The Great Stall of China

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Now, here’s a summary of what I’ve read about the issue of the day – the Chinese currency issue and China’s desire to stall any currency appreciation…




The rhetoric is heating up between the US and China.  Since the US has the world’s largest GDP and China will soon pass Japan to become number two (although China is much smaller on a per-capita basis), these are important issues and everyone is watching.




Part 1: Here’s a quick summary of events:

1. In the past few months, tensions between China and the US have risen. In particular, China is upset that we have sold arms to Taiwan and that the President met with the Dalai Lama.  China’s Prime Minister (Wen Jiabao) said “these moves have violated China’s territorial integrity.”  (Personally, I find it amusing anytime that anyone connected to the Chinese government uses the word “integrity”, but that’s me.)




2. Last week, President Obama called on China to let their currency appreciate and to move toward a more market-based currency.  The Peterson Institute for International Economics said that the yuan should appreciate by approximately 40%!  Some IMF insiders have indicated that the IMF believes that the currency is undervalued by 20%.




3. China sells renminbi (yuan) and buys foreign currency (in order to keep their currency weak).  They now have $2.4 trillion of reserves (this is the combined value of all currencies that they hold).  In the last 18 months, their foreign reserves have increased by approximately $590 billion.  Some economists view this increase as the greatest reflection of China’s pursuit of a weak currency.




4. On Sunday, Chinese Prime Minister Wen Jiabao said that China would keep its currency (the renminbi) stable.  He said that it was not undervalued.




5. The Prime Minister also said that the US was failing to rebuild our economy and that we should maintain the value of the dollar as a matter of credibility.  He said that “it is not only in the interests of the investors but also the United States itself.”




6. He accused the US of simply wanting to improve our exports at the expense of China.  He said, “but what I don’t understand is the practice of depreciating one’s own currency and attempting to force other countries to appreciate their own currencies, just for the purpose of increasing their own exports.  He said that this is protectionism and warned that all countries should be alarmed by such developments.




7. On Monday, a bipartisan group of 130 US Congressmen signed a letter urging Treasury Secretary Geithner and Commerce Secretary Gary Locke to label China a “currency manipulator” in the upcoming (mid-April) report on Foreign exchange.  No Administration has been willing to do this in the past fifteen years. If they are so designated, it would lead to negotians and possible economic sanctions if the US took a case before the WTO (World Trade Organization).

Also on Monday, four senators sent the President a letter urging him to not go along with giving China special treatment when considering sanctions on Iran that Congress is currently debating.  If we exempt China, any legislation is basically worthless.  The letter was sent by two Democrats and two Republicans.




8. While all of this is going on, some believe that China may be signaling their desire to ease tensions.  They allowed five US warships to dock in Hong Kong.  They also announced the smallest increase in military spending in twenty years.








Part 2: My Thoughts on This Issue

1. I am the resident populist.  I believe that China’s refusal to allow their currency to appreciate results in a tremendous trade advantage for China.  This means that jobs go to China at the expense of other countries.  In addition to hurting the US, this is also hurting many third world countries.  In effect, China is creating jobs at the expense of all other nations.  We need more nations to stand up with us against China. It is sometimes difficult to stand up to a bully alone.  It’s easy to do it in unison.




2. The irony of China calling the US protectionist is lost on no one. It’s like when I said to Jenny, “we should do more stuff as a family; lets talk about it when I get home from the gentleman’s club.”  Is China serious?  Countries complain about protectionist policy when another countries taxes imports or give subsidies to their own industries that export.  Of course, by keeping their currency devalued, China is effectively doing that for all products.




3. China is very aggressive in labeling other countries as “protectionist.” The New York Times reported that while China ran a $198 billion trade surplus in 2009, they filed more trade disputes with the WTO than any other country.  At the same time, they’ve worked to suppress an IMF report that argues that the Chinese currency is undervalued.




4. One of the other great ironies (that some commentators have pointed out) is that if China allowed their currency to appreciate, it may help curb inflation.  (Many expect China to increase their bank reserve requirements this week.)  With that said, I’m a little skeptical of this argument, as much of China’s inflation is the result of a possible asset bubble (and would not necessarily be remedied by a stronger currency).




5. We’re never going to jawbone China into doing what we want – we need another methodology.  Public speeches and threats don’t work with China.  With that said, subtle diplomacy has not worked either.  We need to understand the ramifications of our policies and either decide to stand up to the bully or decide that we’re going to appease them.  But it’s pointless to threaten the bully from inside our house and refuse while refusing to go outside and fight him.




6. Some people argue that a weaker dollar will hurt China because they hold approximately $900 billion of Treasuries.  I don’t think that’s the issue at all (to China).  I think that they are worried about keeping jobs.




7. One other irony is that all this talk may push up the dollar (against other currencies) as it spooks the market and investors see the dollar as the safe currency.  In effect, we’re hurting our trade deficit as a result of our attempt to alleviate the problem.




8. For politicians, this is the perfect time to bash China.  (For me, it’s always a perfect time.)  We have high unemployment and there are few Americans who have good feelings about the Chinese government.  As a result, President Obama is going to be in a tough position.  It’s hard to understand how he can avoid taking action.  Politically, he is going to be hard-pressed to express concern about jobs while maintaining past Administrations’ policies of kowtowing to China.




9. It’s going to really be fascinating to watch whether the Administration labels China a “currency manipulator” under the Omnibus Trade and Competitiveness Act of 1988.  This really carries no explicit penalties.  But, it would infuriate China and would result in giving Congress the “moral authority” to take action.  We’ll find out in April…




One last unrelated note about China…

China’s accounting transparency was under fire today as they didn’t include cash payments (as part of their deficit) that were paid with funds “carried over from last year” – and this effectively reduced their deficit from 3.5% of GDP to 2.8%.  They seem to want to keep their deficit below 3% (similar to the goals of the EU).  Most countries use cash accounting and China’s deficit would have been 3.5% if they had done this.

Interestingly, the International Budget Partnership rated the 2008 transparency of public finances and gave the UK and 88, the US and 82 and China a 14.  If you want a real feel for how bad that is, realize that Nigeria got a 19 and most of their funding comes from email scams.
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