If ever there was something to make you clean out your house and sort out your ‘rubbish’, this has got to be it!! A Chinese vase found gathering dust in an attic has just sold for £43 million at auction. The buyer will pay around £53 million after paying the buyer’s 20% commission to the auction house and VAT. The seller will get around £40.75 million, after deduction of the seller’s commission by the auction house. The auction house itself will make over £10 million – not a bad day to be an auctioneer!
With the price starting at £500,000, onlookers could hardly believe it as the price began to increase by £1 million at a time. The buyer is thought to be a Chinese person or a state-backed company. And, just in case you didn’t realise, the FT article does make special mention that the person is likely to be ‘wealthy’!
The Chinese vase sold for over 40 times its estimate, with speculation that the price was forced up by a Chinese cultural agency owned by the state. As China aims to regain many of its lost artefacts, prices for objects such as this have been pushed up: although perhaps £53 million is a little expensive for the everyday consumer! However, unstable financial markets and rising inflation may also be partly to blame for the surge in prices for objects such as this. We’ve seen how gold and other commodities have increased in value throughout the recession, as investors look for more stable investments – and the same appears to be happening in the world of art. I’ll certainly be keeping a look out for any dusty artefacts!
House clearance vase fetches £53 million Financial Times, Jan Dalley, Peter Aspden and Justine Lau (12/11/10)
Chinese vase: the suburban auction house that made £12m Telegraph, Andy Bloxham and Martin Evans (12/11/10)
Qianlong Chinese porcelain vase sold for £43m BBC News (12/11/10)
Chinese vase fetches record $69 million in UK auction Reuters (12/11/10)
Questions
- Why are auctions a good way of selling and buying a product?
- The auction house has made over £10 million from this sale, despite only employing 8 people. Does this income guarantee the success of this business?
- Using a demand and supply diagram, explain the factors that have fuelled the price increase in artefacts, such as this Qianlong porcelain vase.
- Why are people investing in assets, such as art and commodities, rather than in more traditional financial assets?
- Could an auction be an example of price discrimination?
The possibility of currency and trade wars and how to avert them were major topics at the G20 meeting in Seoul on 11 and 12 November 2010. Some countries, such as the USA and the UK have been running large current account deficits. Others, such as China, Germany and Japan have been running large current account surpluses. But balance of payments accounts must balance. Thus there have been equal and opposite imbalances on the financial plus capital accounts. Large amounts of finance and capital have flowed from the trade-surplus to the trade-deficit countries. In particular China holds a vast amount of US dollar assets: a debt for the USA.
The trade and finance imbalances are linked to exchange rates. The USA has accused China of keeping its exchange rate artificially low, which boosts Chinese exports and further exacerbates the trade and finance imbalances. The USA is keen to see an appreciation of the Chinese yuan (also known as the renminbi). The Chinese response is that the USA is asking China to take medicine to cure America’s disease.
So was the meeting in Seoul successful in achieving a global response to trade and exchange rate problems? Has it averted currency and trade wars? Or were national interests preventing a concrete agreement? The articles look at the outcomes of the talks.
Articles
G20 pledge to avoid currency war gets lukewarm reception Guardian, Phillip Inman and Patrick Wintour (12/11/10)
G20 fails to agree on trade and currencies Financial Times, Chris Giles, Alan Beattie and Christian Oliver (12/11/10)
Main points of the G20 Seoul summit document Reuters (12/11/10)
Factbox: Outcome of the Seoul G20 summit Reuters (12/11/10)
No deal: Seoul’s G20 summit fails to deliver on currencies, trade imbalances The Australian, Laurence Norman and Ian Talley, Dow Jones Newswires (12/11/10)
G20 to tackle US-China currency concerns BBC News (12/11/10)
The expectations game BBC News blogs: Stephanomics, Stephanie Flanders (12/11/10)
Obama: Imbalances threaten growth BBC News (12/11/10)
Obama leaves G-20 empty-handed on currency spat msnbc (12/11/10)
The ghost at the feast The Economist, Newsbook blog (12/11/10)
Forget summit failures, look at G20 record Financial Times, Christian Oliver, Chris Giles and Alan Beattie (12/11/10)
Obama warns nations not to rely on exports to US BBC News (13/11/12)
G20 summit distracted by ‘currency wars’ Guardian, Mark Weisbrot (12/11/10)
Current account targets are a way back to the future Financial Times podcasts, Martin Wolf (2/11/10) (Click here for transcript)
Ben Bernanke hits back at Fed critics BBC News (19/11/10)
Why should you care about currency wars? BBC News, Stephanie Flanders (9/11/10)
G20 sites
G20 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
Questions
- What are the causes of the large trade imbalances in the world?
