Currency Wars: The Yuan and The Dollar Face Off

renminbi-its money comrade.jpg

In the currency wars looming between the United States and China, everyone is focused on the decline of the U.S. dollar and the overvaluation of the Chinese renminbi. In the standoff, China maintains a low valuation for the yuan — the unit in which the renminbi is denominated — against the dollar, insuring that Wal-Mart can fill its aisles with goods that cost less than the patio furniture and video games made in Paducah, Kentucky.

The Obama administration would like to “jawbone” the Chinese to relax its currency peg, so that the yuan appreciates, making it possible for Chinese consumers to buy goods from the United States. This monetary logic assumes that Chinese buyers want to own serialization rights to "The Apprentice", or are shopping for B-1 bombers, as at the moment that may be what the U.S. economy primarily has to offer for export.

In trying to explain the depth of the current U.S. recession, economists have latched onto the phrase “structural issues,” to indicate that the U.S. needs fewer pilates classes and more steel orders if it is to pay down its debts and create new jobs. The phrase itself is a hint that the currency wars have provoked bizarre east/west role reversals.

While the mandarins of the Chinese politburo sound increasingly like hard-nosed American executives, the Obama administration is speaking a language that could well be lifted from Mao’s Little Red Book.

Like the Cultural Revolution, the U.S. administration came to power pledging to get rid of the “four olds”: old thoughts, old culture, old customs, and old habits. It might well have denounced “Party formalism” or “spiritual pollution.” Yes, there would be struggle sessions and the opposition of turmoil elements. But the result of the reforms would be a Great Leap Forward, although one that evidently comes with the price tag of $2 trillion in annual deficits.

China’s worry, meanwhile, is that its economy relies on one client with a receivable problem. Its treasury sits on $1 trillion of U.S. government bonds and securities, the peg to keep the yuan in line with the dollar, while the dollar is sinking under the weight of its GM shares, subprime loans, entitlement IOUs, and health care payouts.

Twenty years ago it would have been a dream to imagine “capitalist roaders” running China. Now, we fear having to answer to repo men.

Like any nervous creditor, the Chinese leadership focuses on “payout ratios,” “interest cover,” “debt-to-equity,” and “price-to-book.” Mao might have warned about “spontaneous tendencies toward capitalism,” but the new Chinese leadership thinks more about solvency and capital adequacy.

Hence the current American hand–wringing at IMF meetings and the calls in Congress to convene what the Central Committee used to call “Grievance Redress Societies.”

While the Chinese are working on Saturdays, the Obama administration’s jobs policy, for the moment, consists largely of hiring America’s unemployed into the Census Bureau. Maybe we can expect large posters of Uncle Sam exhorting Americans: “Do Your Economic Duty: Stand Up and Be Counted!”

Why do Americans have trade and payment imbalances with China? The short (and nonacademic) answer might begin by saying that Americans are in love with such big box stores as Target and Costco, and can’t own enough sheets, towels, housewares, wrapping paper, sweatshirts, shoes, T-shirts, caps, kitchen appliances, televisions, recliners, electronics, iPhones, picture frames, blue jeans, and sneakers, all of which China is willing to supply at cut-rate prices.

Consumerism in China is not the state religion that it is in the United States. Shoppers in the U.S. congregate in malls and stores that are the size of the Vatican, and they walk around in the same hushed raptures. The average shop in China, as best as I can tell from my travels there, is the size of a closet and sells bags of rice, bottled water, Hand of Buddha Tea, little pots, bird cages, and shoots of bamboo, none of which are made in those retooled New England woolen mills.

China would buy our software, were it not already stealing it. As it is, all the Chinese want from the U.S. is a few buckets of KFC chicken, some coal plants, and the odd New York Yankees cap. Too bad they don’t want to buy AIG, the city of Las Vegas, or the Social Security system.

Although the last thing I want to be accused of is “mountaintopism” or “right opportunism,” my fear is that the failure of the Obama administration’s currency pronouncements, combined with the rise of Tea Party nativism, will provoke the kind of protectionism that would warm the earmarks of Senator Smoot and Congressman Hawley.

