United States versus China By Richard Mills on Sun, 19 Sep 2010
As a general rule, the most successful man in life is the man who has the best information
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
In 2009 U.S. imports from China were worth $296.4 billion. U.S. exports to China
equaled $69.5 billion. In the first half of 2010 the U.S. trade gap with China equaled
$119.5 billion.
The American Congress is facing a restless, very concerned, and increasingly vocal
American public. Lawmakers in both the Senate and House, responding to voters unhappy
with high unemployment - 25 million people don?t have a job or are working part time,
6.2 million people have been out of work for longer than 6 months - are blaming China
for the loss of US jobs and are pushing for legislation that would expand the government's
power to impose trade sanctions on China.
With midterm elections in November and the Obama Administration vulnerable in the House
and Senate there?s the
very real possibility that President Obama will pass a law that restricts
Chinese exports into the US - Obama did promise to get tough on China over its currency
practices in his election campaign and he is now facing bipartisan pressure.
Many economists, and most US manufacturers, estimate China's currency is undervalued by
up to 40 percent. An undervalued yuan means that Chinese products are cheaper for U.S.
consumers but American products cost more for Chinese consumers.
Treasury Secretary Timothy Geithner, while not yet endorsing the new legislation, said China
must move faster to allow its currency to rise in value against the dollar. Recently China's
central bank did allow (the yuan's trading range is controlled by the Chinese government)
the yuan to rise against the US dollar. But with only just a 1.6 percent rise since June many
lawmakers in the US are frustrated.
The US Treasury is required to submit to Congress twice a year (April and October)
a report Congress can use to identify whether any of the US?s major trade partners
have manipulated their currencies to boost their exports to the US or make U.S. goods
more expensive in their markets. Will the US declare China a Currency Manipulator this October?
We will take China's actions into account as we prepare the next Foreign Exchange Report
(due on Oct. 15) and we are examining the important questions of what mix of tools ...
might help the Chinese authorities to move more quickly." US Treasury Secretary Timothy
Geithner If China is designated a currency manipulator it could lead to economic sanctions
if the U.S. took a case before the World Trade Organization (WTO) and won.
The Obama administration recently filed two new trade cases against China before the
Geneva-based WTO.
We are concerned that China is breaking its trade commitments to the United States and
other WTO partners. ? U.S. Trade Representative Ron Kirk
China?s ProblemsCapital 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 assets investment reached 14.1 trillion
yuan (2.1 trillion U.S. dollars) in the first eight months of 2010.
China is able to invest so much into FAI because, in addition to the inflow of foreign direct
investment (FDI equaled 488.7 billion yuan in the first eight months of the year, 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. And 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. Before he was forced onto the Bush/Snow party bandwagon former Federal Reserve Chairman
Alan Greenspan said a floating exchange rate and/or ending capital controls could trigger an
outward flood of capital to more secure foreign banks (Chinese banks, still to this day, carry
a massive amount of bad loans). He went on to say this might destabilize the Chinese economy
and drag down world growth.
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, cloth 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 midterm elections and nothing is more
important to a politician than getting reelected, jobs are the hot button of these midterms
and the Obama Administration is vulnerable.
Japan increased its holdings of US Treasury Bonds by $16.9 billion in June alone. Demand for
Treasuries from U.S. investors is increasing at a tremendous pace. Spending and incomes
are stagnating and the savings rate hit the highest level in almost 18 years reaching 6.4
percent in June said the Commerce Department on Aug. 3 - the U.S. savings rate has
now been higher than 5 percent for 21 straight months.
The bottom line here is China?s buying of US debt might not have the importance it use to. Americans are consuming less and saving more. That causes an increase in savings and deposits,
which end up being invested in government securities. ? Jeffrey Caughron, the chief market analyst
in Oklahoma City at Baker Group,
The US could put in place their own capital controls. Washington could also 100 percent shut
down the US market to Chinese exports.
A major clash would bloody both nations but in the
end China would lose the most and the politburo would run an even greater risk of losing its
position of power than in a loosening of capital controls.
This dispute over Chinese currency reevaluation is just the harbinger, the tip of the iceburg,
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
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?s a powerful story unfolding
in real time and it should be on everyone?s radar screen. It certainly is on mine.
Is it on yours?