- What problems arise from large trade imbalances?
- What is meant by beggar-my-neighbour policies?
- Are moves towards freer trade a zero-sum game? Explain.
- Are moves towards protectionism a zero-sum game? Explain.
- Are attempts to get a realignment of currencies a zero-sum game? Explain.
- How successful has the G20 been over the past two or three years?
- Would it be desirable for governments to pursue current account targets?
According to GDP figures released on 15 August, China overtook Japan in the second quarter of 2010 to become the world’s second largest economy. This raises two questions: just what do the GDP figures mean and why has this happened?
The GDP figures are total figures measured in US dollars at current exchange rates. According to these nominal figures, Japan’s GDP was $1.286 trillion in the second quarter of 2010; China’s was $1.335 trillion. This follows several years when Chinese growth rates have massively exceeded Japanese ones.
As far as explanations are concerned, economists look to a number of different factors, including investment policies, relative exchange rates, confidence, deflation in Japan and the scope for catching up in China.
The following podcasts and webcasts look at these questions, as do the articles.
Podcasts and webcasts
China eyes Japan’s slowing GDP growth BBC News, Roland Buerk (16/8/10)
Japan’s economic strategy ‘not happening’ BBC Today Programme Interview with Dr Seijiro Takeshita of Mizuho International banks (16/8/10)
China’s growth rate slows to 10.3% as lending tightens BBC News, Chris Hogg (15/7/10)
China exports jump in May BBC News, Chris Hogg (10/6/10)
China Overtakes Japan in 2Q As No. 2 Economy Associated Press on YouTube (16/8/10)
China’s economy takes over Japan’s AsianCorrespondent on YouTube (16/8/10)
Articles
China overtakes Japan to become world’s second-biggest economy Telegraph, Roland Gribben (17/8/10)
Chinese economy eclipses Japan’s Financial Times, Lindsay Whipp and Jamil Anderlini (16/8/10)
Decoding China’s modesty Financial Times blogs, Jamil Anderlini (17/8/10)
China ‘overtakes Japan in economic prowess’ asiaone news (17/8/10)
China overtakes Japan to become second largest economy in world Irish Times, Clifford Coonan (17/8/10)
China Passes Japan As Second-Largest Economy Huffington Post, Joe McDonald (16/8/10)
Data
World Economic Outlook July 2010 Update IMF (7/7/10)
China Economic Statistics and Indicators EconomyWatch
Japan Economic Statistics and Indicators EconomyWatch
Questions
- Why may simple GDP figures be a poor indicator of the relative size of the Chinese and Japanese economies?
- If purchasing-power parity figures were used, how would this affect the relative sizes of the two economies? Explain why purchasing-power parity exchange rates are so different from nominal exchange rates in the two countries.
- What impact have the relative exchange rates of the two countries had on economic growth?
- Why are simple GDP figures a poor indicator of living standards?
- What factors will determine whether income inequality is likely to widen or narrow in China over the coming years?
- What factors explain Japan’s low rate of economic growth since the early 1990s? How likely is it that these factors will apply in China in the future?
Trade relations between the USA and China have deteriorated recently. There are two key issues: the exchange rate and trade protectionism.
The Chinese currency, the yuan or renmimbi, since 2005 has been officially pegged to a trade-weighted basket of other currencies. In recent months, however, as the dollar has fallen relative to other major currencies, so too has the yuan. It seems as if the peg is with the dollar, not with the basket. From March to December 2009, the exchange rate index of the dollar depreciated by 16 per cent. Yet the exchange rate between the yuan and the dollar hardly changed. In other words, the yuan depreciated along with the dollar against other world currencies, such as the euro, the pound and the yen. The trade advantage that this was giving to the USA with other countries did not apply to China.
