U.S. politicians are tempted to blame Chinese currency manipulation for the country’s economic woes. But doing so is unhelpful.
In a close election year, the easy option for politicians is to blame the United States’ economic woes on China. The U.S. bilateral deficit with China hit a record $295 billion for last year. Protectionist sentiments are running high with recent complaints filed with the WTO that China doesn’t follow the rules. Passage of a countervailing tariff bill exemplifies the skirmishes that are coming. These efforts are bolstered by repeated calls for the renminbi to be revalued upwards to offset China’s alleged currency manipulation.
The problem is that this isn’t the real story.
From China’s perspective, admonitions that the renminbi is significantly undervalued seem devoid of logic. China’s current account surplus has declined from 10 percent of GDP five years ago to less than 3 percent last year and many project even further declines. Moreover, Beijing finds it perplexing that after steadily appreciating the renminbi by nearly 40 percent in real terms since 2005, critics say that the renminbi is still undervalued by the same 20 percent or more as if nothing has happened over the past five years.
Much of the confusion comes from focusing on the still huge U.S.-China bilateral trade imbalances, rather than looking at it from a global perspective.
Chinese policy makers are reminded that the United States took a similar approach in complaining decades ago that an undervalued yen was the major reason for Japan’s sustained trade surpluses. That the Japanese yen appreciated from 240 to 80 to a dollar in response to the 1985 Plaza Accord and yet the country continued to run a surplus until its recent nuclear disaster reminds the Chinese leadership that factors other than the exchange rate are far more important in shaping trade balances.
The truth is that China’s surpluses aren’t driving America’s deficits. This is illustrated by the differences in timing for when changes to both countries’ trade balances occurred. The U.S. trade deficit began increasing rapidly around 1998 and peaked around 2005. China’s trade surpluses began increasing around 2005 and peaked in 2008. This pattern suggests that U.S. deficits and China’s surpluses aren’t directly related, but reflect global shifts and country specific circumstances.
Clearly, “manipulating” the value of the renminbi had little to do with the emergence of China’s trade surplus since its value was pegged to the dollar until 2005. And only as the renminbi began to appreciate, did China’s surplus increase.
One could argue that China’s reluctance to allow the renminbi to appreciate even more rapidly after 2005 allowed surpluses to grow larger. However, more rapid appreciation would likely not have reduced U.S. trade deficits but only transferred some of the China specific surpluses to other Asian countries as long as the U.S. continued to run major fiscal deficits.
The driving force behind the U.S. deficits and China’s surpluses lies not in exchange rates but in structural factors that built up over time. Three factors largely explain the emergence of China’s trade surpluses: surging U.S. consumption that fueled import demand, maturation of the East Asian production sharing network centered on China, and ratcheting up of China’s savings rates.
The story of the origins of the decline in U.S. household savings rates which was then exacerbated by growing fiscal deficits and together led to the excessive demand for imports is well known and still unresolved. This part of the story has little to do with China, but reflects the political gridlock in Washington.
The role of the Asian production sharing network didn’t just surface in the mid-2000s. It began much earlier as Japan moved portions of its production base to Southeast Asia decades ago. China’s central role took off only with its accession to the WTO in 2001, giving it easier access to Western markets. This was supported by a massive infrastructure construction program that strengthened its competitive position.
Thus, despite substantial real wage increases of around 12 percent annually, labor productivity increased even more rapidly at an estimated 15-20 percent, making it profitable for multinational firms to use China as the assembly plant for the world. As a result, the U.S. trade balance with China is really a regional rather than a bilateral issue and one which has been substantially shaped by the interests of firms like Wal-Mart in driving costs down.
