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It would be for China to peg the RMB to a basket of major currencies

Comments on Yu Yongding "China still has room to move on RMB" , 7/02/2016

While it is the conventional economic wisdom that the exchange rate should be determined by the market, the tendency of exchange rate overshooting and the generally observed excessive fluctuations (partially due to speculations) even in major currencies, as well as the impact of exchange rates on international trade and business costs (disruptions to businesses as either costs or prices) (consumption of traded goods and services should probably be included too), probably suggest that it would be desirable if exchange rate movements truly reflect relative economic fundamentals.

Economists' reliance on market is because it is regarded as efficient. However, the faith in the foreign exchange market should be tested by the relative importance of its rationality and irrationality. When market is predominantly irrational, that is, generating bubbles, its efficiency should be questioned, and perhaps ways to correct inefficiency or find a better alternative. If one still argues for rely on the market when the market has clearly lost its efficiency does not represent good logic.

As such, it would be an appropriate strategy for China to adopt a compromise between free floating and a hard peg to the US dollar, that is, to peg, with some margins to move, the RMB to a basket of major currencies with weight reflecting relative trade and capital account positions with those countries.

In this way, the RMB is not fixed with any major currencies, but the relative movement against any single major currency would be smaller than some other major currencies.

Yes, the Chinese central bank still needs to keep an eye on the peg and has to use foreign currency reserves to balance the peg, but the costs would be much lower than to defend a currency against the US dollar as it has been doing in the last couple of years as Yu mentioned in the post.


Payroll tax and company tax, and informed tax reform

Comments on Michelle Grattan "Turnbull points to problems in raising GST", 5/02/2016

It is strange for the PM to argue that payroll tax is efficient and at the same time also argue that company tax rate should be reduced. The two arguments are contradictory. It appears that the PM has been ill advised or not been advised but he only talk out of his own intuitive feel.

Comparing payroll tax with company income tax, the only difference is the degree of the impact on business, with payroll having a greater impact on business. That is because when without payroll tax, that amount would be profit and business pay income tax on that amount as opposed to pay the full amount when payroll tax is imposed.

It would be better if significant tax reforms or increasing taxes be put out much earlier in an election cycle, so it give plenty and adequate time to the public to consider them and make their mind on whether they would support or not support them.Leaving significant reform policy proposal to the last minute does not show enough respect to the voters!


Maybe China can improve its environment in 2016

Comments on Kerry Brown "China’s challenges in 2016", 4/02/2016

On the foreign policy front, the formal launch of the Asia Infrastructure Investment Bank should also qualify to be a very significant achievement.

The bilateral summit meeting between China and Taiwan, while highly symbolic, is questionable in terms of foreign policy achievement, particularly in the context of the anticipated change in the governing party from the Nationalist Kuomintang Party (KMT) to the Democratic Progressive Party (DPP) in Taiwan and the subsequent confirmation in the January election. It was and still is unclear what purpose and effect of a meeting with a losing party.

While China, in 2016, faces the same very challenging task in term of rest its slowing economic growth in this year as in the last two years did, given the not so promising world economy and domestic rebalancing, maybe it is having a reasonably good opportunity to do something in improving the environment, particularly air quality when it forces the closure of some inefficient and high energy consuming plants in the steel and other industries. But the deficit in environment is so large, it would be difficult for people to feel it probably.

China probably needs a bit more active fiscal policy to arrest the slowing economic growth rate, although any fiscal stimulus must be well targeted.

While it has been a big thing inside China when it set up the Shanghai Free Trade Zone, it is unclear to me what that can really achieve, particularly in the context of economic rebalancing. It may improve the efficiency of importing, but that could also be a drag to domestic growth, as imports are subtracted from growth.


Regional food challenges and world production

Comments on R. Quentin Grafton, John Williams and Qiang Jiang "Food security: Asia’s critical balancing act", 3/02/2016

This post seems to argue the challenges of crop production in Asia, particularly South Asia on the one hand, and the apparently success worldwide in crop production in meeting world demand. If that is the case of regional challenge, then trade will feel the uneven distribution in crop production between regions/countries, unless some countries are so poor that they cannot afford to import grains. So one of the solution/strategy is to boost the income level of poor countries as an alternative to increase their domestic crop production.

Another factor that will exacerbate food security is the change in the family planning policy in China that will shift from one to two children per couple from the past one child per couple. Given China's population size, future population will be greater than most past projections. Higher population means the demand for food will be greater too. That means any baseline population projection needs to be updated.

Another point is generically modified food. Is the issue of safety of generically modified food for human consumption completely settled?


Hedging, alliance and dynamic developments

Comments on Darren J. Lim, ANU and Zack Cooper "Are East Asian states really hedging between the US and China?" 1/02/2016

The main argument or conclusion in this is likely to depend on the relative dynamic development of China and the US in terms of political, economic and military strengths. The argument may be currently valid, but can be problematic if the growth of China’s military strengths follows the same path of its economic development of the last three decades, particularly the last two decades.

