Various observers have continued to ascribe a central role to real RMB appreciation to effect global rebalancing. I think it's useful to remember that, given a Chinese trade balance in excess of 260 billion USD, appreciation can only have a certain impact. From Cheung, Chinn and Fujii (forthcoming):

...using a single equation error correction model, allowing for coefficient shifts with Chinese accession to WTO, leads to a statistically insignificant estimate of the price elasticity. In the 2000-06 period, the implied price elasticity is zero. Using this point estimate, then a 10% appreciation would actually lead to a shrinkage of the trade balance from 400.9 billion to 355.2 billion. This estimate of 45.7 billion (2000$) is somewhat less than the $88.6 billion current dollars reported in Marquez and Schindler (forthcoming) [working paper version].

The export equations take the form:

Δ exp _t = θ ₀ + ρ exp _t-1 + θ ₁ y^* _t-1 + θ ₂ r _t-1 + θ ₃ k _t-1 + σ ₁ Δ exp _t-1 + 2 lags of first differenced right hand side variables + quarterly dummies + WTO dummy + v _t

Where exp is log exports, y^* is log RoW GDP, r is the real exchange rate, and k is the Chinese capital stock. The import equations take the form:

Δ imp _t = β ₀ + φ imp _t-1 + β ₁ y _t-1 + β ₂ r _t-1 + γ₁ Δ imp _t-1 + 1 lag of first differenced right hand side variables + quarterly dummies + WTO dummy + u _t

Where imp is log imports, y is log GDP.

Separate regressions are run for ordinary and processing trade, over the 1993Q4-07Q1 period. The adjusted R²'s range from 0.77 to 0.92.

If we take the Goldstein-Lardy misalignment estimates of 20% to heart, then a 20% appreciation would lead to an approximately 91.4 billion (2000$) reduction in the Chinese trade balance. As best as I can tell, the export prices from China, and to China (as proxied by unit value indices for Hong Kong) have probably stayed constant relative to 2000; hence the nominal impact is around 90 billion USD (with considerable uncertainty surrounding this point estimate).

This leaves a large Chinese trade surplus in place, around 170 billion even before the rebound in the Chinese surplus anticipated as the world aggregate demand recovers. Now, to the extent that Chinese reserve accumulation is due to a current account surplus and capital inflows, one could hope that a revaluation would have an additional knock-on effect by deterring capital inflows (the argument would be revaluation would eliminate expectations of appreciation that would provide capital gains on holding RMB). That is, recall the balance of payments identity:

CA + KA + ORT ≡ 0

Where CA is the current account, KA is private capital account, and ORT is official reserves transactions.

Figure 2, drawn from Prasad and Sorkin (2009) shows that net inflows were not a major factor, at least in 2008.

This suggests to me that rebalancing requires as much or more Chinese fiscal stimulus and a concerted effort to encourage private consumption via enhancing the social safety net, in addition to RMB revaluation. (This can be seen in a Mundell Fleming framework, as applied to China [3]). And it also requires determined action from the US side as well (see here). If only we'd conducted a sane fiscal policy in 2001-08 [4], our range of action would now be wider in this respect.

Chicago, IL – November 17, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Dell Inc. (DELL), Apple Inc. (AAPL), Nokia (NOK), Research In Motion (RIMM) and American Dairy Inc. (ADY).

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Here are highlights from Monday’s Analyst Blog:

Dell’s Smartphone Strategy

Dell Inc. (DELL), one of the world’s leading computer manufacturer, has decided to start manufacturing its smartphone device. The company has zeroed in on Brazil as the first manufacturing destination and chosen Claro as its carrier partner in the region. Dell will also be manufacturing the device in China and partner with China Mobile in that region. The phone will be using the Google Android operating system.

Dell’s entry into the smartphone segment looks like a logical progression, as the company is already manufacturing and rolling out reasonably priced netbooks in the market. However, Dell is a late entrant into the market, unlike its peer Apple Inc. (AAPL), which has already grabbed a large share through smartphones such as iPhone 3G and iPhone 3GS.

As per the technology research firm Canalys, third quarter 2009 worldwide smartphone shipments grew 4% year on year, to 41.4 million units. As per the findings of the research firm, Nokia (NOK) maintained its worldwide smartphone leadership position with a 40% share of the market, up from its year-ago position, but down 5% from the previous quarter. Research In Motion (RIMM) was in second place, with a market share of 21%, almost flat sequentially. Apple’s market share was 18% in the third quarter, up from the 14% it held in the second quarter, with significant improvement in the iPhone 3GS supply across many countries. HTC retained the fourth position with a 5% share.

