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It seems like every six months the debate over China's currency, the yuan, reaches a fevered pitch: The Washington bureaucrats threaten to label China a "currency manipulator" and Beijing threatens to dump its U.S. debt holdings.
Then, with the imminent approach of a major inflection point – be it a key international summit or major financial report – both sides grudgingly agree that a modest appreciation of the yuan would be mutually beneficial.
However, things could be slightly different this time around. China has routinely ducked calls to revalue its currency, and in doing so greatly agitated the West.
Most recently, China removed the yuan's peg to the dollar, ceding to months of U.S. and global pressure on the issue just ahead of the Group 20 summit in June. However, U.S. policymakers were again left feeling had as the currency has gained just 1.5% against the dollar since that announcement.
That pace is far too sluggish for U.S. lawmakers who are counting on U.S. exports to help pull the country out of its economic malaise and have grown increasingly impatient with Beijing's unwillingness to compromise.
"China does basically whatever it wants while we grow weaker and they grow stronger. We clearly need concrete action here," said U.S. Sen. Christopher Dodd, D-CT. "This administration must be the one who takes a stand. For years the Treasury Department has relied on a strategy of dialogue which has yielded few meaningful reforms."
U.S. Treasury Secretary Timothy F. Geithner responded yesterday (Thursday) by taking his boldest steps yet in denouncing China's uneven currency practices. The rhetoric comes three months after China pledged to revalue its currency, the yuan, and one month before the Treasury Secretary will deliver a currency report that could officially label China as a currency manipulator.
In testimony before the House Ways and Means Committee, Geithner said China uses "heavy intervention" to keep the yuan undervalued – a practice that has created a "major distortion" in the global economy that is having a "negative impact" on the United States especially.
The United States asserts that China deliberately keeps its currency undervalued to boost exports by making them cheaper for overseas buyers. Other countries – which include European nations as well as emerging markets like Brazil and India – have lobbed similar accusations.
"The pace of appreciation has been too slow and the extent of appreciation too limited," said Geithner. "We are examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly."
Geithner said the Treasury would take China's recent actions into account as it prepares its crucial Foreign Exchange Report. The Treasury's biannual foreign exchange report is due in Congress next month. In that report, the Treasury will again be forced into a decision over whether or not it should officially label China a "currency manipulator." Such a label would open the door to tariffs on Chinese imports.
Geithner has stopped short of affixing the currency manipulator label to China in his past three reports. He even pushed the release of its last report from April to June of this year to give China an opportunity to respond. However, time is running out for both parties to come to terms on the currency debate.
"With the bilateral trade imbalance widening and U.S. unemployment still very high, there is a rising danger that China could misjudge the amount of movement needed to placate the U.S.," Mark Williams of Capital Economics in London, told the Wall Street Journal. "Political developments can easily take on a momentum of their own."
More than 140 House members have signed onto a bill sponsored by U.S. Reps. Tim Ryan, D-OH, and Tim Murphy, R-PA, that would impose countervailing duties against China.
The United States on Wednesday brought two new cases to the World Trade Organization (WTO), accusing China of blocking imports of a specialty steel product and denying U.S. credit card companies access to its markets. The first case accused China of imposing duties of as much as 65% on U.S. flat-rolled electrical steel. The second dealt with China Union Pay, which since 2001 has had a monopoly on yuan-denominated debit and credit card payments in China.
U.S. Senator and chairman of the Senate Finance Committee Max Baucus, D-MT, applauded the filings, calling them "critical steps forward in our effort to enforce our market access rights in China."
"It's about time the administration decided to act," said U.S. Sen. Charles Grassley, R-IA. "The administration should go one step further and bring a case against China's unfair currency manipulation at the WTO."
Calls for a tougher stance on China will only heat up as the United States approaches mid-term elections in November.
"As the U.S. mid-term election nears, the temptation of grandstanding on China will be irresistible to most congressmen," Eswar Prasad, Cornell University economist and the former head of the International Monetary Fund's China department, told the Wall Street Journal. "Democrats and Republicans are trying to outdo each other in blustering about China's currency and trade policies."