Just as few had imagined or foreseen the rise of China economically three decades ago, it is difficult to predict what China’s military strengths will be in two to three decades into the future.

Another is whether China will maintain its current and long held policy of non alignment. Arguably, China could have options in that respect.

Should China, either alone or with reliable partners, have stronger or at least the same military strengths, the argument in this post could be significantly discounted.

Some rational choice now could be changed when the circumstances and assumptions change.

Further, the US, though strongly committed to its alliance partners now, at least apparently, will also need to calculate the costs of a direct war against a rising power.

During the cold war, the threat of mutual destruction made the US and the former Soviet avoid direct war. Arguably, the US may have had superiority in conventional weapons. The Soviet invaded Afghanistan, though eventually it had to withdrawal or it was defeated there.

The point is that few countries will go to war without considering the costs it would incur, particularly it is to fight for a partner country.

Changed relationship between QE and inflation

Comments on Masanaga Kumakura "Japan is sinking in a sea of money", 28/01/2016

The recent QEs in the US, European Central Bank and Japan appear to have cast doubt on the conventional economic theory, i.e. the monetisation of government debt is a recipe for fiscal profligacy and hyperinflation. Whether it is because the special circumstances or other reasons, the QE in the US played a useful role in averting more nasty economic depression. Economists should revisit that conventional economic theory, perhaps.

China unlike to catch up with the US on per capita income in three decades

Comments on Peter Robertson and Longfeng Ye "China’s greatest challenge will be escaping the middle income trap', 30/01/2016

The terms of the richest and most powerful country in the following paragraph is confusing. China will not be the richest country in many decades to the future. One should not be confused by the size of a nation and the average income or per capita income. Most powerful or not, it is also debatable. “China’s slower growth figures have caused jitters in world financial markets. Nevertheless its growth remains at miracle levels. At this pace, China would appear to remain on track to become the richest and most powerful country in the world, bar none.”

Further, the following paragraph is questionable, the implied calculation seems to be incorrect: “In a scenario where Chinese “miracle” growth continues around 5-6% for three decades and gradually slows to the average world growth rate, the average Chinese citizen would be as wealthy as the average American.”Per capita income in China is around one fifth of that in the US. Growth rate of around 5-6% is at the best only 2-3 percentage points higher than the US. Three decades of that greater growth rate does not give a factor of 5!

China in its current stage of development shares more similarities with Japan and Korea in their relative developmental stage than with Brazil or Turkey, in culture and economic characteristics, such as saving rates, education state role in growth. Purely from that perspective, China is more likely to avoid the middle income trap, barring disastrous government policies.

PS: Professor Robertson replied to my earlier comments with the following: "Hi Lincoln
I think you have overestimated the US growth rate and underestimated China’s current per capita GDP in $PPP.
The growth rate gap is more likely to be around 4 percentage points as the US per capita income growth unlikely to exceed 2 percentage points per year.
Also China’s per capita income (in $PPP) today is closer to 26-27% of the USA’s.
Obviously one can question the assumptions but I hope that answers your question.

My tcourtsy to Professor Robertson "Thanks Professor Robertson for your reply and clarification that clears some confusion that I had."

PSS: Notwithstanding Professor Robertson's clarification, I still doubt China could practically catch up with the US on per capita income in three decades. While it is possible for a small economy like Singapore or Hong Kong, it is unlikely for a large economy. Japan's per capita income ($37,500 in 2014, re CIA World Factbook) is still quite a bit below the US's ($54,400 in 2014), not to mention South Korea's (interestingly also $35,400 in 2014).

Both Japan and Korea, with reasonably large economic size, are two of the best examples of catching up in the post war era and up to now as well.

One may argue that Japan has had a period of lost decades, but that is exactly part of the parcel of economic development and catch up processes, and reflects the difficulties for a large country to catch up in a short period.

Beeson's bizarre comparison of China with Japan's military past

Comments on Mark Beeson "What China did and should learn from Japan", 30/01/2016

This article, though probably good in economics, is unfortunately overblown in terms of comparing China’s current military stance, or even its or approach in the South China Sea or East China Sea, with that of Imperial Japan in the second half of the 19th century and the first half of the 20th century. Japan was then a militarised country, expansionary and aggressor, invaded quite a number of countries in Asia.

It is hard to understand the author could get the comparison so wrong. Even in economic and developmental aspects, it is doubtful that the China model is similar to the Japan model.

In terms of development stage, China is now far from the stage of 1990 Japan. As a result, there is still a long way for China to go to ‘exhaust’ the role of state in maintain rapid growth, if the argument of the different roles of state (institution reforms) needs to evolve.

PS: That piece by Beenson, shows some economists may get very strange perspective when they apply their economics knowledge to something new to them, even though I am an economist too.