Andy Xie: Renminbi revaluation may harm, not help, US

Andy Xie of Morgan Stanley warns that a revaluation of the Chinese renminbi may do more harm than good to the US.

If China were to implement a significant revaluation of its currency, as some in the US are demanding, I believe inflation in the US would surge, which could help cause the US bond market to collapse. A major Chinese currency revaluation would shift jobs from China to other developing countries, not the US. Thus, a Chinese revaluation would harm, not benefit, the US.

Presumably, though, a renminbi revaluation would be accompanied by the revaluation of the other Asian currencies, so it's conceivable that there may still be some job gains by the US. Of course, that doesn't help with inflation in the US, though.

Xie has other insights into the US trade with China.

On average, each dollar the US pays for imports from China retails for US$3–4 in the US. Adding value to Chinese imports may account for 3–5% of US GDP. Four to eight million jobs in the US could be associated with adding value in the China trade. In contrast, for each dollar that China earns from exporting to the US, Hong Kong, Taiwan, or other foreign countries...China gets 50 cents. Thus, for each dollar from the China trade, the United States’ value-added is six to eight times China's... My rough calculation...is that corporate America earns 10% net profit from final sales of Chinese goods in the US. Total profits from the China trade for corporate America could have amounted to US$60–80 billion, or 10–15% of total S&P 500 profits, last year.

I have been saying that part of the reason for the rising productivity of the US and the rising profitability of US corporations has been the sourcing of goods from China. Xie puts figures into the latter's impact.

Xie also downplays the impact of China on the loss of US jobs.

The USSC [US-China Economic and Security Commission] report cites only a figure of 1.5 million [jobs lost] since 1989, or 1% of the US labor force over a period of 15 years. The US economy creates more jobs in one year, and normal economic restructuring would have shed far more jobs.

This, of course, is at odds with the view of most other economists (see "The impact of China on the world economy"), including his own colleague at Morgan Stanley, Daniel Lian (see "Sino Hollow").

It's not for nothing that Andy Xie has been called an iconoclast.