Consequences of a Currency Conflict
Labeling China a currency manipulator or engaging the Red Dragon in an all out trade war will have consequences, but analysts are divided over what those consequences would be.
When pressed on the currency issue, Beijing traditionally has threatened to stop financing U.S. debt. China is the world's largest holder of U.S. Treasuries, with holdings of $846.7 billion in July.
Lou Jiwei, chairman of China's $300 billion sovereign wealth fund earlier this month said China should diversify its assets away from the dollar if the United States maintains loose monetary policy that weakens the currency.
"For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.
Ding Yifan, a policy guru at the Development Research Centre, said China could force a rise in U.S. interest rates by unloading its holdings of U.S. debt, estimated at over $1.5 trillion. His comments at a forum in Beijing followed a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.
However, such threats have hardly left some economists quaking.
"They are utterly wrong," Gabriel Stein from Lombard Street Research told The Guardian. "The lesson of the 1930s is that surplus countries with structurally weak domestic demand come off worst in a trade war."
Stein described the implicit threat to sell Treasuries as "empty bluster" because Beijing's purchase of these bonds is a side effect of its yuan policy.
"Bring it on: it will weaken the dollar, which is what the U.S. wants. The interest rate effect can be countered by the Fed," he said. "Some Chinese officials seem to believe that buying Treasuries underpins U.S. public spending. In fact China's mercantilist policy is forcing the U.S. to run large deficits against its own interest. China should be terrified of a trade war."
Stein is joined in that line of thinking by Nobel Prize winning economist Paul Krugman. Krugman said last week in the New York Times that "in a world awash with excess savings, we don't need China's money – especially because the Federal Reserve could and should buy up any bonds the Chinese sell."
"It's true that the dollar would fall if China decided to dump some American holdings," he said. "But this would actually help the U.S. economy, making our exports more competitive. Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen."
Japan on Wednesday intervened in the currency market for the first time since 2004 to weaken its currency, the yen, after China purchased Japanese bonds. Some analysts and Japanese policymakers had theorized that China was attempting to hamper Japan 's recovery by keeping the yen excessively strong.
"I don't know the true intention" behind China's purchase of $6.9 billion (583.1 billion yen) of Japanese government bonds in July, Finance Minister Yoshihiko Noda said earlier this month.
Interestingly, Japan, the second largest holder of Treasuries, was the biggest net buyer in July, boosting its portfolio by $17.4 billion to $821 billion. The gap between China and Japan has narrowed sharply this year, to just $25.7 billion from $129.1 billion at the end of 2009.
Japan, which was the largest foreign owner of Treasuries until September 2008, could once again overtake China if it continues to intervene to hold down the value of the yen.
"It would not be a total surprise to see Japan as the No.1 holder of Treasuries by the winter," Dan Greenhaus, chief economic strategist at Miller Tabak & Co., told The Journal.
