The Chinese regime’s currency manipulation has been a touchy issue for years, and members of the U.S. Congress are again calling for bipartisan legislation that would put America on equal footing with China and give a boost to fair global competition.
“The first steps must be taken by the [U.S.] government to declare China a currency manipulator—either through legislation or executive action—and then follow through with sanctions if China fails to respond, said a panel of trade and economic experts this morning [June 14] at a special China trade policy forum in Washington, D.C.,” according to a mid-June article on the AFL-CIO website.
America’s political establishment didn’t sit idle, as Sens. Sherrod Brown (D-Ohio) and Olympia Snowe (R-Maine) called in an August press release for immediate action on the Currency Reform for Fair Trade Act addressing Chinese currency manipulation.
In 2011, Reps. Sander Levin (D-Mich.) and Tim Ryan (D-Ohio) introduced H.R. 639, also called the Currency Reform for Fair Trade Act, trying to level America’s competitive playing field by curtailing China’s currency manipulation.
Out of several bills addressing the Chinese regime’s currency manipulation floating in Congress, one may be selected for consideration, or perhaps two would be combined, according to The National Journal, a Washington, D.C., nonpartisan news media.
“We can tell them [the Chinese] they have to move their currency to market rates or we will impose a tariff on their goods. This is what the rules say we are supposed to do,” proposed Dave Johnson in a September article on the Campaign for America’s Future website. Johnson is a Fellow at Campaign for America’s Future, an anti-conservative think tank.
What’s troubling Johnson is that presidential hopeful Jon Huntsman, former U.S. ambassador to China, openly stated during the Iowa GOP presidential campaign, “What will fix the U.S-China relationship, realistically, is fixing our core right here at home, because our core is weak, and it is broken, and we have no leverage at the negotiating table.”
Huntsman’s remark is a matter of interpretation. Johnson, as a lone voice, with no one else even remotely addressing Huntsman’s remark, suggests that Huntsman is saying that a trade war would be in the offing if America challenges China for trade violations and finds ways to make offsets, for example, to the regime’s currency manipulation tactics.
The Brookings Institution, a nonprofit public policy think tank based in Washington, D.C., mirrors Huntsman’s remark in a September article: “The United States possesses no leverage that can be plausibly brought to bear.”
Dissecting the Numbers
In mid-2010, The People’s Bank of China, China’s Central Bank, announced that it would let its “currency float more freely against the dollar. … Since then, the yuan has inched up at a glacial pace, rising only 5.5% through June 14, 2011,” according to a mid-2011 report by the Economic Policy Institute (EPI).
For a meaningful rise of China’s currency that would put the rest of the world on more equal footing with China’s export machine, that country’s currency must, for a start, rise between 25 percent and 30 percent against the U.S. dollar.
In a counteractive move, China purchased the world’s currencies, mainly the dollar over the past months, increasing its foreign currency reserves by $597 billion, to a total of $3 trillion by the end of the first quarter of 2011.
“While appearing to let the yuan [also called the renminbi] float, China has actually increased its currency intervention by amassing record amounts of foreign exchange reserves to prevent meaningful appreciation of the yuan,” said the EPI report.
Opinions differ when it comes to the undervaluation rate of the Chinese currency, with some suggesting that the currency is not undervalued and others suggesting that it is undervalued between 5 and 27 percent.
“We’ve seen quite a substantial reduction in the current account surplus in China, and I think that led many directors to come to a view that the currency was not undervalued,” said Nigel Chalk, the International Monetary Fund’s (IMF) Mission Chief for China, during a published July conference call.
During the same conference call, Chalk said that the IMF “staff’s view on the currency is that the renminbi remains substantially below the level that’s consistent with medium-term fundamentals.”
Fallout of Currency Manipulation
“Currency manipulation is also costly for China and other Asian countries that follow China’s lead,” according to the EPI report.
The researcher suggests that in keeping the renminbi significantly below market value to keep alive its cheap exports, China harmed its economy, mainly local employment. By letting the Chinese currency adjust to market value, the domestic cost for commodities would decrease, lessen inflationary pressures, and improve China’s workers’ purchasing power.
“Revaluation is a ‘win-win’ scenario for the global economy,” said the EPI report.
Adjusting the Chinese currency would have a positive effect on the U.S. gross domestic product (GDP). The U.S. GDP would grow by 1.9 percent, that is, $286 billion. At the same time, at least 2.25 million new jobs would help reduce unemployment.
Although the positive effect of letting the Chinese currency adjust to market value would take from one and a half to two years to take hold, it would shrink the U.S. budget deficit by $71.4 billion annually.
The effect on the U.S. trade deficit would be remarkable. America’s trade deficit with China in the month of July stood at $27 billion, given imports of $35 billion into the U.S. and exports of 8 million from the U.S. to China. The total U.S.-China trade deficit from January to July was at $160 billion, with $218 billion in imports into the U.S. and $58 billion in exports to China, according to the latest U.S. Census Bureau numbers.
“The International Monetary Fund (IMF), the World Bank and many economists have also argued for faster appreciation and a more flexible exchange rate policy as part of a broader program of ‘rebalancing’ the Chinese economy away from its traditional reliance on exports and investment, and towards a more consumer-driven growth model,” according to Brookings.
Next...Western View of Chinese Regime’s Intentions
Western View of Chinese Regime’s Intentions
“Consistent intervention by China to keep its exchange rate substantially below the level the market would set is, in this view [the price one pays], a distortion that prevents international markets from functioning as well as they could,” according to the Brookings article.
At the same time, the Chinese regime’s price manipulation results in a Chinese export-oriented growth model, restrains local investments, and causes friction with trading partners, which could have a retaliatory effect on China in the long run, such as other economies leveling a tariff on imports from China.
IMF staff, economists, and analysts have long recognized that the Chinese regime will not relent from manipulating the currency, because officials view it as a method to achieve the number one international trade status, place America in a secondary position, and become one of the richest and most powerful nations.
“They [Chinese] see the exchange rate—and prices and market mechanisms in general—as tools in a broader development strategy. … Market mechanisms are simply means, not ends in themselves, suggests Brookings.
A more long-term intention by the Chinese regime is to make its currency an international reserve currency and within time unseat the U.S. dollar.
Such intentions are wishful thinking. China’s market is not transparent, the Chinese regime will not refrain from manipulating market forces, and its intervention in its own and at times in foreign markets makes its currency undesirable as a reserve currency
The Brookings article states that “to be a reserve currency, you need to have safe, liquid, low-risk assets for foreign investors to buy; these assets must trade on markets that are transparent, open to foreign investors and free from manipulation.”
The world’s media has run amok at times, suggesting that China could collapse the U.S. economy and with it the U.S. dollar. This is far from the truth, as the Chinese regime wouldn’t cut off its own foot, just to spite the United States.
China increases its reserves by approximately $400 billion annually. The only market where such large holdings could be invested is the U.S. market.
“If China sells U.S. treasury bonds, it must find some other safe foreign asset to buy, to replace the dollar assets it is selling. The reality is that no other such assets exist on the scale necessary for China to engineer a significant shift out of the dollar,” according to Brookings.
At the beginning of 2011, the Chinese regime invested about 65 percent of its reserves in U.S. Treasury stock, which is only 8 percent of all outstanding U.S. Treasury stock, while 69 percent is held by U.S. entities.
“Treasury bond holdings are super-safe, liquid holdings that can be easily redeemed at short notice, just like bank deposits. Far from holding the United States hostage, China is a hostage of the United States, since it has little ability to move those deposits elsewhere—no other bank in the world is big enough,” advises Brookings.
Friends Read Free