Photo Credit: David Dennis
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Gimme a Break
This take on the undervalued renminbi, is the sort of self serving, exceptionalist argument that so often comes out of the self-centred attitude of Beijing which does not concern itself with fairness, or any injustices done to others through their actions. The fact that the author was country director for the World Bank in China is, in this context alarming
Whilst I would not lay all of economic woes at china’s door, this does not mean that the undervalued renminbi seriously damages the American economy and others. This author would seem to deny China has any responsibility to address any aspect of its financial governance but is ready to instruct other countries so that China can go on in the way it pleases.
The artificial undervaluing of their currency, relative to others within the world economic system causes untold hardship and suffering to other countries economies and the prospects of their citizens.
This article again reflects the frequent observation that China doesn't want to play by the rules whenever it can avoid them (but will complain bitterly about others not doing so) and will use whatever selective or spurious arguments to avoid doing so.
The arguments put in the article forward often lack basic logic, and displays knights move thinking to spuriously “prove” the point the author is trying to make.
Typical of this is that they "finds it perplexing that after steadily appreciating the renminbi by nearly 40 percent in real terms since 2005, (that) critics say that the renminbi is still undervalued by the same 20 percent or more as if nothing has happened over the past five years."
The renminbi was grossly undervalued, it may have been deliberately appreciated by 40% via their control of it but this certainly does not mean it is not STILL grossly undervalued. The fact that some critics say it is 20% undervalued does not make their criticism in anyway wrong – the author is trying to trap people into drawing the conclusion that because the same figures are still being cited even after their upward manipulation that they must have it wrong. This is false as many things influence a currency, some upwards some downwards; one factor may change (appreciation) whilst the rest can also change. All it means is China hasn't done enough and their currency is appreciating in value, which of course it would. The argument and the author are dishonest.
Similarly the statement “Clearly, “manipulating” the value of the renminbi had little to do with the emergence of China’s trade surplus since its value was pegged to the dollar until 2005” is less than honest as the simple fact that the currencies were pegged relative to each other , with the renminbi seriously undervalued does not, in an of itself mean that the low value of the renminbi was not an important part of China’s trade surplus.
His patronising description of protectionist sentiments in the US is laughable and typical of Chinese hypocrisy – China demands 51% ownership of foreign ventures and stipulates that intellectual property must be fully shared with the Chinese "partners" owners. The forced transfer of Billions (Trillions ?) of dollars worth of intellectual property is the result. Can you imagine the howls and whines if China were subject to this treatment elsewhere? – We are more likely to hear protests about the Boxer rebellion and the Opium wars and past injustices than any genuine examination of their own behaviour.
Furthermore, it is interesting that those who support the authoritarian state frequently use the phrase “the truth is …” as if they have a right to pronounce the truth to all. Perhaps they have inadvertently internalised the mindset of their authoritarian masters.
While the ability to pronounce truth, re-write history and edit the public dialogue might be the norm for the regime and their tightly controlled society where censorship and control of the internet and media is legendary, I believe it has no place in dialogue, persuasive writing, or even pieces such as this where the object is to advance a point of view.
China is always ready to point the finger at others and cite the less than perfect record of other countries whilst doing whatever it likes or behaving totally contrary to those same values it is invoking to criticise others.
China never wants to play by the rules when it means they might suffer a disadvantage, and advances whatever argument it can to get try and rationalise it.
The_Observer
Your argument that China doesn't follow the rules because she attempts to maintain a fixed exchange range for the USD-Yuan doesn't hold water.
The Bretton Woods Agreement which served the world from 1946 – 1971 aafter WWII had fixed exchange rates. It ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce. Then as now was because so many USD (Eurodollars) floating around because of purchases for the Vietnam War that the USA did not have enough gold to cover those Eurodollars. As an aside, France was the clever one and swapped her dollar holdings back for gold quickly.