There is no reason to think that Dell phones would not gain popularity considering the company’s history of innovation, although the success rate could vary as competition is intense. We believe that even if Dell is able to capture a small share of the smartphone market, the additional growth opportunity would be substantial.

American Dairy Beats Expectations

American Dairy Inc. (ADY) reported third quarter results before the opening bell today. The company’s net income from continuing operations stood at $11.1 million, or 52 cents per share, from a loss of $22.1 million, or $1.19 per share in the year-ago quarter. Quarterly earnings also surpassed the Zacks Consensus Estimate for a profit of 31 cents per share.

American Dairy is a leading producer and distributor of premium infant formula, milk powder, and soybean, rice and walnut products in China. The company, which operates through its wholly owned subsidiary Feihe Dairy and other subsidiaries, has 200 milk collection stations, 2 dairy farms and 6 production facilities. The company has capacity to produce approximately 1,220 tons of milk powder per day and a distribution network of over 90,000 retail outlets across China.

The Beijing-based company recorded an impressive 94.1% year-over-year growth in quarterly sales to $72.1 million. The expansion was primarily driven by strong demand for American Dairy’s milk powder products (mainly infant formula products), which recorded a 151.7% growth in volumes to 6,561 tons and contributed 77.5% to total sales. Moreover, the robust revenue performance was also helped by company’s augmented distribution network and efforts to expand into new geographic areas in China.

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Chicago, IL – November 16, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Apple Inc. (AAPL), Microsoft Corp (MSFT), Quality Systems Inc. (QSII), Allscripts-Misys Healthcare Solutions, Inc. (MDRX) and Cerner Corp. (CERN).

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Here are highlights from Friday’s Analyst Blog:

Apple Opens New Store in New York

Apple Inc. (AAPL) will open its newest retail store with an 8,500 square feet retail space in New York tomorrow. The store will help Apple deliver more Macs, iPods and iPhones, taking advantage of the coming holiday season. The new store is the fourth in Manhattan and fifteenth in New York.

To ensure a high-quality buying experience for its products, in which service and education are emphasized, the company has expanded and improved its distribution capabilities by opening its own retail stores in the U.S. and internationally.

The company operates a network of 280 retail stores in 10 countries across the world, including the U.S., U.K., Italy, Australia, Canada, Japan, China, Switzerland, Germany and France to drive the demand for its other products. Further, Apple is soon to open two new stores in Shanghai as well as London and Paris.

The company further plans to open 40 to 50 new larger retail stores next year, about half of which are expected to be outside the U.S. Apple had earlier estimated that it would open 25 to 50 new stores.

Retail sales increased 4.0% to $6.57 billion (averaging $26.0 million per store annually). Store traffic grew to around 170 million in fiscal 2009. The company has extended its footprint in international retail markets. Growing its presence in the international retail market, Apple opened its first store in Sydney and Beijing and opened stores in Switzerland, France and Germany during the calendar year 2008.

Apple's business strategy leverages its ability, through the design and development of its own operating system, hardware and many software applications and technologies, to provide its customers around the world with compelling new products and solutions, superior ease-of-use, seamless integration and innovative industrial design.

To attract customers during the holiday season, the company plans to offer gift-wrapping of any iPod or portable Mac for just $5. It will also allow customers to set aside a gift and pick it up at their local Apple store for free from Dec. 15 to Christmas Eve.

Apple’s stores hosted 42.7 million visitors during the last quarter, an increase of 7% from the year-ago period. The stores posted revenue of $1.87 billion ($7.6 million per store) in the quarter, the highest level ever and up 15% from the year-ago period.

Last month, Microsoft Corp (MSFT) announced the opening of its own first retail store in Arizona. But we do not expect Microsoft to catch up anytime.

Quality Systems Barely Beats

Quality Systems Inc. (QSII) reported fiscal second-quarter earnings of 41 cents, beating the Zacks Consensus Estimate by a penny and the year-ago earnings by 4 cents.

Total revenues for the quarter increased 21.5% to $71.69 million from $58.98 million. The company’s NextGen Healthcare Information Systems division posted revenue of $67.4 million for the reported quarter, representing a 23% increase from the previous year.

Category-wise, System sales, including software, hardware and supplies, increased 5.9% to $26.24 million from $24.78 million. Revenues from maintenance, electronic data interchange (EDI), revenue cycle management (RCM) and other services grew 32.9% to $45.46 million from $34.19 million in the year-ago period.

The total cost of system sales, including software, hardware and supplies increased 16.8% to $7 million. Total cost of maintenance, EDI, RCM and other services for the quarter were $21.27 million as against $15.2 million in the year-ago quarter, up 39.9%. Consequently, total cost of revenues for the quarter increased 33.4% to $28.3 million. The company reported a gross profit of $43.4 million for the quarter opposed to $37.8 million in the year-ago period, up 14.8%.

