Conn Hallinan – January 23, 2011
Are the U.S. and China on a collision course? Consider the
following:
During the 2010 mid-term elections, some 30 candidates for
the House and Senate are blasting China for everything from undermining
America’s financial structure to fueling the U.S. unemployment crisis.
The Obama Administration is accusing China of manipulating
its currency to sabotage the U.S. exports trade, and the U.S. House of
Representatives just passed a bill to slap huge tariffs on Chinese goods unless
Beijing allows the renminbi, China’s currency, to appreciate.
A recent Financial Times article on the failure of the
International Monetary Fund (IMF) to resolve the currency issue says, “The
hostility between Washington and Beijing has escalated into something
resembling trench warfare.” Last year a CNN poll found that 71 percent of
Americans thought China was an economic threat, and 51 percent of those polled
thought Beijing represented a military threat as well.
If one adds to the above the growing tensions with China in
the South China Sea and the Taiwan Straits, some kind of dust up seems almost
inevitable, though any “collision” would be a diplomatic one. But a major
diplomatic fallout between the world’s two largest economies has global
implications.
What is going on here? Is China indeed manipulating its
currency to beggar the U.S.? Does it bear some responsibility for the high
jobless rate and the inability of the American economy to recover from the deep
recession?
The answer is both yes and no, and thereby hangs a tale.
The U.S. charges that China is deliberately undervaluing its
currency, the renminbi, which makes Chinese export goods cheaper than its
competitors and thus undermines other countries exports.
China is indeed manipulating its currency, although it is
hardly alone. In one way or another, Brazil, Japan, Switzerland, Thailand,
South Korea and others have recently acted to keep their currencies
competitive. Nor is currency manipulation something new. During the 1980s the
Reagan Administration and Japan jimmied their currencies to deal with a huge
trade gap. Indeed, the current free market orthodoxy regarding currency is a
recent phenomenon in world finances, a reflection of the “Washington Consensus”
model that has dominated institutions like the IMF and the World Bank for the
last two decades.
How one sees the current dispute depends on where one sits.
With U.S. unemployment above 10 percent, Americans are focused on policies that
will bring that rate down. But from China’s point of view, any major upward
evaluation of the renminbi would simply transfer U.S. jobless rates to China.
Since it would also reduce the value of the dollar, it would
lower the value of the massive debt the U.S. owes China. “And that, to the
Chinese, would feel suspiciously like a default,” says Stephen King, chief
economist for HSBC.
In short, a lose-lose deal for Beijing.
From the Chinese side of the equation, the U.S. is
essentially trying to unload the consequences of the economic meltdown that
Wall Street caused onto them. And they dispute the fact that the huge trade
surplus is all that relevant to the current crisis.
According to Avinash D. Persuad, chair of Intelligence
Capital Limited, even if China’s $175 billion trade were to somehow vanish, it
would only have a 0.25 percent impact on global GDP. “The Chinese economy is
one quarter of the U.S. economy, and at the peak of the U.S. trade deficit,
China’s surplus was less than a third of it. David may have toppled Goliath,
but he couldn’t carry him,” says Persuad.
Exports have certainly been important to China, but they
have only accounted for 10 to 15 percent of growth over the past decade. The
main engine for Chinese growth has been investment. According to the World Bank
Growth Commission, of the 13 countries that have enjoyed 7 percent growth rates
over the past 10 years, all had high investment rates. These countries
suppressed consumption by keeping wages low, allowing them to amass enormous
pools of capital to pour into upgrading infrastructure or subsidizing industry.
The Chinese economy is booming—it never fell below 8
percent growth during the recession—but it has some vulnerabilities. The
Chinese recognize that they need to shift their economy, away from an over
reliance on exports to one based more on internal consumption,. To this end,
private wages and consumption have been growing at a respectable 8 to 10
percent yearly. The thinking is that as consumption goes up, China will absorb
more of its own products, and thus the trade deficit will go down.
China’s new five-year plan is trying to do exactly this.
