It seems we do that, and the EU does that, and other rich and poor nations do that, to money all the time. Everybody has a theory that the latest revaluation, the latest trade agreement or producer subsidy is going to result in winners and losers. But these are pretty open maneuvers, and should be the kind of thing trade has factored in for millennia. If your deal involves foreign currency, you have to guess, like everyone else, what it’s really worth in another currency.
The concern is that China is keeping it’s currency artificially weak. This makes their exports to us cheaper and limits our ability to export to them.
IOW a form of protectionism. Well, the U.S. has had protectionist economic policies at several periods; might or might not be a good idea, but there’s not dishonest or illegitimate about it – unless it’s a sneaky way to circumvent the provisions of established U.S.-China trade treaties. Is it?
Clearly China is using it’s (substantially) undervalued currency as a trade weapon to make it’s exports more competitive and block imports. This is not a new situation, and is in breach of trade agreements if China’s trading partners decide to challenge it.
Do we care ? Apparently the Bush administration has decided not confront China about this right now, by taking the position that we can’t ‘prove’ that China is doing this. Not that anybody has any doubt that the Chinese Yuan is undervalued by a factor of about 5 against this USD - the administration has simply decided that it wouldn’t be politically advantageous to impose sanctions right now.
This is certainly harmful to the US manufacturing industries, but on the other hand, in the short term US consumers have access to cheaper goods.
You’ve heard of the hypothetical case of one company wiping out another with artificially low prices. In that case, the deep-pocketed company is willing to lose money until the puny company goes belly-up.
In the example of the People’s Republic of China, the deep pockets are not full of money. They are filled with workers, compelled to work cheaply. Instead of directly tweaking prices (which would be dumping,) China devalues the yuan by half. No one ever thought to make that illegal. It’s pretty clever, I guess.
In an old book called Stillwell In China, about US military in China around the time of Mao’s revolution, Gen. Stilwell saw something startling. At first, it looked like a giant centipede. He realized it was a train car being pushed by a large number of people on each side of the track. He turned to his aide and said, “That is what will save China.”
I don’t understand this at all. Can you explain this in generally accepted economic terms? How exactly does the Chinese goverment “compel” workers to work cheaply? How would it “tweak prices”? How does it “devalue the yuan by half”?
They compel workers with force(you have heard of sweatshops, haven’t you?). They could tweak prices by selling goods at below-market value, but that’s illegal under international trade rules.
There are several ways to devalue a currency. The easiest way, is to have the central bank buy large amounts of foreign currency with domestic currency. Exchange rates are subject to the laws of supply and demand, so by increasing the supply of the yuan available on the market, they can keep the price(i.e. the exchange rate) low.
The problem is that if China stops “manipulating its money” then who is going to finance our Iraqi adventures and our tax cuts and our general fiscal irresponsibility? China manipulates its money by buying American debt. Are we sure we want that to stop?
So you’re telling me that A) ALL labour in China is employed by the Chinese goverment, and in fact, workers are forced to work at gunpoint, something that never happened before the economy was liberalized, B) ALL capital, companies, factories, all manufacturing capacity is wholly owned and controlled by the Chinese goverment, no foreign firms have any interest or invested anything, ever, in the Chinese economy, and C) EVERYTHING produced in China is exported at prices set by the Chinese goverment?
I see, so of course things like inflation and the money supply do not exist in China, and the Chinese economy has a limitless capacity to immunize forex inflows at no cost?
JHust as an aside, I’ve read a report recently that China’s dollar holdings are dwarfed by those held by oil-producing nations in the Mid-East. Just saying…
The goverment sets the exchange rate. Take the case of my friend Shunyu. Lets say he earns 10,000 yuan a month. That is about $1,000 US. It should be about $2,000 US. This means when he buys imported goods he is paying twice as much as he should be. Things net out for domestic goods.
Americans meanwhile, get to buy things made in China for about half what they “should” cost.
If China was democracy the workers might complain and have their currency revalued. But in many ways, it helps the workers because it attracts investment and provides for more jobs.
My sources about global economy are mostly editorial (as I can’t really digest much more). That fact doesn’t seem to be getting much press. Is this a new “finding” or something that has always been true but is just not as interesting to editorial writers?
China is stocking up a war chest of $US
- they will use it to buy up raw materials, they have already done some of that.
They have no interest in seeing the $US devalue
What will be very interesting is when they move their focus onto their domestic market, if they get it right they will not need to export at all.
I don’t doubt that there is some overt compulsion in China, but that’s not necessary at all. If you have a choice between:
(1) working for 10,000 yuan in a factory;
(2) working for 5,000 yuan on a farm;
(3) being unemployed and taking home 0 yuan;
most people take option 1.
This is interesting. Can you please flesh this out, because I’m clearly missing detail. Any market can always use more buyers.
This is the invisible hand at work again, and it’s a good thing. However, this isn’t sustainable. This only works if China can continue to stock up on US dollars and debt. Either the US becomes more responsible with regards to savings and spending, which would make our currency stronger and much more lucrative to the world, thus giving us more wealth; or, we continue to spend fruitlessly and inefficiently and we cause a downward spiral in the global economy, of which whoever is holding our dollars and are debt will also be left holding the bag. It’s a win-win situation.
I thought I heard this, too. But this page here, direct from the US Treasury, says that as of October, the Chinese held $345 Billion of our national debt, or about 16% of our debt held by foreigners. Japan held almost twice as much, $641 Billion.
The OPEC countries held just $98 Billion.
Am I overlooking some area where the Chinese have vast hoards of American capital?
By depressing the value of the yuan, China is essentially depressing its workers’ labor costs on the international markets. But from the workers’ perspective, this is only important with regard to imports. Domestically-produced items, like food, clothing, and shelter, are essentially irrelevant to this discussion; as long as life’s essentials aren’t harder to obtain for the worker, the Chinese leadership is insulated politically from its currency shenanigans. And, as noted, this policy provides for a booming manufacturing sector, so it in fact does benefit the Chinese labor force in that sense.
It also has driven US manufacturers OUT of business-we don’t have any more domestic manufacture of shoes, TV sets, radios, watches, or clothing left (except for high-end/luxury lines). Nobody seems to care, but the day will come when Chinese made goods become very expensive-but there won’t BE any domestic alternatives!
Right – but there will be alternatives in India, Indonesia and Mexico. It actually does make sense for wealthy countries, with an highly educated work force, to concentrate on the upper end of manufacturing and service industries.