My guess on this topic – probably yes, hard to justify money sitting in a foreign investment when your parent organization is facing a credit crisis in the parent country. Besides, China is not immune to the crisis, not to mention that some things are overplayed and the unwinding is not quite done; the quiet trickle hasn’t quite gone to torrent yet. Chances are, some people are discovering that it isn’t that easy getting out of China.

Tyaresujm, yes I saw the Wolf column and, perhaps not surprisingly, I liked it very much. I think more and more analysts are starting to recognize the balance of payments constraints, and I think this is key to avoiding a messy trade environment. I didn’t see the Duy’s piece, but to me there is no question that something important happened in 1997-98 that caused the explosion in Asian reserve accumulation that has been such a fundamental part of the global imbalance.

Twofish, I am not sure I agree with your statement that China cannot “boost domestic demand and then reduce the trade deficit with the United States” without US help. On the contrary, boosting domestic demand would increase Chinese imports as well as divert some Chinese production previously exported towards domestic consumption. That would cause an reduction in the trade balance. Actually boosting domestic demand is probably the only good way of reducing the trade surplus (the other ways would be: trade restrictions, a collapse in US demand or, what would amount to the same thing from China’s point of view, closing down Chinese factories). I am also not sure that boosting demand can only be accomplished by increasing the money supply. I would have though that there are a lot of other ways to do it – including fiscal, interest rate and wage policies. I also don’t agree with your reasoning about why the RMB has declined (it hasn’t “tanked” by any stretch of the imagination). It declined on rumors of an intense debate within policy-making circles over depreciation as a policy to boost exports. The value of the RMB is driven largely by PBoC policy.

LetUsHavePeace, I am glad you bring up that period because it is very relevant for the discussion, but Grant’s very orthodox monetary moves may have aggravated the contraction. They were good for money center bankers (dollar trading up, for example) but they caused fury within the agricultural, mining and labor sectors and were seen by many Americans as a gift to Wall Street at their expense.

Megatone, I have to check that, but dollar loans surged in the first half of the year, so if there were caps either they were very high or they were not taken seriously.

From my point of view, this is a great improvement. A month and a half ago, it had the feel of a fast motion train wreck.

To boost domestic consumption you need to expand the money supply. However if you expand the money supply this causes the value of the currency to go down. Conversely if you keep the RMB value high, this shrinks the money supply and this decreases domestic demand.

To think it about it another way. Anything that encourages Chinese to spend more money on Chinese goods will also cause Americans to spend more money on Chinese goods.

The reason that the RMB has started to tank is that the government has announced a massive stimulus package and that will cause the RMB to drop. If you want to keep the RMB high, then you have to sell dollars, but if you sell dollars you have to buy RMB, and this shrinks the RMB money supply which defeats the purpose of stimulus.

I’d be interested if anyone sees a hole in this logic, and comes up with a way that China can simultaneously encourage spending through monetary and fiscal means while at the same time reducing the trade gap with the US. The only why I can see this working is that if you have coordinated stimulus by both China and the US in which China expands the money supply, but the US expands the money supply even more.

Did you get a chance to look at today’s FT editorial by Martin Wolf? Also, look at the comments today by Tim Duy over at Economit’s View. Seems like there is a consensus forming along the lines you have been arguing.

OT: I would really appreciate your thoughts on Duy’s statement that the Asian CBs started accumulating surpluses in response to their poor treatment by IMF during the 1998 currency crisis. Did Geithner and/or Summers had a role in it?

Why is all talk about protectionism always worrying about what the US government will do? China has been one of the most protectionist countries in the world, what with its endless export tax rebates, its closed capital account (at least to foreign institutions), its disallowing of foreigners to take stakes in Chinese banks, its policy of often forcing foreign companies to create JVs with locals instead of just starting a local subsidiary, numerous hoops foreign corporations need to jump through when doing business, and, above all, its massive currency manipulation and reserve accumulation, one of the ultimate causes of this global crisis in the first place.

If we want to talk about hypocrisy, I would again point to the often made statement in China that “China’s currency is a sovereign issue and the US should respect this.”