Research & development spend for the quarter increased 30% to $4.34 million for the quarter. Selling, general and administrative expenses for the reported quarter increased 11.7% to $20.4 million.

Quality Systems exited the quarter with cash and cash equivalents of $75.4 million opposed to cash and cash equivalents of $70.2 million at the end of fiscal 2009.

Quality Systems, headquartered in Irvine, California, develops and markets healthcare information systems that automate certain aspects of medical and dental practices, networks of practices such as physician hospital organizations and management service organizations, ambulatory care centers, community health centers, and medical and dental schools. The company competes with players like Allscripts-Misys Healthcare Solutions, Inc. (MDRX) and Cerner Corp. (CERN).

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Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

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About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

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Chicago, IL – November 5, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Wal-Mart (WMT), Target (TGT), Claymore China Small Cap ETF (HAO), Coca-Cola (KO) and Aflac (AFL).

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Here are highlights from Wednesday’s AnalystBlog:

China Booming Again

The long-term key for China is to generate more consumer demand at home so it is not forever dependent on exports to fuel its growth. This is the mirror image of what the U.S. needs. We cannot forever run trade deficits, consuming more from the rest of the world than we produce.

It is the trade deficit that drives the expansion of U.S. debt held by China, not our fiscal deficit. Remember that point, it is an important one -- and one that the vast majority of talking heads on TV just don’t seem to get. Of course, each country’s exports are another country’s imports, and for every trade surplus, there must be an offsetting trade deficit somewhere else in the world.

So far it has been a pretty sweet deal for the U.S.: we get all the goods that fill the shelves of Wal-Mart (WMT) and Target (TGT), and they get little green pieces of paper. Recently those little green pieces of paper have been going down in value. How much longer does China want to send us real useful stuff in return for those pieces of paper (or, more accurately, little blips inside of computers)?

They have done so thus far because along with the paper, making that stuff they send abroad (actually, they export more to Europe than they do to the U.S.) creates jobs, and China needs jobs for social stability. However, so does the U.S., as our unemployment rate approaches 10%.

The deal is getting progressively less sweet for both sides as the dollars keep on piling up in Beijing. The solution over the long term is for China’s 1.3 billion people, the majority of whom still live in poverty, to start to consume more. If that can be accomplished, then Chinese society will be more stable, it will be able to maintain its employment levels and the U.S. might actually start to add a few jobs.

This would also greatly benefit the millions of smaller non-state-owned firms in China. The best way to play that trend is in the Claymore China Small Cap ETF (HAO), which has by far the largest exposure to the Chinese consumer of any of the China ETF’s. Buying individual stocks that are direct plays on the Chinese consumer is a risky proposition and is probably best left to those who can both read Mandarin and decipher financial statements written in it.

While China’s market has done well so far this year, so have most emerging markets. However, the economies of most emerging markets have not come close to matching the performance of the Chinese economy.

Underpinned by the strength in China, and rapidly growing inter region trade, the World Bank sees all of East Asia growing at a 6.7% rate in 2009, up from 5.3% growth seen back in April. Since Japan’s growth is likely to be rather sluggish (but also improving), that implies solid growth for the rest of the region. As the auto sales numbers yesterday showed, the Korean auto industry is not exactly hurting that much anymore.

In short, there are better places in the world to invest than in the U.S., and most U.S. investors are still far too heavily weighted towards domestic investments. However, you don’t just have to buy ADR’s or ETF’s to have international exposure. U.S. companies that get a high proportion of their sales from Asia will also probably benefit from the growth there. Coca-Cola (KO) would be a good example to take a well-known name. Aflac (AFL) is another, although for them the revenues come from Japan, not China.

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Zacks Equity Research provides the best of quantitative and qualitative analysis to help investors know what stocks to buy and which to sell for the long-term.

Continuous coverage is provided for a universe of 1,150 publicly traded stocks. Our analysts are organized by industry which gives them keen insights to developments that affect company profits and stock performance. Recommendations and target prices are six-month time horizons.

Zacks "Profit from the Pros" e-mail newsletter provides highlights of the latest analysis from Zacks Equity Research. Subscribe to this free newsletter today: http://at.zacks.com/?id=5517

About Zacks

Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Amongst his many accomplishments was the formation of his proprietary stock picking system; the Zacks Rank, which continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros at http://at.zacks.com/?id=5518.

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CA ≡ (T-G) + (S-I)

Where CA is the current account, (T-G) is the consolidated government budget balance, and (S-I) is the private sector saving-investment balance. Figure 1 depicts the profound shifts that have occurred in these components (normalized by nominal GDP).