I'm actually in favor of fixed exchange rates as it provides some sort of stability and predictability in your own currency of what your imports cost and what you get for your exports. Also no need to spend extra money on hedging currency losses, etc
Currently world trade has a governing body, the WTO. When countries join that organization they have certain duties and obligations to perform in return for the benefits of being in the system. By all accounts, China has kept her end of the bargain. By 2016, China should have completed all the changes required of her agreement and when the developed world will have to take down their remaining trade barriers to China and regard her as a market economy. I am looking forward to buying even cheaper consumer electronics, clothing, and perhaps a MkII version of those Chinese-made pickup trucks selling at the moment in Australia for not much more than a medium-sized Korean car.
Dan
With a consumer market just the size of France's, China is actually not yet an attractive market at least for now for the US& EU not mentioning its trade protectionism & business discrimination there etc. Maybe the real reason for multi-nationals'doing business there is the cheap labor. But soon this will be over. Stuck in the middle-income trap in addition to the EU debt crisis, US sluggish economic growth , & China's easier-said-than-done economic reforms, China will surely have a very hard time in the coming days.
The_Observer
I'll take issue with your generalizations. China not a big enough market??? Tell that to the French, Germans, Japanese, S.Koreans who provide China not just with capital equipment but also high-end consumer goods. Many of them are setting up production in the world's fastest growing consumer market not just for export but for local consumption as well. Volkswagen, one of the earlier entrys use to have over 75% of the Chinese car market but in the last decade and that percentage has dropped as Ford, GM, etc are all producing cars there now.
See:
China to become the world's second biggest consumer market by 2015:
http://abcnews.go.com/Business/wireStory/chinese-consumers-pay-expect-16554295#.T-pDu_U_xdA
China's current online retail market size of US$23 billion is second only to the United States:
http://www.retail-digital.com/press_releases/apparel/china-tops-inaugural-at-kearney-retail-e-commerce-index-of-emerging-markets
Airbus wants to expand plane assembly in China beyond 2016:
http://www.reuters.com/article/2012/06/14/airbus-china-idUSL3E8HE62N20120614
Brazil's Embraer is going to manufacture planes in China:
http://www.businessweek.com/news/2012-06-24/china-plant-gives-embraer-asia-jet-sales-boost-corporate-brazil
The Chinese already shown with their space program that they can do specialized production. China also manufactures cars for the big automanufacturers showing that they can do mass production. Now they will develop the skills to do batch processing of sophisticated planes. And in the last decade the Chinese have acquired the skills to do large-scale infrastructure projects that are on time, on cost and sometimes even better. There are not many countries in the world that can say that about their projects.
Dan
China's domestic consumption for now (around 33% of GDP) is just the size of France's ( even with a huge population of 1.3 billion people), not enough for its own manufactures in case of slumping export let alone for foreign products. These days, Western corporations have become increasingly disillusioned with China's consumption repression, IP theft, business discriminatory policy (against foreign companies), rising labor costs etc. in addition to easier-said-than-done economic reforms due to vested interest groups, factions' power struggle, these all will give China a very hard time in the coming days. Good luck, anyway!
Gimme a Break
@ The_Observer
Your argument that my argument that China doesn't follow the rules because she attempts to maintain a fixed exchange range for the USD-Yuan doesn't hold water is no an argument its a pronouncement and an opinion. You don't back it up.
Your almost learned spiel about the death of the modified gold standard as practicaly nothing to do with the artificially low value of the renminbi (I do;t know what the Yuan has got to do with it – were talking exchange rates)
"By all accounts, China has kept her end of the bargain" – ya think? Ya really think?
I don't know you can just pronounce things a they come true, however much you want to hug the Pand and enjoy puchasing cheap Chinese stuff.
You might like the security of fixed exchange rates – its human to prefer certainty but it doesn't reflect the changing influences in the interconnected economies and the fiat money system. Circumstances change and exchange rates must to reflect that.
China does not play by the rules, WTO, UNCLOS or others.