What could be easier than to impose tariffs on a variety of Chinese–made goods? The problem with protectionism is that it will further delay the economic recovery.

In the short run, protectionism could redress the monthly U.S. trade imbalance (up to $28 billion a month with China), stimulate a few jobs, and end the “capitulationism” toward the subsidized state capitalism of the Far East.

Longer term, protectionism puts the U.S. on a path in which its economy will be isolated from the rest of the world, with these (“renegade”) consequences: trade collapses, government debt remains high, foreign investors disappear, costs and inflation increase, unemployment goes up, savings go down, and “the carefree clique” in Washington raises taxes to pay for these “opportunist errors.”

The currency disagreements mask the inherent imbalances in the global financial system: the West consumes too much and saves too little, and the developing world, and countries like China, spend too little and horde too much. Only economic expansion, debt reduction, and expanded trade can redress this so-called disequilibrium. Neither protectionism, nor more Fed magic will do the trick. Nor will declaring a currency war against China.

Even the Chinese know that it’s better to be a dog in peace than a man in troubled times.

Photo by Eric Mueller, "It's Money, Comrade!"

Matthew Stevenson is the author of Remembering the Twentieth Century Limited, winner of Foreword’s bronze award for best travel essays at this year's BEA. He is also editor of Rules of the Game: The Best Sports Writing from Harper's Magazine. He lives in Switzerland.

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U.S. officials use the

U.S. officials use the Chinese Yuan issue as a straw man intended to draw attention away from the 'structural issues' (as Mr. Stevenson says) facing the American economy. The interesting thing about this currency debate is that it seems to be one of the few truly bipartisan issues that both Republican and Democrat politicians actually agree upon. From the White House, Timothy Geithner and Larry Summers, along with Senior Republican Senator Richard Shelby, have all taken to calling out China on its currency manipulation. Even the uber-liberal economist Paul Krugman writes an opinion piece every few months in the New York Times blasting China.

The rhetoric coming out of Washington is nothing more than a distraction for Americans wondering where all their jobs went. Assuming that jobs will magically reappear back on U.S. soil once China's Yuan value goes up is a pipe dream. Businesses that rely on manufacturing (and to an increasing extent, so-called 'knowledge' work) will continue to seek ways to minimize overhead and increase their bottom line. If this means moving operations to India, Vietnam or the Philippines once China becomes too expensive, they will do so. What they won't do is return to the U.S., no matter how low the value of the dollar gets, because the looming threat of increased taxes, worker entitlements and potential frivolous lawsuits pose way too much risk.

Regarding China's trade relationship with the U.S., America does in fact offer a fabulous export to the Middle Kingdom: Hollywood entertainment. 'Iron Man 2' was a big hit in China, as was the recent film 'Inception'. TV dramas 'Sex and the City' and 'Gossip Girl' are watched by millions. Unfortunately, these exports amount to little benefit to the American economy as pirated DVDs can be bought on the street corner for less than $1 USD each- and TV shows can be downloaded for free.

The Chinese love American brands. The Apple iPhone is a hugely popular in China. Wal-Mart stores are popping up all over China. KFC and Pizza Hut are hot dating spots for young Chinese couples.

Surely, these are American companies, but in actuality, their expanding market presence in China is of little benefit to the average American worker. Wal-Mart products sold in China to newly-hungry consumers will be made in China, or nearby Southeast Asian countries. Apple will continue to find the cheapest possible way to manufacture its cool products. In the end, shareholders will benefit, and the U.S. middle class will continue to dwindle as employment opportunities shrink even more.

Political posturing by Washington against Beijing amounts to little more than a cover-up for what has really happened: America dug its own grave.

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Everybody knows how important first impressions are, but what you may not realise is just how much of an impact good web design can have on your brand or business.
A poorly designed website not only distracts users from delving into what you’re trying to say or sell, but could also potentially reflect your personality in a negative light