Preface

The reason I wanted to write this booklet was entirely accidental. Just like the birth of the concept of Fdamage, it originated completely from a random thought of mine.

One day, I saw a news report saying that the China Index Academy released the nationwide housing price data for November, showing a decline of 7.98%. Of course, I did not believe this data. Mainly, it does not align with our physical perception of the Chinese economy. Housing prices fell only by this much, yet inflation data has been lingering at deflationary levels. The nominal GDP, of course, still looks quite good, around 4.x% to 5.x%.

So I asked my AI assistant if there is a way to calculate the real decline in housing prices, given various macroeconomic data such as inflation, GDP, and exchange rates.

Coincidentally, at that time I saw a news report saying that The Wall Street Journal or some other foreign media claimed the RMB exchange rate was undervalued, and the real RMB exchange rate should be around 4.2?

Before this, I suddenly saw an economist from a certain investment bank—the kind of investment bank that is a professional contrarian indicator—propose that the RMB should be appreciated to enhance its purchasing power. This would lower consumer prices for domestic citizens, which is equivalent to handing out money to ordinary people. I highly agree with this approach, though I fear those in the export trade, as well as consumers and producers in Europe and the Americas, might disagree.

So, what is the range of the real RMB exchange rate? Is it 4.2, 7.2, 6.2, 5.2, or perhaps 3.2?

Then I asked my AI assistant: What method does The Wall Street Journal use to calculate the RMB/USD exchange rate? It said Purchasing Power Parity, and gave me a formula:

• China Unit Price ($P_{CN}$): About 25.00 Yuan (actual price).
• US Unit Price ($P_{US}$): About 5.95 USD.
• Nominal PPP exchange rate: $25 \div 5.95 \approx \mathbf{4.20}$.

Oh, it said it is calculated this way now. At first, I didn't know how $P_{CN}$ and $P_{US}$ were derived. Later, I asked it to explain in detail, but it couldn't explain clearly. However, after reading the website of the National Bureau of Statistics, I roughly understood.

"Economies participating in the ICP are required to split their expenditure-based GDP expressed in national currency into 155 basic headings (i.e., basic classifications). The sum of expenditures under these basic classifications must equal the GDP. The second set of data comes from price surveys. Each basic classification contains a number of representative specifications, and each economy must survey the annual average price of these specifications in national currency according to a pre-determined catalog of specifications."

So, $P_{CN}$ and $P_{US}$ here are the annual average prices of a "basket of specifications" calculated in their respective national currencies.

Here we place the reference material Purchasing Power Parity in the appendix for your reference. The link is: https://www.stats.gov.cn/zs/tjws/tjbk/202301/t20230101_1912952.html from the website of the National Bureau of Statistics.

I said, wait, that's not right! If you follow this algorithm, the RMB exchange rate is severely undervalued! Undervalued by about 3 Yuan/USD. I said there is a fallacy in your algorithm: the price of the "basket of specifications" in China's national currency—which we will simply refer to as "domestic price" ($P$) below—is actually artificially suppressed. Look at the domestic labor price; it's so cheap, migrant workers are extremely cheap. The cost of human resources alone has dragged down the prices of many goods. And the low price of human resources, in turn, leads to insufficient domestic consumption capacity and weak bargaining power for the people.

Therefore, we should integrate these factors that suppress the "domestic price" into a single factor, Fdamage, which I call the "price gain/loss factor," and factor it into the calculation of the exchange rate and other macroeconomic prices.

This was basically my first reaction when I saw the exchange rate formula it provided. It was also the intuitive reaction of my long-term thinking: that is, our prices are distorted and intentionally suppressed. While this makes our exports competitive, it actually means we are subsidizing foreign consumers—with our labor time, our resources, and our environment.

So, at that very moment when we were discussing the exchange rate, I finally figured out how to express this "price undervaluation" I had in mind, as well as what Yellen, Trump, and their peers call "dumping" and "overcapacity."

So, this is probably the topic I wanted to continue discussing with my AI assistant at the time. I remember that day I happened to be walking to the Xinshidai Supermarket to pick up my package. I was thinking about how efficient the couriers are, yet delivery fees in our country are so cheap. If you have ever used UPS, FedEx, or DHL in the United States, you would know what truly expensive means. SF Express is just a little brother compared to them. The "Four Tongs and One Da" compared to them are like beggars.

Therefore, this is how the "price gain/loss factor" works in specific markets and services. As I said, suppressing labor income and suppressing labor social welfare both have price impacts. On one hand, it reduces the cost of products and services; on the other hand, it reduces the bargaining power of workers. This is just like the "execution threshold" in the US and the "despair rating" of food delivery riders that have recently become popular on the internet.

So, all in all, when I first proposed this price gain/loss factor, Fdamage, it was simply to explain why I think foreign media like The Wall Street Journal, financial journalists and media, and economics in general, are incompetent. Of course, this has always been my view. Financial media is truly more about media than finance.

I remember my disenchantment with financial media occurred in 2009 or 2010. A columnist on FTChinese wrote that the surge in China's soybean prices that year was due to a crop failure in Northeast China! Of course, at first glance, there seemed to be nothing wrong with this statement. However, if you knew the composition of soybean sources in the Chinese market, you would know that this was feeding readers crap! That year, China imported over 40 million tons of soybeans, while the soybean production in the main producing region of Northeast China was less than 7 million tons. What does that mean? It means the market share of domestic soybeans was actually insignificant to the market price. Not to mention today, when annual soybean imports easily reach 100 million tons. So I left a comment under that financial columnist's post: "In 2009, China's total soybean imports were 42.55 million tons, a year-on-year increase of 13.6% or 13.7%, while domestic soybean production was around 16 million tons. So what difference does it make if Northeast China produces a few million tons more or less?"

As for the reporters of The Wall Street Journal dogmatically applying the so-called PPP to calculate the RMB exchange rate this time, they completely forgot that $P_{CN}$, the key price they revere as the "actual price", was also completely, thoroughly, profoundly, deeply, and one might even say tragically, suppressed. Therefore, the RMB exchange rate will certainly not be 4.2. It will definitely be lower than 4.2, and perhaps much lower. It is even possible that at the current exchange rate, considering the extent to which our domestic prices are suppressed, the RMB is still overvalued, and perhaps the RMB to USD rate should actually be 10 Yuan to 1 USD.

This was my initial intuitive thought. Hence, I proposed the concept of Fdamage to refer to the degree to which domestic prices are "damaged."