News and Related Story Links:
- Money Morning:
China-U.S. Trade Relations Plagued by Protectionism
- Money Morning:
China Trade Surplus Reignites Tensions Over the Yuan
- Money Morning:
China Dumps the Dollar as Yields Sink
- Money Morning:
Washington – Not China – Is the Real Manipulator Here
- Money Morning:
China's Plan For Yuan Appreciation Likely to Boost Inflation in U.S. & Lift Chinese Consumer Stocks
- Money Morning:
The Case for the Yuan: Why China's Currency Isn't the Problem Policymakers Make it Out to Be
- Money Morning:
Why the Yuan Won't Be an Issue at the U.S. China Summit
- Money Morning:
Geithner's China Jaunt May Signal Easing of Tensions on Yuan
- Wall Street Journal:
Geithner Critical Of Pace of Yuan Hike;Lawmakers Seek Action
- NY Times:
China, Japan, America
- Wall Street Journal:
China's Yuan Gesture Could Backfire
These economists are wearing blinders. If the U.S. and China enter into a trade war, China will not suffer. Gabriel Stein is wrong, wrong, wrong, by comparing China to other countries with limited internal consumer growth. The growth of the Chinese consumer will outpace anything that the world has ever seen. I understand that China wants to control the credit card industry. They need to control the interest rates being charged consumers as their economy grows. It gives them the ability to increase interest rates as their economy heats up. It also keeps them from being beholding to U.S. banks who would, if they were in the Chinese market, have a certain amount of control over the Chinese economy, through interest rate manipulation. "Bring it on"??? Plllleeeaase. Mr Stein has been watching too many movies. You cannot spit in Superman's face. Who does Stein think will buy the U.S.'s manufactured goods if it gets into a trade war with China? It is time that U.S. policy makers come to grips with the FACT that the U.S. is no longer the economic engine that drives the world economy. Everyone else outside of the U.S.A. can see this because we are not blinded by U.S. propoganda and small minded, non-world view, thinking. It reminds me of what happens when you put a frog in boiling water. He hops out. But if you put him in cool water and bring it to a boil, he will stay in and die. Well wake up U.S.A. Your water has been boiling for some time now and you just cannot see it.
A well written article by Mr. Simpkins….I enjoy reading his perspectives. And an excellent comment by Jeff. I tend to agree with his analysis…JWS
I guess govt should go after every discount retailer in the U.S. since they are taking jobs away from other retailers losing sales.I say if China is willing to take our declining fiat currency for real goods we should continue doing business with them.I exchange fiat every week by taking advantage of sales by businesses.If the Dollar crashes against the Chinese Yuan it will mean higher prices for goods in the U.S. and a lower standard of living for Americans.
With US economy in shambles, its dollars devalued with the printing press and mad spending, and its trade imbalance getting worse decade after decade, the Washington lunatic gang is shamelessly trying to manipulate the exchange rate between US and China currencies for the purpose of selling more to China. The Chinese have not done anything, except expanding their economy and keeping the exchange rate stable. One has to be crazy to believe that doing some name calling will improve the US economy.
The trouble is that people refuse to face the reality. It's taboo to tell the truth. If you want to find out the reasons of unemployment, just go to an unempoyment office to see how many foreign-made cars are parked out there. Each foreign-made car is equivalent to a job shipped abroad. We have absolute control over what we buy. We have absolutely no
control of how things are produced abroad. We buy too many foreign cars to create our own unemployment directly in the auto sector and indirectly in other areas. We devalue the dollar and ruin the economy, and blame other countries for not adjust their currencies accordingly. The lunatics are indeed running the asylum. Do you know how much "clunker"
car money went abroad? Do you know how much interest the US pays per year to foreign
creditors such as China, Japan, and Taiwan?
Wake up!
All I can think of when I see the US claiming China is manipulating their currency is that old cliche, That's like the pot calling the kettle black.
do you really think TG is the right person to make such decisions?
The Raping of America
In the 1980’s American’s believed their government stood for something, decency, values, democracy, and fairness. The previous decades were wrought with troubles and strife much of which connected to the mistreatment of the other races. White was the sole air of the American dream for the 1st 200 years in the great experiment. People did not actually melt together in the great melting pot but rather assimilated themselves to become as white as possible in order to savor the flavors of success.
In the 90’s were brought out of a recession mostly through a public works project which sought to not only create jobs but also repair a crumbling infrastructure. America had for centuries been the birthplace not so much of the inventions themselves but rather the process of birthing these new creations into the homes and lives of the common man. One of the countries great endeavors, rivaled only by the Romans, was the creation of a national power grid, a clean water act and a highway system connecting this vast expanse of space into an economic Mecca.
Unfortunately in years recent we have seen our government leaders pronounce blatant lies upon us as though there were a special prize for the most despicable. From a president with a public affair who not only denied its existence but defied the same law he was sworn to uphold not only as our leader but in his profession as a lawyer by blatantly lying to congress and yet receive no corrective action. To one who created a network of deception if for no other reason than to pursue corrective action against a foreign dictator for whom his own father had chosen political ambition over finishing the mission he began.