Complaints continued that cheap Chinese goods were flooding into the USA, threatening US jobs and undermining US recovery. The Chinese currency was argued to be undervalued relative to its purchasing-power-parity rate. For example, the July 2009 Big Mac index showed the yuan undervalued by 49% against the dollar (see Economics 7e, Box 25.4 for a discussion of the Big Mac index).
The USA, and other countries too, have been putting diplomatic pressure on the Chinese to revalue the yuan and to remove subsidies on their exports. At the same time various protectionist moves have been taken. For example, on December 31 2009 the US International Trade Commission voted to impose tariffs on the $2.8 billion worth of steel-pipe imports from China. The tariffs would be between 10.4% and 15.8%.
The following articles look at these trade and exchange rate issues. Are we heading for a deepening trade war between the USA and China?
Currency contortions The Economist (17/12/09)
Beijing dismisses currency pressure Financial Times, Geoff Dyer (28/12/09)
China aims for 10pc growth and won’t appreciate yuan The Australian (29/12/09)
Wen stands firm on yuan China Daily (28/12/09)
China’s premier says banks should curb lending BusinessWeek, Joe McDonald (27/12/09)
China insists will reform yuan at its own pace Forexyard, Aileen Wang and Simon Rabinovitch (31/12/09)
US slaps new duties on Chinese steel Financial Times, Alan Rappeport (30/12/09)
Chinese Steel Pipes Face Heavy U.S. Duties BusinessWeek, Daniel Whitten (31/12/09)
The US-China Trade War Is Here The Business Insider, Vincent Fernando (10/12/09)
Year dominated by weak dollar Financial Times, Anjli Raval (2/1/10)
Questions
- Explain what is meant by the ‘purchasing-power-parity (ppp) exchange rate’.
- Why is the yuan (or ‘renmimbi’) undervalued in ppp terms?
- What are the the implications of an undervalued currency for that country’s current and financial account of the balance of payments?
- What would be the implications of a revaluation of the yuan for (a) China and (b) China’s trading partners?
- Discuss Premier Wen Jiabao’s statement, “The basic stability of the renminbi is conducive to international society”.
- What forms of protectionism have been used by (a) China and (b) China’s trading partners? Who gains and who loses from such protectionism?
“We will look back at 2009 as a watershed in economic history. This is the first time since the war that the world economy has not been led out of a recession by the US consumer.” (Jeremy Beckworth, CIO, Kleinwort Benson Private Bank – see second linked article below) How has the Chinese economy fared during the global recession? What policies has it pursued and how successful have they been? Will Chinese growth continue and how will this impact on the rest of the world? What economic risks does China face? These are questions that the following articles consider.
Array of figures adds to optimism over China economy Reuters (15/10/09)
Look East for the land of opportunity Jeremy Beckwith, Portfolio Adviser (14/10/09)
Greenback Woes Boost China’s Global Muscle Money Morning (15/10/09)
China Rises Amid Global Economic Crisis Manufacturing.net (13/10/09)
Why China must do more to rebalance its economy Financial Times (22/9/09)
China economic growth accelerates BBC News (22/10/09)
Chinese economy grows at fastest pace in a year Telegraph (22/10/09)
China’s 3Q growth accelerates to 8.9% pace Los Angeles Times (22/10/09)
Questions
- Examine whether Chinese inward investment to the UK is desirable for UK companies and employees.
- Why is a more powerful Chinese economy a ‘mixed blessing’ for the USA?
- In what ways is the Chinese economy ‘distorted’? Explain why this matters.
- Why is it encouraging that China’s current account and balance of trade surpluses have been shrinking?
- What effect would an appreciation of the yuan (or ‘renmimbi’) have (a) on the Chinese economy; (b) on the rest of the world? What would determine the size of this effect for any given appreciation?
- Why must China do more to rebalance its economy?