Epic Nation

Wednesday, May 18, 2005

Commies warned on currency distortion... again

It looks as though the Bush administration has finally worked up the nerve to ask that China stop bending the US over a barrel with their monetary policy. The NY Times reports:

The Bush administration warned China on Tuesday that its currency policies were distorting world trade, and it brandished the threat of retaliation against the country's exports if Chinese leaders did not change course in the next year.

In language far harsher than it has used before, the Treasury Department declared that China's fixed exchange rate between its currency, the yuan, and the dollar posed a risk to its economy and the economies of much of the rest of the world.

The administration stopped short of accusing China of outright currency manipulation, a move demanded by American manufacturers who complain that the Chinese have artificially undervalued their currency to make exports cheaper in the United States.

This article addresses the increasing concern over the undervaluation of the Chinese yuan to the dollar. The Chinese government pegs their currency to the dollar at a ratio of about 8 to $1. Economists estimate that the yuan may be undervalued by as much as 40% compared to the dollar, and conservative estimates say the yuan is undervalued by 10%. In any event, the Chinese are creating problems for a US economy already facing adversity.

The manufacturing sector in China has grown by leaps and bounds in recent years, amassing a trade surplus between themselves and the US alone of $162 billion in 2004. This represents a 30% leap upward from 2003’s number. By pegging their own currency to the dollar the Chinese ensure that they will reap such windfalls from their exports to the US in the future as well. This is because even with a declining dollar, sales to the US will not be affected because the yuan will decline with it. It is no surprise that some economists are putting pressure on the Chinese to switch to a market based system as far as their monetary policy is concerned, and move away from the unscrupulous method they are currently using.

The US Congress is mulling over tariffs and other trade sanctions it could place on the Chinese to encourage them to change there policy. I would normally be completely against such measures as they stand against the tenets of free market capitalism. But considering the fact that the Chinese are cheating the system to begin with, such measures would be well deserved on the part of China. China is profiting at the expense of American exporters by undervaluing their currency.

Consider a situation in which the Chinese allowed their currency to float. Now also consider a declining dollar, which is what the US has been experiencing over the past 2 years. As the dollar declines on its own in this situation the Chinese yuan would appreciate against the dollar. Chinese exports would become slightly more expensive, but US exports would make up the difference and then some because more world consumers would want to purchase US goods. Also, domestic consumption would increase because Americans would be buying less from China and would turn to US producers.

But the reality is that none of these offsetting activities can take place, and as the dollar declines the Chinese take the yuan down with it. The dollar is in crisis while the Chinese laugh all the way to the bank because so called “free marketers” would rather we fall on our sword than check the Chinese with trade sanctions.

Some argue that putting pressure on the Chinese is out of line because they are a sovereign country who has their own right to manage their currency as they see fit. But if the Chinese wish to continue benefiting from the free market trade that large countries such as the US allow them to participate in, they should play by the free market rules across the board. The Chinese hardly care about the value of their currency compared to foreign currency since the state runs the entire economy and there is little if no concern as to how the Chinese citizenry are affected by such economic policies, as the so-called “rulers” of China are nothing more than self appointed tyrants who rule under the authority of the gun as opposed to the voting booth.

9 Comments:

  • Right. The Bush team blames our problem on China. Why shouldn't China act in it's own best interest? What power does Bush have on this rising empire, who owns more and more of us daily?

    Why doesn't Bush put the blame where it belongs: on America's deficits? Oh wait, he can't do that because that would be a self-critique. What's our budget deficit again? How much is Iraq costing us again?

    Sure, let's blame China. While we're at it, insert head in sand to nose. The comfortable lie is easier than the hard truth.

    By Blogger Doc NOS, at 6:00 PM  

  • Yeah, thats it. There is a war in Iraq and we have budget deficits, so obviously China cannot be blamed for any wrong doing concerning anything at all.

