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China’s RMB. Ain’t Gonna Be No World Currency No How.

Posted in China Business, Recommended Reading

I often write how irritated I get when I see pseudo-economists write on China’s economy. Whenever I do that, I get comments and or emails asking me what constitues a real economist and who I consider to be a real China economist. A real economist is someone trained as an economist who works as an economist. Though many seem to think they qualify, there are damn few who meet these two rather basic criteria and study China’s economy and write about it in English. Michael Pettis is one of the few.

What also greatly irritates me is how some people act as though an economist is an idiot simply because some prediction or another he or she has made did not prove to be. That is one way to judge an economist, but just one way. The best way is to look at their analysis and judge them on that, rather than their conclusion/prediction. The prediction matters, but so often the analysis can be right on, but some totally unforeseen event can intrude and change the outcome. Was the analysis wrong? No. Was the prediction wrong? Sort of, but really what happened was that something nobody could have predicted came along and changed the result.

I mention all this because I just read a great analysis by Michael Pettis, in his post, “The dollar, the RMB and the euro?” on why China’s currency will not be the reserve currency for a very very long time, if ever. I totally buy it. He also makes the very valid point that being the world’s reserve currency is not necessarily all good. For the rare piece on China’s economy by someone who actually knows whereof he speaks, I urge you to read Pettis’s most recent piece.

What do you think?

  • dan berg

    I fully agree; Nicholas Lardy, Eswar Prasad and Victor Shih are also consistently reliable.

  • Chris

    Strange that while Michael Pettis works at Beijing University Guanghua School of Management, his Website is blocked in China. Obviously his thinking is only fit for the elite. I’m a huge fan but haven’t seen this article.
    My VPN has gone flaky and international Web access in China is awful.
    Life behind the Great Firewall…

  • http://www.geoffinwuhu.blogspot.com Geoff Gibson

    I’ve read Pettis’ latest column, as I always do. I find his writing to consistently reveal a welcome clarity of thinking. What he invariably does is just to take a few key (and, really, quite simple) principles and flow logically from there. For example: in his latest output, he talks about the relationship between (current account) debtor nations and surplus nations and how it’s all just a recycling exercise. Now, this is not news. It’s not even close to being news. And it’s certainly not (pardon the hackneyed phrase) “rocket science”. It’s just common sense – once you “get” it. There is absolutely no moral dimension to the surplus/deficit equation (how many commentators just don’t get that?). And yet a whole load of consequences flow from this axiom that suggest other possibilities and preclude others. Pettis’ strength is that he’s really good at this sort of thing – this leads to this which logically leads to that – and never (as far I can see) varies from it as a methodology.
    That is, his writings are not particularly assumption-rich.
    And, I guess, it’s precisely because he doesn’t deal much in conjecture that I have my only minor criticism: namely, that he underestimates (at least publicly) the political risks in China. Underestimates in the sense that he just doesn’t seem to adequately factor in the risk of a political “shock”. That’s his choice.
    I’m perfectly happy to read assumption-free analysis as I can, if I wish (and do), overlay my own assumptions as I see fit for my own purposes and for my own better understanding..

  • Paul Maidment

    There is no way that the RMB can be a reserve currency until it is fully convertible. That is not going to happen anytime soon.

  • Albert J

    Pettis is one of the few who both knows China and knows economics and for that reason alone I try to read most of what he writes.

  • Bill Rich

    Economics, just like statistics, music appreciation, philosophy, political science, sociology, logic, medicine, etc. is something everyone thinks he/she knows better than anybody, because they don’t know what it is. Most people confuse investment, finance, public finance as economics. And since most people know how to buy a stick of gum, and therefore they are economists.

  • Neil

    The problem with Pettis, and to a much lesser extend Chovanec, is that they only have a few basic themes. In the case of Pettis, that is underconsumption. There are only so many facets to talk about:
    underconsumption as a cause for trade imbalance;
    underconsumption as a cause for growth imbalance;
    low consumption growth reflects low “real growth” since investment growth is unsustainable
    underconsumption as a cause of the housing bubble (excess consumer deposits at below market interest with no outlet)
    underconsumption as a cause for inflation (same as above)
    etc.
    In short, it’s easy to predict what he’ll think with respect to any given topic, without reading his latest article (one of his many on the status of the RMB), I can bet it’s something along the lines of “since China is a net-exporter (due to underconsumption), it’s mathematically impossible for the rest of the world to accumulate RMB, and similarly, mathematically impossible for the rest of the world to not accumulate USD”
    Therefore, while Pettis has a good point, he never really adds anything new, and once you’ve read a few of his (very long) articles, there’s very little marginal value in reading new ones.
    The reason for this though, is that while Pettis is fluent in economics, he fails what Dan calls “trained as an economist and works as an economist”. Pettis trained primarily on Wall street and in finance, and he is a lecturing-focused finance professor in Beijing. So he will not be coming up with original research in economics since that’s not his job. (compare with Victor Shih exposing the problem of local debt in China, or Jim O’Neil’s BRIC)
    So what Dan is looking for, is not a “real economist” (who writes papers for peer review), but just someone who is fluent enough in economics to conduct logical analysis (for the masses). But that is a subjective criteria. What may seem like clear logical induction to one, will be gross simplification to another. As readers, our own ability determine where we sit on that continuum, so a “pseudo-economist” for Dan could make interesting points for others and vice versa.
    I do agree though, that it can be irritating sometimes when people who are neither trained nor working in economics write about economics.