And, as you put it, if in "2016, China should have completed all the changes required of her agreement" and "when the developed world will have to take down their remaining trade barriers to China" I suppose you will still be in favour of all the massively protectionist policies written and unwritten laws that China subjects foreign companies to when they want to do business in China? What you don't know about these? 51% Chinese ownership and forced technology transfer (as if their world topping theft of others IP isn't enough)
Gimme a break mate – you're another one who wants rules for the rest of us and the Chinese can either not follow or not be made to follow them.
The_Observer
@Gimme a Break
Most of your issues I've addressed to Dan above.
As regards the gold standard I was just showing that when only the USA mattered and wanted to help Western Europe and Japan after WWII, it suited them to have a fixed exchange rate via the gold linkage. Only when the USA started on it's neverending war-mongering did she have to come off the gold standard. Fixed exchange rates have no emotion. Either you can afford to maintain it or you can't. Chinese maintained exchange rates within boundaries actually favor the living standards of customers overseas who make purchases with less amounts of USD and the US companies profits in USD are maintained. It is the Chinese consumer that suffer because imports of fuel, food produce and other goods are more expensive than if the Yuan rose. The West should be actually thanking China for their standard of living. My computer laptop, flat-screen TV, etc is a fraction of the cost and has more functions than 15 years ago. All this while some workers did their job in China for a fraction of the cost of a European or US worker.
And you seem to be under a great misapprehension on what is illegal in trade. When China accededto the WTO she had agreed to the negotiated WTO terms on what she is allowed to do or not as regards trade. And while most Sino-foreign automobile joint ventures have a 50-50 structure and are theoretically equal partners, foreign automakers usually have a majority ownership or even 100 percent share of the parts companies that provide components needed to make the cars. If joint ventures were illegal then the foreign companies could take China to the WTO. None have on that premise because it's not illegal and besides they make too much money in China. Other companies like Dell own their own Chinese subsidiary and production lines and contrary to the media actual supply various Chinese government departments.
I trust I've cleared up a few of your misunderstandings.
The_Observer
I thank the author for laying it out as it is and explaining who is making the most out of globalization. That is. the company directors and stock-holders of companies that have outsourced sourcing of components, assembly, help desks, etc.
Australia, Germany, Japan, S. Korea, Switzerland all have trade surpluses with China because they sell the things that the Chinese need and want whether for manufactures or consumption. The Americans, on the other hand, put many blockages in their dealings with China whether it be exports of hgh-tech goods or preventing the Chinese from reinvesting their dollar surpluses by purchasing American brands or failing American corporations .
The Chinese work hard for their achievements and all credit is due them.
The internationalization of the Chinese Yuan is ongoing and is in part owing to US pressure. There are bi-lateral currency swaps between China and other countries, Yuan FX trading in Hong Kong and London, the start of Yuan corporate bonds (both local and international companies), and Chinese government issued Yuan bonds (provincial and Chinese government), The Chinese are taking a slowly, slowly approach and to be commended for their caution especially in light of the 1997 financial crisis, 2008-2010 GFC and GFC II in the wings. When the market for Chinese bonds both deepens and finds more exchanges to trade them on that is when the financial markets will have an additional choices. The Americans then might regret having added to the pressure for the Chinese to open up their currency. When they first started pressurizing China, Wall Street and the US Federal Reserve bestrode the world as a colossus in financial terms and were able to sell dodgy products to European banks and investors. The GFC exposed all the shenanigans of the US financial system (which started the financial melt-down in Europe) and the USA has added huge amounts of debt owing to unecessary wars and financial bailouts. There is a subsequent loss in faith in Wall Street and the US Federal Reserve has spent all their ammunition. Many jobs in Wall Street will never return as their biggest European and Middle Eastern customers were burnt and those now have other investment options in N.E Asia, ASEAN, India and the new rush for Africa. WIth modern communications and the choice of tax regimes people can run investments from Dubai, Frankfurt, Hong Kong, London, Luxemborg, Mumbai, Shanghai, Singapore, Sydney, Tokyo, Zurich and perhaps Dubai, all who have excellent facilities.
