MacroScope

A grand bargain to solve global imbalances

Michael Pettis, a professor and China expert at the Carnegie Endowment for International Peace, has put together a thorough and informative look at all things U.S.-China trade. It’s well worth reading and watching the entire thing, but here’s a few highlights that jump out:

* We’re likely to see a significant increase in global trade tensions

* China will probably allow the renminbi currency to rise, but not by a lot

* There is a way to resolve those huge global imbalances but it will be painful and the chances of mustering the political will — in China, the United States and Europe — look slim.

A bit more on that last point: Pettis thinks that those three players need to “come to some kind of grand agreement.”

“China needs to recognize that the trade surpluses it needs to absorb its excess capacity are politically unacceptable in countries suffering from high unemployment.

“Europe and the United States need to understand that China simply can’t adjust quickly enough. In an ideal world, the leadership of the three economies would get together and work out a plan—six years, eight years, however long it took—in which China committed to taking the necessary steps. 

from Changing China:

Starbucks and the overvalued yuan

 

 

 

 

 

 

 

 

 

 

Is latte at Starbucks in China overpriced or is the local currency, the yuan, unexpectedly overvalued? The former is certainly more plausible, but it might be equally true that the yuan, if not overvalued, is at least not as undervalued as other measures suggest.

This conclusion would come from my proposed Grande Latte index, the caffeinated equivalent of The Economist's Big Mac index. The Grande Latte index, like its burger brother, is a light-hearted attempt to find a basket of goods that can be compared across countries to assess purchasing power parity (PPP) and, by extension, fair currency value. There are serious flaws, but I will save these for, ahem, the bottom of this blog.

The cross-country cost comparison of grande (i.e. medium in Starbucks-speak) lattes shows that the Seattle-based coffee chain's brew is rather dear in China. A grande latte costs $3.75 in the United States but $4.10 in China in dollar terms. It is even more expensive in Japan. The conclusion, that the yen is currently overvalued by 23 percent, accords well with the views of many analysts. But the idea that the yuan might be overvalued by 9 percent flies in the face of pretty much all conventional wisdom. It is also a drastically different perspective than that of the Big Mac index, which in its latest edition showed the yuan to be 49 percent undervalued.

from Global Investing:

Yuan vs. Dollar

The United States and China hold economic and strategic talks in Washington starting on July 27. The United States, International Monetary Fund and other groups have urged China to allow its currency to appreciate in order to help unwind global imbalances. Here is a chart showing the Chinese yuan vs the U.S. dollar.

UPDATE: More on U.S.-China economic ties here.

from Summit Notebook:

The Esperanto currency

Hiroshi Watanabe, president of the Japan Bank for International Cooperation, saw his share of dollar buying intervention during decades at the nation's finance ministry.  But the market veteran says despite prevalent talk recently, a shift away from the greenback as the world's reserve currency may be great in theory, but like the language of Esperanto short on daily practitioners.

"Esperanto is a very good language, but no community uses it in its daily life, " Watanabe told the Reuters Japan Investment Summit.

"That's the same situation that applies to the currency... I don't see any other currency that can take the position to replace the key U.S. dollar."