Surely it was hard enough being a Chinese man without being held responsible for a global currency war.
This is, roughly, the usual US-China currency war logic: (1) Chinese officials intervene aggressively in the currency market, (2) foreign exchange reserves rise, (3) the real exchange rate falls, (4) a current account surplus emerges.
But according to a new NBER paper from Columbia University’s Qingyuan Du and Shang-Jin Wei, this is the wrong imbalances story — we should be looking at sex ratio imbalances, instead.
The authors argue that a high sex ratio translates into a low real exchange rate via two channels:
1. A savings channel. According to research from Shang-Jin Wei (again) and Xiaobo Zhang, China’s one child policy and corresponding high sex ratio (more male than female babies) accounts for about half of the increase in the household savings rate during 1990-2007. Apparently: savings = wealth = good marriage prospects.
Du and Wei claim that high savings could lead to a decline in the RER (defined as a departure from the purchasing power parity) as consumption falls, and demand decreases for all goods — but whereas prices for tradeable goods are tied to the world market, nontradeable goods are (by definition) not. Therefore their relative value declines and, hey presto, there’s a decline in the RER.
2. An effective labour supply channel. The authors propose that worse marriage prospects lead to less leisure and more work. They then cite some (admittedly patchy) statistics to suggest that this increase in effective supply is greater in nontradeable than tradeable sectors. Hence a further decline in the relative price on nontradeable to tradeable goods and a reduction in the RER.
That’s the model, but is there empirical evidence? Yes, say Du and Wei. They regress a host of “structural” factors against the PPP-RER deviation present in several high sex ratio countries. They argue that even after controlling for GDP per capita, financial system maturity, capital account openness, terms of trade and currency type, a high sex ratio remains statistically significant.
From the paper’s conclusion:
Empirically, countries with a high sex ratio do appear to have a low value of the real exchange rate and a current account surplus. If we take the econometric point estimates at face value, it appears that the Chinese real exchange rate has only a relatively small amount of undervaluation (2-8%) once we take into account the sex ratio effect and other structural factors.
There are — of course — some important caveats. These results are subject to the quality of the RER undervaluation definition and the comprehensiveness of the variables used to regress against it. The authors also assume that the sex ratio is exogenous, which may make its impact hard to isolate. You may also dispute the logic of the two channels describe above.
And, for the record, the authors point out that they are not saying China is not manipulating its currency.
But if it is, the story might be more complicated than first thought.