Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing Access Your Profit Alerts

Currency War: China Stands Firm on Yuan as Global Criticism Escalates

Germany and Japan are joining the U.S. in pressuring Beijing to let the yuan appreciate to prevent an international currency war from spiraling out of control. Still, China remains firm that a gradual rate change is all it will allow.

German Economy Minister Rainer Bruederle warned yesterday (Wednesday) that a trade war could erupt if China didn't float its currency for a more fair value. As the China-U.S. currency tensions have heated up, other countries are saying China's unfair trade advantage is threatening export-driven recoveries around the globe.

"We have to take care that the currency war doesn't become a trade war," Bruederle told German business paper Handelsblatt. "China bears a lot of responsibility for ensuring that it doesn't come to an escalation."

China's $16.9 billion trade surplus in September narrowed from August's $20 billion level, but is still unsettlingly high for countries facing large trade deficits, like the United States.

China removed the yuan's peg to the U.S. dollar in June after mounting pressure from the United States, but has only allowed its currency to rise 2.3% since, falling far short of U.S. expectations.

Now other countries are struggling with rising currencies that threaten their economic recoveries. The euro has soared against the dollar and the yen hit a 15-year high that led Japan to intervene in its currency market last month for the first time in six years.

Japan sold an estimated $20 billion yen as the currency surged to a little short of 90 to the dollar. Some analysts and Japanese policymakers had theorized that China was attempting to hamper Japan 's recovery by purchasing Japanese bonds to keep the yen excessively strong.

Japanese Finance Minister Yoshihiko Noda recently noted that Japan has only intervened once in currency markets, while South Korea appears to be far more active.

"With regard to the won, surely repeated interventions have been made," and "progress has been slow" in regards to yuan appreciation, he said.

A weak won has favored Korean companies over Japanese competitors for years. Since September 2008, the yen has climbed 29% against the U.S. dollar while the won has weakened 1.2% against the dollar and 23% against Japan's currency.

South Korean and Chinese officials have defended their currency policies and said neither country wants to perpetuate a currency war.

"We are doing our best to avoid that but it will require the effort of all the G20 members, not China alone," Cui Tiankai, Chinese deputy foreign minister, said during a recent visit to Seoul.

China's Unwavering Stance  

So far China has reacted to international pressure by telling foreign leaders to back off the issue, and that rapid yuan appreciation would cause too much damage to the Chinese economy through factory closures, job losses and social unrest.

"Many of our exporting companies would have to close down, migrant workers would have to return to their villages," Chinese Premier Wen Jiabao warned.

China's central bank governor Zhou Xiaochuan last week said he supported a gradual rise in the yuan, but also remained firm on resisting the quick change foreign nations demand, saying "there will be no shock therapy."

The likely next step for currency resolution will be at the Group of 20 (G20) meeting next month in Seoul.

But before then U.S. Treasury Secretary Timothy F. Geithner will have another chance to formally name China as a currency manipulator, although most experts think Geithner will again skirt the label.

"Even if they do name China [as a manipulator], the only way to pursue the issue is through the G20 in any case," Steven Englander, head of foreign exchange strategy for the big economies at CitiFX, told the Financial Times.

The FT's Martin Wolf supports unity among G20 nations to encourage change in China's currency policy, but also offers little in the way of detailed maneuvers for doing so.

"[H]ow might China be cajoled or coerced into changing its policies? Negotiation remains a hope. The rest of Group of 20 leading countries should unite in calling for these changes. But if negotiation continues to fail, alternatives must be considered," said Wolf.

The U.S. House of Representatives took a route other than negotiation last month by passing legislation that would impose heavy tariffs on goods from countries with intentionally devalued currency. The proposal is now awaiting action in the Senate.

Germany's Bruederle warned that the tariffs proposed by the United States would "only lead to retaliation."

"We can all only lose through protectionist measures," he said.

But Nobel Prize winning economist Paul Krugman has said it's time for the United States to take action.

"[I]f China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should," wrote Krugman.

While some economists are supporting sending a dynamic global message to China, the repercussions remain a concern. Opponents to the U.S. proposal say the United States should be careful not to anger the largest holder of U.S. government debt. If China unloaded its $846.7 billion in U.S. Treasuries, U.S. interest rates would rise.

But Krugman says the U.S. doesn't need China's money.

"It's true that the dollar would fall if China decided to dump some American holdings," said Krugman. "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."

Now Japan is on its way to becoming the top holder of U.S. debt, a title it hasn't held since August 2008. Japan added $55.3 billion in Treasury bonds to its reserves this year, boosting total holdings to $821 billion. Japan 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 Wall Street Journal.

News and Related Story Links:

Join the conversation. Click here to jump to comments…

  1. Jeff Pluim | October 14, 2010

    If Japan really wants to keep the yen low against other currencies, they should be buying up the Chinese yuan. It is inevitable that the USD is going to take a tumble against other currencies and commodities. Why would Japan want to be caught holding the empty bag. If they buy up the yuan, then they will have helped to keep the yuan high and when the Chinese eventually let the yuan float, which is also inevitable, then the value of Japan's holdings in the yuan will make them a whole bunch of money. The Chinese have been steadily reducing their holdings of U.S. dollars and have reduced them by almost half in the last 18 months. When their holdings of USD gets below $400 billion, (my estimate) then just watch how they stop buying up U.S. treasuries. The USD will tumble and it will be impossible to buy anything in the U.S. that is imported, because it will be so expensive that the average person will not be able to afford it. Can anyone spell hyper-inflation? The biggest problem though, is that that inflation will not be accompanied by an increase in the U.S. economy.

  2. DAVE | October 14, 2010

    I know where this is going…its a conspiracy to bring about one world currency…
    where total power is concentrated to the corrupted elitist blame it on the fed, blame it on euro, blame it on china …blame it on greed

  3. frankline | October 15, 2010

    please give me more information concerning fund partnership

  4. Peter Knopfler | January 18, 2011

    Sorry but Communist China is playing with the world in all areas, products and research development. Communists live by history the long view. but not too long this year is the year of the rabbit, run around romance everyone make friends miles of smiles, the year folowing, 2012 is THE YEAR OF THE DRAGON and this will be the year of great Communist China domination/conquering, The Worlds financial center in Communist China will be finished the year of the dragon it will be the largest maybe tallest bld. in the world. recall the olympics, Communists had to have it on the 8th day 8 month 2008, or nothing so the Olympics caved in to the communists. Hidden agendas will show themselves by Communist China, year of the drag, and for the rest of us it will be a huge drag, World Communism spearheaded by Communist China get my point Folks, lets do something like do not buy communist products boycott Communism.It is yes when you buy you vote VOTE COMMUNISM OUT DO NOT BUY CHINESE. Thanks


Leave a Reply

Your email address will not be published. Required fields are marked *

Some HTML is OK