  • DerrickManson

    Neil, I disagree. Besides discussing what the logical consequences of underconsumption are (a hugely important topic that explains a lot), he also has been the first and/or clearest on many other issues. By now many accept his explanation of Chinese growth, of the relationship between bad debt and high savings, on reserve accumulation, in fact nearly every aspect of the economic debate on China has been influenced by him. The reason it is all tied in with consumption is because, as Pettis explains, everything is tied together and this is the fundamental imbalance that drives everything. A good journalist comes up with lots of new gimmicks so as not to bore his readers, but Pettis isn’t a journalist. He is trying to work out the logic of the system..
    The funny thing is if you talk to Victor Shih about Pettis, Shih will tell you that all the original ideas about how the system tended towards rising debt came from Pettis and that he (Shih) is mostly doing the research to prove it. I would argue that because he is so logical (and knows so much), Pettis is the most out of the box thinker out there. By the way Jim O’Neils BRIC concept is not economics. That is pure Wall street marketing and pretty foolish as a concept otherwise.

  • Mike Z.

    I have the same complaint. Being a businessperson in China does not make you an economist. Pettis I like.

  • Twofish

    I agree pretty much with what Pettis has to say in this article, but he misses the most important reason why the RMB is unlikely to be world reserve currency for a long time, and that is that no one in China really wants it to be. Something that happens is that when Americans look at China they assume that because the US wants to be in charge of the world, that China wants to be, and except that China has as much interest in running the world as France or Italy has.
    Now as far as Pettis writes in general…..
    Neil: Therefore, while Pettis has a good point, he never really adds anything new, and once you’ve read a few of his (very long) articles, there’s very little marginal value in reading new ones.
    The problem here is that is that he’s articles don’t change very much even though the world around him does. He argues that China’s banks are inefficient, and that the government maintains the system in order to create banking stability. Point taken, but given what happened in the United States, it’s at least plausible to argue that stability is better than efficiency.
    Also, Pettis main point is that China has been underconsuming, but that doesn’t take into account that large capital investments create economic growth and that underconsuming creates reserves which increase stability within the system. Just looking at China, it’s not clear that the putting a lot of money in investment is a bad thing. However, because Pettis makes the same arguments, once you’ve concluded that those arguments are wrong, there’s no point to reading much of what he has to say.
    This is in contrast to Victor Shih who comes up with new ideas, and to Minxin Pei and Yasheng Huang. Reading the latter two people are more interesting because you know what conclusion they are going to come up with (privatization is good, state investment is bad), it’s reading how they get to that conclusion that makes for interesting reading.
    Something that I would like Pettis to write (and I haven’t read much of him recently so that if he has done this let me know) is “what I learned from the collapse of Lehman Brothers.” He is making the same arguments that he did before the collapse of Lehman, but the world has changed. Without massive government intervention, Chinese banks may well be bankrupt, but it can be argued that without massive government intervention, any banking system is going to be bankrupt.
    Something else that I would find interesting (and again if he has written something like this, let me know) is his thoughts on what the United States should do.

  • Twofish

    DerrickMansion: By now many accept his explanation of Chinese growth, of the relationship between bad debt and high savings, on reserve accumulation, in fact nearly every aspect of the economic debate on China has been influenced by him.
    And many people don’t.
    More specifically, since I think a lot of his policies are bad, I would probably pay more attention to what Pettis writes if I got the sense that the people that run the Chinese economy are influenced by him more than they are.

  • DerrickMansion

    Twofish, if I remember correctly you’ve been spanked a couple of times by Pettis on his blog a while back, so maybe that has colored your views a little. The fact that all the people you mention favorably read him and cite him suggests that even if he is wrong, he is wrong in a very interesting way. By the way how do you know that the people who run the economy are not influenced by him? I know people at the central bank and the CBRC, and nearly everyone I have met knows his name and his arguments, and at least a few agree. I realize that neither of those groups have much influence on policy, but since they all seem to read him regularly I would have expected that quite a lot of other people in Beijing do too.

  • James Wu

    It’s going to take quite awhile for this to happen but never say never…