US warns Beijing against dumping products to save the planet; AI boom looms

(Originally published March 28 in “What in the World“) China’s weakening currency has been a long-running symptom of its economic malaise, but it also may now be government policy.

The yuan has already dropped roughly 2% this year against the dollar, which has helped make its exports cheaper in foreign markets and thus sparked a rebound in shipments. China maintains rough controls over its exchange rate, meaning that such a decline has occurred with at least some government acquiescence. That has in turn sparked concerns that China might be aiming to flood foreign markets with its manufactured goods to help revive economic growth.

Combined with subsidies for products that Beijing is promoting as “new productive forces,” like solar panels and electric-car batteries, the White House is worried China might actually blunt its own subsidies on domestic production of green technology as part of U.S. President Biden’s misnamed Inflation Reduction Act (massive investment in new technology to create jobs doesn’t reduce inflation, even if it’s a good idea). So naturally, U.S. Treasury Secretary Janet Yellen is warning China not to dump solar panels and EV batteries on global markets.

The problem is that the yuan isn’t the only currency that’s falling against the dollar. So are the yen, the won and the Taiwan dollar, so much so that the yuan has actually appreciated against those currencies and made China’s exports relatively less cheap abroad than exports from Japan, South Korea and Taiwan.

Currency traders think that gives China’s central bank no choice but to continue letting the yuan depreciate to keep the export game going, since the domestic economy remains in a funk. Who knows if they’re right. But steering a currency lower to boost exports has several side effects, some good, some bad.

On the one hand, a weaker yuan will make the price of imports more expensive, thereby helping counter the deflationary pressure in China’s moribund economy. Inflation helps heavily indebted borrowers, since their revenues rise while their debt repayments stay the same.

But a weaker currency also encourages capital flight, another problem with which Beijing has been wrestling. That makes domestic capital relatively more scarce pushing up real domestic interest rates and adding to the brakes on domestic growth.

Asian economies suppressed their currencies—and domestic economic growth—for decades to let export earnings and trade surpluses fund their industrial development. That’s why domestic consumption has been a latecomer to Asia’s economic growth story.

But for the White House, the question might not be whether Beijing is trying to turn back the clock on its currency policy, but rather to ask why the dollar is still rising. And that comes back to relative interest rates and the outlook for inflation: investors still think U.S. inflation is too hot for the Federal Reserve to start lowering rates, whatever Biden’s Inflation Reduction Act may be accomplishing. That means U.S. rates will likely continue to offer a higher return on cash than Asia’s, and so investors are selling their yuan, yen and won for dollars.

In an environmental irony, drought in China’s mountainous southwest is forcing the country to boost its use of coal to generate electricity as its dams lack sufficient water to boost power production.

The drought, which is affecting hydroelectric plants in Sichuan and Yunnan, started in 2022, saw power produced drop 1% in 2023 from 2019, despite an 18% increase in hydroelectric capacity. Hydroelectric output rose just 2% in the first two months of this year. To make up for the shortfall, thermal generation from coal and natural gas rose 11% in the same two months.

Leaving aside the hysteria around “AI,” which in so many ways is merely the latest advertising slogan for cheaper chips and more powerful computing in a long line since “fuzzy logic,” the “internet of things,” “the Cloud” (a latter-day repackaging of Sun Microsystems’ old “the network is the computer”), “software as a service,” and “robotic process automation,” could the world be on the verge of a new industrial revolution, driven by the productivity gains afforded by artificial intelligence?

That’s the question Dylan Matthews attempts to answer in an article for Vox. To test the theory, I asked ChatGPT to sum up his 3,300-word treatise because, honestly, who has the time? Here’s what it came up with:

Artificial intelligence (AI) is already generating substantial wealth for individuals and companies. Figures like Nvidia’s CEO Jensen Huang, with a net worth skyrocketing to $83.1 billion due to AI chip demand, exemplify this trend. OpenAI’s valuation at $86 billion and other AI firms’ success further underline AI’s economic impact. However, some researchers anticipate AI triggering unparalleled economic growth, potentially reaching 20% to 30% annually. This bold projection suggests a transformative shift in societal wealth creation. Yet, skepticism persists, with doubts about AI’s ability to achieve human-level capabilities and drive explosive growth. Challenges include the uncertainty of AI’s technological advancement and its potential to substitute human labor. While the promise of explosive growth is tantalizing, its realization remains uncertain, prompting varied perspectives on AI’s future economic impact.