John Paul

China Business Philippines Interviews John Paul C. Tanchanco on the Yuan and USD Currency War

China Business Philippines interviews the popular Asian economist, John Paul C. Tanchanco, head honcho of T1W on his views about the Yuan and US Dollar Currency Policies.

1. Do you believe America's accusation that China is a currency manipulator?  Why/why not?

Nope, I do not.  Some traditional western economic policy makers might think that a "Trade Surplus" should always equate to the appreciation of currency but there's another side to it.  China has a BOP surplus because of FDI flows in the domestic production / investment sector and Export Sales (Net Export Surplus) but USD is still the reserve currency in the world.  And so all exports sales are transacted in USD.

It is important to realize that there has also been no significant (real) currency demand (currency export) for the Chinese Yuan to push it to appreciate.  In fact the Yuan takes only 15% of the Fed's exchange rate basket.

Contrary to old school textbook economics, a BOP Surplus does not always equate to currency appreciation.  Most especially because we are living in a new globalized economy with multilateral players and currencies that we're not as active when the old textbook economics where created.

If we also review statistics, China US trade only accounts for about 12 % of total Chinese trade.

In lieu of this condition, following the principle of economic equilibrium ... I believe the Yuan is where it is and the Chinese trade surplus should not eventually lead into drastic currency appreciation.

This is why it does not follow that China is a currency manipulator.  Markets are just flowing and clearing perfectly.

2. The US has been pressuring China to "allow" the yuan's value to raise to "normal" levels (approximately 20%) to make US companies more competitive. How reasonable is this?

I believe that the markets are just following a natural flow.  I do believe that eventually the Yuan would appreciate but maybe lower.  There are other variables that affect a country's exchange rate that some political policy makers are not considering.

Even if it appreciates to the 20% rate that they (the US) claim, I believe that it (Yuan appreciation) won't create any real productivity and jobs in the US.  Holding the 15% weighted value of the Yuan in the FEDs exchange rate basket constant means that a 20% appreciation in the Yuan can lead to only 3% appreciation against the dollar.

Another point to consider is that many US imports from China are just assembled in China and some parts of the production processes are done in the US and other countries.  Thus, US trade deficit is exaggerated.

The world is changing and we're already in the era of Globalization.  Whoever started the gossip of the currency and trade war is still living in the old school protectionism view.  As markets grow (I believe will always be for the better of all) and so should macro-economic accounting and policies.

I'm sure Adam Smith would agree that there is always an "invisible hand" (Nature) working in this present globalization process.  Because of this each nation would be naturally led into their core competencies.  Just like the Philippines being led into monetizing our core competencies (Labor, Natural Resources and Tourism)

I also believe that Americans save too little and no longer makes some the goods that China sells but their economy has a lot of other core competencies to bank on (tourism, high technology, innovation, education, financial markets etc.) In fact my own personal business activities promote US export sales objectives.

The US can freely focus on expressing their export sales objectives, expanding their product lines and increasing their local micro-small-medium entrepreneurship.  They can also re-evaluate their habits by starting to spend what they earn to create healthy financial habits and new attitudes in spending, saving and investing.

I think it all boils down to Mental-Economics (a personal coined perspective / concept)...

I believe that the true essence of economics is the invisible hand of Adam Smith. (Father of Economics)  This invisible hand is a reflection of mass mental attitude, cultural beliefs and actions of different individuals always working to meet in harmony (equilibrium).   I call this psycho-economics.

This concept shows that all economic effects in a country reflect their different beliefs and habits. Mental-economics boils down to the mental attitude of the people in a nation, which is an effect of the prgramming of a nation's culture, education, media, social and religious influence. Ones mental programming becomes ones life program and experiences.  It also creates individual desires that sum up into utility curves.

A thorough understanding of this concept could create enlightenment with regard to the China US currency debate.   It would also foster harmonious local and foreign policy that can really achieve certain goals.

China and US represent 2 different mental-economic profiles.