Note that I've omitted the statistical discrepancy which makes these items add up exactly.

How much of the recent shift in the net private saving is due to changes in personal saving (as opposed to corporate behavior)? Actually quite a bit. Of the 2.6 ppts shift in net private saving since 08Q1, 2.9 ppts is accounted for by the shift in personal saving.

How persistent will this shift in the personal saving rate be? This is the big question, in terms of the rebalancing issue (keeping in mind that the national saving identity is a tautology). Deutsche Bank provides an interesting set of calculations, which indicates how long it will take to hit the 20 year average net wealth/disposal personal income ratio.

Peter Hooper, Torsten Slok and Christine Dobridge write:

To try to gauge historical norms that households may aim for we appeal once again to average values that have prevailed over time. The 20-year average of household net worth is 533% of income. On this basis, net worth has returned about half way to its historical norm from the low reached in Q1. Chart 6 shows two prospective paths of adjustment back to the 20-year average, a 3-year path and a 5-year path. To follow these paths, we assume that households use half of their saving to pay down debt, and the other half to purchase assets. We also assume that income grows at 1% a year and asset values grow at the same rate. In order to rebuild wealth in three years then, households would need to raise their saving rate to 7% immediately and to 8% by 2012. In order to rebuild wealth in 5 years, however, households would need only a 2% to 3% saving rate. The saving rates implied by this wealth calculation are lower than the rates implied by the debt calculation. This is because net worth has risen since Q1 because of the rebound in the stock market. Net worth-toincome looks to have been about 500% in Q3; households have already made good progress towards their wealth target.

This set of calculations suggests at least a few years of relatively muted consumer behavior. The key factor is the rate at which households seek to reestablish their target net worth/income ratios.

It's interesting to contrast this perspective with that the "Blame it on Beijing" view, which holds Rest-of-World excess saving as the driver. I believe that when considering the US economy -- which is about three times as large as that of China (according to IMF WEO data) -- one can reasonably argue that what happens here is at least as important as what happens in East Asia (in contrast to some observers, I take Chairman Bernanke's recent speech, focusing on raising US national saving, as a welcome return to thinking about the primacy of US factors [speech text]).

...recent research questions the claim that the financial panics themselves contributed to their contemporaneous and severe employment downturns.

The post continues:

The timing was different in this recession -- the largest employment drops seemed to come immediately after the financial panic -- but a recent paper by Ravi Jagannathan, Mudit Kapoor and Ernst Schaumburg of Northwestern argues that the coincidence is just as misleading. They argue that the changing global economy -- with more employment of residents in developing countries like China -- created a glut of savings in those countries, and was destined to reduce employment in developed countries regardless of whether there had been a financial panic.

This paper was discussed earlier on this weblog, and Professor Jagannathan provided some clearly exposited counterarguments to my criticisms in his comments. Indeed, I think there's a lot more subtlety to that paper, and the posited causal chain, than is related above, even if I disagree with the main thesis (see [1]).

But even if you believe the Jagannathan, Kapoor, Schaumberg thesis in full, this does not invalidate the idea that banks provide useful intermediation services, and that failing banks, insolvent banks, or banks that are retrenching in terms of their lending will exert a contractionary influence on the economy. (After all, if one reads Bernanke's 1983 paper (AER 73(3)), you'll see him focus on the declining ratio of loans to the sum of checking and savings deposits, shown in his Table 1) It's just that you think that what caused the banks to overleverage is the "saving glut". (Another way to put it is you think the financial system is the proximate cause, and Beijing the ultimate cause, a la "Blame it on Beijing"). This interpretation is suggested to me by this passage in the conclusion to Jagannathan et al.:

...History might have taken an entirely different path with better risk management controls in place in the US but then again, financial innovation might just have found a different way of getting highly leveraged deals done off-shore or through creative accounting. The root cause of the excess liquidity in the global financial system must be addressed, otherwise we are just squeezing the proverbial balloon only to see it bulge out somewhere else. However, this does not negate the need for the development of improved risk management in the broadest sense in order to ensure financial stability and prosperity going forward.

One truly odd aspect of Professor Mulligan's discussion is the treatment of the banking system as the financial system. I've been hearing a lot about the "shadow financial system" for quite a while -- and I have some inkling there was trouble brewing there somewhat before the plunge in employment and output in September 2008. Below, I graph one aspect of the broader financial system.

So in my view, the financial system problems preceded the initial decline in employment and output. That doesn't preclude the possibility of the subsequent declines in employment and output causing further financial system problems. That I believe is what is called an adverse feedback loop.

More graphs from the real world in this post and the IMF's GFSR.

Postscript: Brad Delong also appears to find this post befuddling.