Saturday, 29 January 2005

US 4Q GDP, chip inventory and renminbi revaluation

A few titbits that I am putting together in this post.

First, US fourth quarter real GDP grew at an annual rate of 3.1 percent, down from the third quarter's 4.0 percent.

Meanwhile, technology research firm iSuppli Corp reported that excess semiconductor inventories fell 38 percent to US$1 billion in the fourth quarter of 2004. Nevertheless, the firm warned that "with semiconductor sales growth slowing in 2005, the surplus remains an issue of concern to the worldwide electronics industry".

Finally, Brad Setser -- responding to arguments suggesting that a renminbi revaluation is not an issue -- puts together a fine case for why renminbi revaluation is in fact desirable. Excerpts:

[B]ooming China should be running a trade deficit right now. China imports lots of commodities, and it is in the midst of an absolutely enormous investment boom... Had savings stayed constant, China's trade balance would have swung into a substantial deficit... Morris Goldstein estimates that China's cyclically adjusted trade surplus is close to 5% of GDP. Moreover, given China's ongoing ability to attract the FDI needed to safely finance trade deficits, there is no reason why its trade should be in balance...

... The Asian NICs plus China -- and emerging Asia more broadly -- runs a substantial current account surplus. That is not the way the world has to work -- very fast growing regions often run trade and current account deficits... It is hard to see how the US can reduce its current account deficit if emerging Asia does not reduce its surplus, it is hard to see how emerging Asia reduces its surplus if China does not revalue. The "China is part of Asia and the Asian value added chain" argument STRENGTHENS the case for a renminbi revaluation as part of a broader Asian revaluation.

[T]he most important channel for adjustment would be indirect.. [S]lower Chinese reserve accumulation and reduced Chinese demand for US assets would tend to raise US interest rates, reduce US consumption (increase US savings) and lead to the eventual adjustment in the current account. Don't forget about the capital market channel.

As usual, good stuff from Setser.

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