The Chinese government, in an effort to maximize exports and minimize US imports, prints their Yuan to buy dollars. This prevents their currency from rising and the dollar from falling. Then it loans those same dollars back to America by buying US debt.
At the same time China:
- Puts in place purchasing restrictions
- Permits piracy
- Delays legitimate items from entering the country
- Provides massive direct subsidization of export production in many key industries
- Maintains strict non-tariff barriers to imports
China was the United States' largest supplier of goods imports in 2010 - goods imports from China totaled $365 billion, a 23.1 % increase ($68.6 billion) from 2009, and up 841% over the last 16 years.
The U.S. goods and services trade deficit with China was $219 billion in 2009 – in 2010 just the U.S. goods trade deficit with China was $273 billion.
U.S. exports to China accounted for 7.2% of overall U.S. exports in 2010 while U.S. imports from China accounted for 19.1% of overall U.S. imports during the same time period.
The American Congress is facing a restless, very concerned, and increasingly vocal American public. Lawmakers in both the Senate and House are blaming China for the loss of US jobs and are pushing for legislation (Currency Exchange Rate Oversight Reform Act of 2011) that would force China’s currency, the Yuan, to rise against the US dollar. If approved by Congress, the CEROR Act would force the US Treasury Department to formally tag China as a currency manipulator, this would allow the US Commerce Department to impose duties and tariffs on imports.
With elections in 2012 and the Obama Administration vulnerable – this author believes President Obama is deeply vulnerable to a 2012 election threat from the GOP fielding their heir apparent Mitt Romney or the incredibly charismatic Rick Perry - there exists the possibility that President Obama will try to penalize China for its large bilateral trade surplus with the U.S.
Obama has promised repeatedly to get tough on China over its currency practices. James Zhang, from the University of Newcastle in Australia, says a 20 percent rise in the Yuan would contract the Chinese economy by 12 percent.
- Tuesday 6 October 2009 1 USD = 6.8312 CNY
- Wednesday 6 October 2010 1 USD = 6.6994 CNY
- Thursday 6 October 2011 1 USD = 6.3751 CNY
China’s Problems
Capital controls and trade restrictions have been absolutely necessary for China to reach this stage in its economic development. The country's economic development is largely driven by fixed asset investments (FAI - fixed assets include items such as land and buildings, motor vehicles, and plant and machinery). China's fixed-asset investments rose 25 percent year-on-year to hit 18.06 trillion Yuan (2.83 trillion U.S. dollars) during the first eight months of 2011.
China is able to invest so much into FAI because, in addition to the inflow of foreign direct investment (FDI is a measure of foreign ownership of productive assets, such as factories, mines and land) its citizens have a very high savings rate as a percentage of income. Because of controls on how and where they can invest that money, Chinese savers have little choice but to invest at home.
If China were to lift its capital controls the resulting outward savings flow seeking higher and safer returns overseas would cause China's economic growth to stall because, the largest by far, of its two major engines of growth, FAI, would simply run out of money.
“Export industries employ so many people, and a drop in exports would mean a rise in unemployment which could cause very serious social unrest. Social stability is Chinese leaders’ top priority, and the way to achieve it is fast economic growth to keep people working.” Xiang Songzuo, deputy head of the International Monetary Institute at Beijing’s Renmin University
The Chinese Communist leaders have to feed, clothe and house untold millions of urban residents and hundreds of millions more rural residents moving to urban areas over the next couple of decades. Their biggest fear is social unrest leading to an overthrow of their communist regime. US lawmakers on the other hand are facing elections and nothing is more important to a politician than getting reelected.
This dispute over Chinese currency reevaluation is just the harbinger, the tip of the ice-burg, of what’s to come in the future US-China relationship.
Potential areas of conflict include:
- Trade disputes
- Conflicts over resources
- Geopolitical disagreements
- Intellectual property rights
- Chinese acquisition of US companies
Conclusion
The US has, so far, been cautious of pushing China too hard on the revaluation issue, that might change.
“China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States. Currency manipulation is one example of it." President Obama at a recent news conference
This is an extremely interesting drama being played out on the world stage between two of the world’s most powerful nations and economies, it should be on everyone’s radar screen. Is it on yours?
If not, maybe it should be.