Chinese Mental Economics

China represents that quintessential risk averse Asian with high value for savings and investment.  It is the culture for Asians to have a higher savings rate.  Cash is King for Asian businessmen.  The value for cash translates to a higher savings rate and financial health.  Asians spend a portion of what they have earned and invest more in order to increase and multiply their existing cash supply.  This mental habit is depply impregnated in the subconscious programming of the Chinese mental economic profile.

As we all know, what we think becomes, what we say, what we do which creates our subconsious habits and what we are.  I personally believe that the Chinese mental economic profile is a very good financial habit.

 

US Mental Economics

The US on the other hand is the quintessential reflection of the BIG spender! (Spending more than what you are earning)

Alot of economic policies in the US have been created to increase consumer spending (stimulated demand) through long-term financing.  This is why US consumers or even High Networth people (take Michael Jackson for instance) have been trained to believe that it is ok to spend more than what you have earned presently.

This habit is also reflected in the Real estate dillema of the US.  Most home owners have morgages of 30 years and above for their houses and since alot of labor force has shifted to Asia through BPO's and Factories ... the labor force that loss their jobs loss their houses ... The loss in the jobs of consumers who do not save created a decrease in real estate demand, prices and increase in real estate supply.

We can clearly see from the effects that this isn't really a healthy economic habit.

I use the word habit because habits are an effect of our own life programming.  Habits are indeed hard to break because they intend to become a vicious cycle. This can still be achieved from a macro-perspective through re-training of mental and social habits using the media and internal economic policy.

Role Mental Economic Profiles

What do the mental economic profiles of the 2 nations say? For one nation it is subconsciously accepted and even celebrated to over spend while for the other nation it is a taboo to over spend.

Ones mental economic profile will always express goods, products and opportunities that are subconsciously accepted for the individual. Just like any habit in an infinite spiral ... history repeats itself unless a cure is administered from the root. (mental attitude)  Thus, the real cure is for the US to change their mental attitude and habits and restructure come western economic beliefs and concepts that pump priming consumer spending through debt is good.

3. What is the effect of a stronger Yuan on Southeast Asia versus its impact on America?

The Yuan would eventually appreciate but it doesn't mean that there would be less demand for Chinese products.  It would have a positive effect though for SEA countries such as ours because eventually inflation will rise in China.  (This is very normal because of higher output and demand)   Because of this SEA countries such as the Philippines expect a spill over expressed as increase in FDI's, exports and productivity.  These FDI's can develop alot of industries like raw material input production and even logistical transportation in the Philippines which then relates to more exports and trade activities.
4. What is the effect of the Yuan's strength or weakness on the Philippine  economy?  Which should the Philippines prefer, a weak or strong Yuan?

I believe the Yuan would eventually rise and it would be good for us.  Most especially if China is our main trading partner for raw material inputs.

5. Do you think the value of the Yuan will rise dramatically (i.e., 10% or greater) in the next few months? If so, how many months do you estimate it will it take?

As I mentioned, the invisible hand of the market would increase it gradually but not dramatically.  The demand of speculative investors in Yuan bonds because of the news on pressures that it will appreciate could even be a more significant variable to it's rise.

6. Where will a stronger Yuan lead the world economy?

Market Equilibrium towards globalization and maybe a unified Asian currency.

7. What would be the general effect if the Chinese Yuan becomes the new reserve currency? Can the Yuan really take over as the new reserve currency?

Nope.  This is far from happening because the USD is the reserve currency and the US economy is still the main financial hub of the world.  (Although I think globalization could gradually lead to the possibilities of a unified world currency)

COPYRIGHT 2010

John Paul C. Tanchanco is a specially cited applied economist of Filipino Chinese descent. He is head of T1W, a global investment and supply chain firm for the Global Elite.  Tanchanco play an active role in substantial offshore investments into exclusive US Bank Commercial Property for the Global Elite.

About the Author

John Paul Young - Love Is In The Air (1978)