    Where to begin with your comment... the blame for China pegging the yuan on our currency is the budget deficit? You've got to lay off the nitrousoxide, "DocNos". Do you even understand the implication of the Chinese devaluing their currency artificially? Right now the supply of dollars is incredibly high, making our currency relatively cheap to other (such as the euro and the yen). This has improved our TRADE deficit with Europe and Japan. But US exports aren't realizing their full potential because the yuan is so undervalued that China is able to undercut US exporters.

    The health of US manufacturers probably is of no real concern for you. Your only real concern is with bashing the president on issues you don't even understand. This explains your asinine assertion that since Bush went to Iraq, China is excused from all bad behavior.

    Your ignorance of basic economic principles is only surpassed by your obtuse logic. China enjoys beneficial trade relations with the US that are determinate on them following basic principles of the free market. If Bush, as the leader of the US, wants to punish China for cheating on our agreements than he has every right to do so. China, enjoying MFN status should oblige and allow the yuan to float.

    Please keep posting to my blog DocNOS. You make a better case for why liberals lack the wherewithal to run this country than I ever could. Dupe.

    By Blogger Kevin P., at 8:07 PM  

  • So the US bears no responsiblity for this mess we've allowed?

    So you would have been right when you state "Right now the supply of dollars is incredibly high," except you don't appear to realize that China then buys our dollars, removing them, and artificially increasing their value. The moment they stop doing this, the dollar will loose value.

    To read me as saying bush = bad, so China is excused is to simply engage in wishful thinking. Are you really that stupid, or are you being disengenous?

    I'm saying that while Bush is demonizing China, an up and comming empire, he should also spend a moment to reflect on the damage his policies are doing to ours.

    Dupe.

    By Blogger Doc NOS, at 10:55 PM  

  • Since you obviously fancy yourself an expert in everything, I won't bother trying to explain the under valuation of the yuan to you. You appear to care much more about a communist government that is breaking trade agreements with the US than the soveriegn right of the US to enforce said agreements.

    I will close this note with a statement from The Economic Policy Institute (though youre probably smart than them as well, right "Doc"?):

    "In recent years China's booming economy, fueled by large inflows of foreign direct investment (FDI) and rapid export growth, has emerged as a significant force in the global economy. This year, China surpassed the United States as the world's largest recipient of FDI, and its bilateral trade surplus with the United States reached $117 billion in the 12 months up through August 2003.

    Both inward investment and export growth create strong demand for China's currency, the yuan. All things being equal, such demand pressures should cause the yuan to appreciate relative to the U.S. dollar and cause China's external position to return to balance.

    But all things are not equal: China pegs the yuan to the dollar at a fixed rate and strictly regulates imports and the allocation of foreign exchange. In order to maintain the yuan's fixed value, China must create a residual supply of yuan to counter growing demand for its currency; China achieves this by buying dollars in foreign exchange markets. Between December 2000 and July 2003, China more than doubled its foreign reserve holdings from $168 billion (16% of its GDP) to $361 billion (31% of its GDP).

    How should the United States respond? On nine occasions between 1988 and 1992, the U.S. Treasury found that similar external surpluses accompanied by much smaller accumulation of foreign reserves constituted evidence that countries—including China—were manipulating their currency's value for competitive trade advantage. When such a finding is made, U.S. law requires the Treasury Secretary to undertake negotiations to end such manipulation. Current evidence indicates that China is engaged in just such a manipulation of the yuan for competitive gain."

    By Blogger Kevin P., at 2:58 AM  

  • You quote this article to defend your post? I agree with it! China has essentially paid for our war in Iraq - Bush's tax cuts allowed them to (yes, I realize it is more complex than that, but the simple fact is that loss of tax revenue combined with war = red). And the Bush solution to this problem is to wag their fingers at China?

    China, and this may surprise you, will continue to act in their best economic interest. Their economicists are much brighter than either you or I. They will take advantage of our weakness. What galls me is that we allow our weakness and we allow their advantage.

    By Blogger Doc NOS, at 1:59 AM  

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