Thomas
Japan, SKorea & Taiwan thanks to the US & EU markets have run trade surplus with China (selling their parts/components to China). Germany, Australia,Canada, Iran etc., also ran trade surplus with China owing to selling their heavy machinery, raw material (ores, crude oil) etc. to China for its investments in infrastructures& export sector. Without the dollars earned in exporting cheap products to the US & EU markets, how can China have the money for its infrastructure investment? Ask yourself that question? All roads lead to Washington &EU. So, please play by the rules!
The_Observer
I never said that China didn't regard the USA or Europe as important markets. Part of what China does is adding value to the imported raw materials and components and then assembling and re-exporting for many multi-national companies. I was saying in my first paragrapgh above that it was these multi-national companies that benefitted the most.
You also didn't answer my question is why wasn't the USA in on supplying China with what she needed to develop her economy and infrastructure? China is not going to by t-shirts and rubber slippers from the USA. The USA has made it difficult for China to buy what she wants and so China goes to Europe, Israel, Japan and S. Korea. The USA also makes it difficult for China to re-invest her USD as in the aborted attempts of taking over Unocal, Westinghouse(washing machines not nuclear power plants) and a secondary supplier of telecomms gear, 3-Com.
You also neglect that China buys more than raw materials, components and capital equipment. The rising middle-class and increasing number of millionaires are purchasing luxury goods like German and Italian high-end cars; European luxury goods such as high-end fashion; perfumes; French wine; overseas homes, etc. Nothing to stop America aiming for those 300 million consumers.
This fast growing consumer market is allowing China to view domestic consumption as providing another driver of the Chinese economy. The move to develop the interior of China should spread the wealth further.
All of this makes common sense and it's only because of the intransigence of the right-wing lobbies/think-tanks and their US Congress lackies that the USA missed out on the first 30 years of China's development. Others are making hay. As I've said China is doing currency swaps with a whole host of countries and allowing Yuan FX and bond trading. There is currently talk of a FTA between China-Japan-S. Korea. That makes eminent sense as China has money, manpower and the consumers while Japan and S. Korea have the technology and need markets. All three countries have FTAs with ASEAN and would be easy to expand the tri-lateral grouping to include ASEAN. At that stage Australia, N.Zealand, India and Taiwan would want in. That would then be the biggest free-trade region in the world dwarfing NAFTA and the EU in terms of people, geographic reach and GDP.
Before that there is 2016 when under the WTO China can be regarded as a developed economy. Since joining China has fulfilled her WTO obligations. Every other country admits that as much although they'll say that China pushes the limit (which other country doesn't). In 2016 many barriers in the developed world with regards to trade with China will likewise have to come down as well.
50 cents brigade
Lets face it, the Americans cannot compete in any part of the world. Lets take a look at US mcuh taunted Nafta Free Trade agreement with it North America bloc where American them\selves champion for it. It is a total dismay failure. They cannot even compete with Mexico and Canada to the extents, the Americans basically tropedo it themselves. Playing in a field where the Law of Economics prevail, the Americans again being beaten badly. As long as the Law on Econimic runs, the American cannot compete. Now they champion for Fair Trade to Free Trade. Why do the American now make a U turn? In Free Trade, the Law of Econmics decide the fate of the players. In Fair trade, the Americans can create a new law to govern trade to their liking. Lets face it, American citizens need laws to govern themselves as it will implode if there are no draconian law used in the US. The President, Congress and Judicial are guilt to create and pass legislation to govern its people. Their much taunted law, the "Bill of Rights" is actually a draconian law to hide and stop its citizens from rearing its ugly "racist head". Just read some of Americans and its pro US media comments and you will know that American leadership was right in using these draconian law to keep its citizen in check. A lot of countries do not need these draconian laws to keep racist in check as its people self nature is non racist unlike the Americans. Watch my word closely, now the Chinese is begining to create many of its own IP property, the Americans will once again cry foul and try to change the rules again. It remind me of an incident I watch in a train ride. In the ride there was a couple, one was a korean girl and the other was an American man. Both were playing a card game and the Korean keep winning. In every game she won, the American keeps complaining and ask for a restart "Obama reset" as he claim he was not ready. Such is what is in store for any countries that trade with the Americans. They will ask for the famous "Obama Reset" whever things are not going their way, just like its pro US media and comments. Asian and Eastern Europe brains are the true Intellectual Property owners and not some a US conceded law as they claims.