Now our country is observed as one of extreme prejudice against those who worship differently than ourselves. Yes radical Islam needs some corrective action and had we chosen to work the slow process through the state department and our allies in the region the radical fundamentalists could have been under control by now. Instead we have enlightened millions of ignorant [ignorance is have little or no knowledge of a matter {not stupid just without a full understanding}] radicals against our entire population.
It was sad to see a minister promoting such an act as to publicly announce the burning of another religions holy bible. These people much like those in America in the 19th century with whom literacy was relatively sparse among the working class. Even my own grandmother as caring and kind as she was, had only been afforded a second grade education and could not read for herself the Bible she carried. If another country dared to promote such an event towards a religious book of ours would we accept it the same way?
Our own population was lead astray, in that in 1900 to 1907 the country was caught up in a real estate boom. The banks were learning a new way to make money, bundle mortgage backed securities and sell them to investors in the stock market. But after the bust congress passed a law in 1907 to make such a practice illegal.
Oops in 1997 our leaders decided it would be a good idea to repeat the mistakes of the past. One of the lessons learned in 1907 was how much fraud and corruption was involved not just from the banks looking to make a quick buck but mostly from appraisals on property values as being worth substantially more than they actually were.
The real losers were not the banks, realtors or brokers. The losers were average people who believed their government was actively protecting them. They were unaware that the government monitors were also involved in the corruption. Yep people entrusted to regulate industries were in reality capitalizing on the venture capital and surprisingly able to realize gains without the loses as common people.
Our government has a protective policy of imbedding specialized investigators in almost every area of the American way of life with the intention to prevent widespread havoc and corruption. These agents were to assume common jobs earning an honest income [in addition to their active status incomes with perspective agencies] and be available as needed as well as filing reports as needed to prevent wide spread issues.
Banks were so anxious to make these hugely profitable deals they actually encouraged people to guess at their expected income in order to qualify for a home. This was of course almost essential since home prices had grown outside the limits of affordability for so many. And many were caught buying these over price homes for fear that if they “don’t act now and you will never be able to afford one in the future”.
Unfortunately most were so caught up in the profit taking as afforded to realtors and the like on these overpriced houses [average 7% of $300k=$21,000.00], to realize the true values appraised had accelerated faster than inflationary possibilities could account for. Furthermore the masterminds who orchestrated the 1997 law were and still are involved in benefiting those who ventured into the process of profiteering and promotion of excessive indebtedness of the nation.
It is overwhelming to consider T.G.’s position in creating this nightmare but absurd to know he was then hired to be the financial advisor to the President. It would make more sense if a bank hired a bank robber as its new president. The federal government has bailed out the banks with tax payer money and yet the banks show no mercy to those whom they have been anxious to foreclose on. The process drives down the value of all real estate further collapsing the fragile economy creating new housing defaults and yep more foreclosures.
Why would the banks loan money to us common people? They borrow our money from the Federal reserve [tax payer money] at 0.25% yep way less than 1% then turn around and use that borrowed money to buy treasury notes which pay 3.5 to 4.75%. Think its not much? Say you borrow a billion at 0.25% but earn 4.75% which means you made 4.5% clear, on 1 billion, you make $45,000,000.00 for doing absolutely nothing for the American society. And worst of all it is the American tax payer who pays the interest on these treasury notes. Unbelievable, the banks borrow our national money from the Feds, use it to buy treasury notes, then earn 45 million buck which comes out of the income taxes of the working American’s many of whom have been aggressively foreclosed on by these same banks. The crooks use the common man much as plantation owners used slaves.
The government which was for, by and of the people has become hypocrisy. We not only have the worst banking system in the world, our infrastructure is collapsing around us as our highways are barely better than dirty roads, our power grids have virtually melted away, our water systems are often filthier than a pond. Joseph Stalin must be laughing in his grave to realize his dream of internal destruction of the American position.
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