Shifting some of the economy away from the wealthy coastal areas toward the
more depressed inland part of the country will help alleviate some of the
wealth gap between city and country, and encourage urbanization in the interior.
All of these moves will increase consumption.
If China were to suddenly raise the value of its currency,
however, it would tank a number of export industries and flood China with
unemployment. Since the jobless have no money, consumer spending would fall,
setting off yet another round of layoffs and plant closings. This is, of
course, exactly what Americans are discovering.
Beijing has begun raising the value of renminbi—it has
risen 2.5 percent since June—but the slow pace has not satisfied
Washington. The Americans are
making other demands as well. For instance, the U.S. would like China to lower
its interest rates, which the Americans argue would encourage consumption.
But as Michael Pettis, a professor of finance at Guanghua
School in Beijing University and a senior associate at the Carnegie Endowment,
points out, “This would be
terrible for China. Lower interests rates and more credit will fuel a real
estate boom and boost both capital-intensive manufacturing and infrastructure
overcapacity—all without rebalancing consumption.”
From China’s point of view the problem is not its currency,
but the lack of controls over American finance that can lead to tsunamis of
money flooding into underdeveloped countries. In 1997, waves of international
investment money poured into Thailand, tanking the currency and spreading a recession, the so-called “Asian Flu,” throughout
the region. The Thais took action Oct. 12 to block a similar “hot wave” of
money pouring into the country by imposing a 15 percent withholding tax on
capital gains and interest payments on government and state-owned company
bonds. Besides Thailand and South
Korea, other countries in Asia, including Singapore and Taiwan, have also
intervened to keep their financial ships on an even keel.
Europeans are blowing hot and cold on currency intervention.
Last year and this past winter and spring, the EU had good reasons for
remaining quiet about the subject of undervalued currencies. The Euro lost 17
percent of its value vis-à-vis the dollar over the Greek financial crisis,
which had the effect of powering up European exports, in particular, by
Germany.
Germany—the world’s second biggest exporter after
China—is as much concerned about the dollar as the renminbi. “We expect
the U.S. to continue its policy of printing money,” Aton Borner, president of
the German exporters’ association, BGA, told the Financial Times. “This will
trigger a currency devaluation spiral that will hit Europe the most.” The
dollar has dropped 20 percent against the Euro since June, and German exports
have fallen for two months in a row.
The Europeans are certainly concerned about the currency
crisis, although they are a good deal more sotto voice than the Americans. “It’s not helpful to use bellicose
statements when it comes to currency or to trade,” says French finance minister
Christine Lagarde.
Governments that don’t take care of their own during an
economic crisis will eventually pay a price at the polls. Brazilian Foreign
Minister Celso Amorim is certainly concerned about defending Brazil’s currency,
but he is careful about applying pressure as a way of finding solutions. “We
have good coordination with China, and we’ve been talking to them,” he said,
adding, “We can’t forget that China is our main customer.”
China charges that the U.S. is scapegoating it for problems
that the U.S. created for itself, and there is certainly a strong odor of China
bashing these days, even from intelligent and thoughtful people like Paul
Krugman, Nobel laureate and New York Times columnist.
Krugman says that while he wants to avoid “hard ball
policies,” he says “China is adding materially to the world’s economic problems
at a time when those problems are already severe. It is time to take a stand.”
Krugman suggests the U.S. should put a 10 percent surcharge on imports from
China, a move more likely to ignite a global trade war than bring China to
heel.
Last weekend’s meeting of the G20, representing the world’s
leading economies, firmly rejected an American proposal aimed at the Chinese
(and also the Germans) and opted for a less confrontational approach. The
meeting in Seoul, South Korea essentially asked everyone to play nice. Whether
they will or not remains to be seen. The subject is sure to come up again in
November when G20’s heads of states get together.
The solution is not a quick re-evaluation of the currency,
says the Carnegie Endowment’s Pettis, but “statesman-like behavior, in which
the major economies agree to resolve their trade balances over several years.”
“Statesman-like behavior” is not exactly what is coming out
of Washington these days.