The U.S. government recently requested that China raise the value of the renminbi. Despite this pressure, however, China has not budged. Why we might ask then, are Western nations driven to demand these changes, and why is China resisting?

The Chinese government clearly knows that their national wealth, as represented by the renminbi, is decreasing rather than increasing. So why are Western nations requesting a raise? U.S. Federal Reserve Chairman, Greenspan, recently commented that an increase in the value of renminbi would raise prices of Chinese products for American consumers. He said, however, that this would not help the U.S. reduce its trade deficit because Chinese goods are all labor-intensive and do not overlap with the American market.

If the benefits for America are not economic, then what propelled the U.S. government to repeatedly request China to raise the value of the renminbi? I believe it is out of political considerations. Their demands are based on the false myth of “Chinese high economic growth” as publicized by China.

The increase in the renminbi value will accelerate the decline of the Chinese economy. When the “high economic growth” myth breaks, the Chinese economy is in for a hard landing. A desperate wish to avoid letting the big cat out of the bag is a compelling reason for the Chinese Communist Party to maintain the current exchange rate in the face of pressure from Western countries.

According to Chinese official statistics, Chinese economic growth is around 9%, an outstanding rate compared to the slow global economy. But China-savvy individuals will probably question the term “high economic growth,” which could bring back painful memories of the end of the Cultural Revolution (1966-76). In the early 1980s, the Chinese Communist Party claimed that the Chinese economy was “at the edge of collapsing by the end of Cultural Revolution.” However, during the Cultural Revolution, the official media always said, “the situation [was] great.” We can see that for Chinese official media, “high economic growth” and an economy “at the edge of collapsing” are actually two sides of the same coin.

On May 19, the director of Beijing University’s China Economic Research Center, Lin Yifu, remarked, “We all know that the Chinese government still has a lot of financial deficit, such as our four state-owned banks’ accumulation of bad debt. Sooner or later the government has to pay this off. Our social security system also has quite a bit of deficit, which the government has to pay. These invisible deficits are more than equal to the 600 billion in foreign currency reserve, and it’s likely that they far exceed it. This means the renminbi should be devalued rather than increased.”

Due to the high economic growth myth made up by the Chinese government, the past two years have witnessed Western countries repeatedly demanding higher exchange rates from China. After all, investments of all kinds of funds are pouring into China, and even when China’s foreign currency reserve reached 600 billion, the Chinese government did not attempt to increase imports, but rather raised exports and trade surplus. It is puzzling, then, that there is no obvious inflation in China. Does this mean that the familiar theory of “supply and demand” is wrong? Or, is it an attempt to deal with China’s huge national debt?

Actually, most of China’s foreign investments went into security and real estate markets that are highly liquid. This explains the dramatic series of ups and downs in Shanghai’s real estate market and the trading of certain stocks in China.

But the main reason for the giant trade surplus is none other than China’s extremely low labor cost, which allows China to monopolize the foreign market by underselling all possible competitors. It is not, therefore, the result of Chinese high economic growth – which is merely a myth made to justify political needs. Under the CCP’s autocratic system, much of the national wealth seems to have ended up in the laps of corrupt government officials, especially since state-owned properties are severely over-valued. The actual wealth represented by each unit of renminbi is much lower than its face value.

Editor’s Note: A country’s total currency value represents its wealth. If a country’s wealth were to increase, while currency flow remained constant, then each unit of currency would be worth more. If investors purchase a lot of one currency, then this country must issue more currency and accumulate more foreign currency. Likewise, if a country issues more currency without an increase in its total wealth, then the growth of currency causes inflation for that country. Consequently, this country should purchase more foreign products with the accumulated foreign currency to curb inflation.