's foreign exchange reserves, the world's second biggest after Japan's, rose to a record $416 billion in January, an increase of 91 percent from two years earlier.

A part of the increase that can't be explained by trade and capital flows shows up as ``error and omission'' on China's balance of payment statistics.

Between 1997 and 2001, the ``error'' amounted to an unexplained outflow of $50 billion of domestic capital. In 2002, the error turned positive, with almost $8 billion of overseas funds creeping into the Chinese economy, unexplained. In May, when the figures for 2003 are announced, unexplained inflows are expected to be large once again.

Real Issues

A recent government audit found that one Beijing-based bank omitted reporting foreign currency transactions totaling $170.5 million by a single client between April and June 2003.

Authorities in Beijing have tried to contain speculative investments by limiting building approvals and by directing banks to restrict property lending. Investment in property rose 30 percent last year, the biggest increase since 1995

Balassa-Samuelson is too far out in China's future for investors to worry about now, says Standard Chartered's Piron, who expects Beijing will widen the trading band for yuan by 2.5 percent in the third quarter of this year.

There are two real issues. Will a small appreciation in the yuan this year be seen by speculators as a signal to increase their bets on a further rise in the currency? And, will China have the confidence to open the floodgates by even that much before it's able to tackle its $400 billion bad loan problem?

Remember Keynes

British economist John Maynard Keynes used to say that in the long run we'll all be dead. Unfortunately, Balassa-Samuelson will come true for China, only in the long run. When that happens, the yuan's market rate will reflect its purchasing power. If that day were today, the yuan would be worth 1.8 to the dollar, 4.6 times higher than the market exchange rate, according to World Bank statistics on purchasing power parity.

If the yuan at 1.8 seems outlandish, remember Keynes. After all, the future isn't here yet for we the living.

To contact the writer of this column:

Andy Mukherjee in Singapore, or ([email protected])

To contact the editor of this column:

Bill Ahearn in New York, or [email protected]

Last Updated: March 3, 2004 16:27 EST