Dan
China's economy is currently in very bad shape : Export faltering, bad debts, property bubble, rampant inflation, middle-income trap, sharply falling growth . All of these will help hasten the red dragon's coming down. Better watch your back!
ImperiumVita
Well that was inventive
Leonard R.
Yukon Huang is not well-informed. Here is a study the author needs to read.
It's an MIT study from 2011 looking at the effect of China trade on local labor markets in the United States. The report shows the effect on governmental budget deficits has been devastating, in part due to the rise in public assistance claims. These claims can be directly traced to trade with the PRC.
http://economics.mit.edu/files/6613
But even if the author was correct – the fact remains the PRC is a hostile foreign power to the United States. Its generals have threatened nuclear destruction against US cities. It has launched cyber attacks against US facilities and and it has launched actual attacks against US ships and planes.
Trading with a hostile foreign power is fundamentally stupid. It's time for the US to step back & reassess the entirety of its relations with the PRC. What it has been doing since the 1980's has not worked. It's time to try something different.
John Chan
@Leonard R,
You are wrong, China as well as rest of world is not hostile to the USA, only the USA is bellicose and is seeking destruction everywhere it does not like.
You are wrong again; threatening nuclear destruction against US cities is your fabrication out of thin air to destabilize the world, so that India can benefit from other nations’ misfortune.
Everybody says free trade is good for the humanity, only Indian says free trade is fundamentally stupid, because they can not make it themselves, so they want to sabotage the free trade because they are jealousy, resentful and fearful.
Thomas
Exchange rate plus trade protectionism plus IP theft are the main culprits for the US' trade deficit with China even a little child could understand that. Please be noted US' trade deficit with Japan has decreased steadily thanks to Japan's importing more products from the US.
applesauce
us bans high tech exports to china, you know the only things aside from food that china really wants.
does the issue you mention affect the trade balance sure it does, , main culprits? not so much
using your example of japan, tell me then why does china run a consistant trade deficite with japan(where the issues you mentioned also exists) and many others while having a large inbalance with the US? clearly something on the part of the US is contibuting to the problem.
Thomas
IP theft alone has cost the US companies around 100 billions dollars a year. China runs a trade deficit with Japan because it imports products (parts/components) from Japan for its final assembly to produce finished goods for the US & EU markets. China bought US-Tbonds to buy down Yuan for its export advantage, & at the same time for its import restriction of foreign products from US& EU (these products being too expensive for Chinese consumers!). China is a communist repressive country so all high-tech exports to China from the US & EU have been banned for security reason.
John Chan
@Thomas,
USA is the biggest IP theft in the world, if you count the volume of compensation sought and the number of defendants being sued for IP infringement.
USA and UK need to take up responsibilities for their own behaviour, always pointing the fingers to others is not going to get USA and UK out of their economy decline. If USA and UK spend the time on working hard instead of creating excuses to blame China, USA and UK might have been out of economic decline by now.
Pianki
No one country has a "Lock" on technology. China and others including even Africa, will over take the US. Thats just how it will be. It is good for mankind.
VIVA
HOPE LAZY BOY KNOWS THAT PAX AMERICANA,MANIFEST DESTINY,EXCEPTIONALISM AND HUBRIS IS OVER.AND DONE
ImperiumVita
Pax Americana may be over, but Hubris is clearly alive and well.