By Simon Johnson
Writing partly in response to “Should We Fear China?“, Robert Salomon of NYU makes some good points – about how rapid appreciation of the renminbi could hurt China and argues:
Although I agree that it is in the best long-term interest of the U.S. and other countries throughout the globe for China to revalue its currency, it isn’t entirely clear to me that such a maneuver is in the near-term interests of China, …or maybe even the global economy.
Robert’s concerns are focused on the effects of a sudden revaluation – a movement in the exchange rate that would be disruptive to Chinese production and plunge that country into recession. But that scenario hardly seems likely.
Even if the US decides to press China hard on the exchange rate issue, we currently lack instruments to make this pressure effective. Working through the IMF is not appealing – because it just won’t work – and the World Trade Organization (WTO) does not have sufficient jurisdiction on exchange rate issues (if pushed today, it would bring in the IMF to determine the extent of exchange rate undervaluation; again, we’re back to the IMF impasse).
To be sure, Congress could threaten bilateral action but this is a blunt weapon that can easily cause a great deal of collateral damage. At the Commission’s hearings on Capitol Hill yesterday, the consensus appeared to be that China should be pressed harder on its exchange rate – including being labelled a “currency manipulator” by Treasury at the next opportunity (in April) – but we should not rush towards any kind of trade war.
It would be much better to give the WTO teeth vis-a-vis exchange rate manipulation, but this will take a while. Even in the best case scenario, effective pressure will build only slowly on China.
On the other hand, if China steadfastly refuses to appreciate the renminbi in any significant manner, the damage when the exchange does eventually move could be even greater.
We should not fear China – our problems are about ourselves, not anyone else. China should likewise mostly fear the unintended consequences of their own misguided policies.
The Baseline Scenario 
so maybe they should just print RMB, generating domestic inflation in china — they could devalue their currency that way
If China is smart, they will have learned the lessons from our recent financial crisis here in the states. They like to tout their recent (20th Century) successes with capitalism on a pseudo-Communist platform. It’s often cited that China heavily subsidizes their manufacturing base and other sectors of their economy in order to not only catch up and meet their own domestic expectations, but are on their way of exceeding the U.S. (although, probably at the expense of environmental degradation and human rights violations). It’s not in their interest to play fair with the U.S., as they seem to be enjoying their own Bull market and economic growth (“The People’s Bank of China buying dollars and selling renminbi, and thus keeping the renminbi-dollar exchange rate more depreciated than it would be otherwise”.)
That is essentially what they have been doing. They have been using all those extra yuan-RMB to buy US securities.
We want them to allow their currency to _appreciate_.
I think Simon’s argument is that while it is not in their short-term interest, it makes more sense for them in the long run to “play fair.” The issue really isn’t (according to SJ) that they are flouting rules of the WTO, IMF, USA, or any other organization. The issue is that they are ignoring basic economic principles that will ultimately come back to bite them. (“…the damage when the exchange does eventually move could be even greater.”)
I agree with Simon that it is in China’s long-term interest as well to address its imbalances via some kind of yuan remediation. However, I should also point out that it is not just economic considerations at play in the near-term, but social considerations as well. Any sudden revaluation could be socially destabilizing for China. Given China’s tenuous political situation, it is therefore difficult from a policy standpoint for Chinese politicians to make decisions that might not be in their best near-term interests (swallow the pill so to speak), …even though they recognize the problem. I tried to articulate that a bit in my blog post, but not sure if I did so successfully.
Isn’t this a game of repeated prisoner’s dilemma where one side is always defecting, and yet the other side refuses to play tit-for-tat in response?
We can print more greenbacks as we are doing. It automatically appreciates the RMB.
Yes, China is Japan circa 1985 but on steroids. Our leverage with China is exactly zero because our elites have sold us out to China for their own enrichment.
All this talk about China as a currency manipulator is BS. China saw what happened to the Asian Tigers and is protecting itself with dollar balances against exchange speculation. Perhaps Lenin was right after all about capitalists selling communists the rope with which to hang them? Not to worry though. China is now our pal. We are just one big happy international family intoxicated by the growth kool aid and made hopeful by every suggestion for further tinkering by some IMF or think tank big shot.
Why not have the Fed start buying Renminbi? They are buying everything else.
If you like this discussion you should look at Michael Pettis disussion on what China can and can’t do with its reserves….
http://mpettis.com/
No, because our payoff is better if we do not intervene. In the prisoner’s dilemma our payoff is better if we do.
A more sensible approach is to negotiate a phased revaluation of the yuan/renminbi over a two year period which will give both nations time to adjust to the changes.
US manufacturing appears to be very weak, certainly where consumer goods are concerned. Thus, it will take time for the US to restore its atrophied manufacturing sector.
An abrupt revaluation of the Chinese currency would likely translate into immediate price hikes and/or shortages of consumer goods and maybe other goods and services in the USA.
China’s present manufacturing and industrial base appears to be concentrated on producing goods and services for wealthy nations such as the US. In many cases, these goods and services are of little value to the bulk of China’s population. So China will need to retool its manufacturing and industrial base to produce goods and services more necessary for its predominantly rural population. In the longer term this should raise the material standard of living in China.
Sincerely,
John
they can’t buy US securities with yuan/RMB. they need dollars to buy US securities.
It is in the US short-term and long-term interest to have the RMB appreciate. It is not in China’s short-term interest.
The answer is to move down the path of appreciating China’s currency for them. It begins with behind the scenes warnings of what’s coming, then investigations into whether they are manipulating, then a declaration that they are manipulating, then an investigation of remedies, and then an application of remedies to begin at time period x, then actual imposition. The US could set a variable tariff reflecting a 25% appreciation of the CNY. The EU and other nations will be forced to go along if they do not want to become China’s new dumping ground.
Whatever retaliatory measures China takes will end up benefiting the US, or only having a minor effect. Halting purchases of Treasuries will speed appreciation. Selling Treasuries will not only speed appreciation but worsen the losses the PBoC will take on its reserves.
China could slap on its own tariffs against the US, but that would violate WTO (unless they claimed the US was also a currency manipulator). It would also barely have an impact on the US economy, with exports less than $75bn per year (or 0.5% of GDP). It would shoot themselves in the foot, as most US exports are key items of capital equipment needed to build new manufacturing capacity or commodities to feed their industries.
The best reason NOT to do the above is that Chinese would blame the US for the implosion of their economy that they have brought about through ludicrous misallocation of resources. Their manipulated FX rate and state-controlled banking system and corporates have invested heavily in high-cost steel, metals, and cement capacity that is barely viable today and will be loss-making at a higher exchange rate. Basically Gary, Indianas and Bethlehem, PAs fifty times over. You could argue the US should let China’s Real Estate and investment bubble collapse of itself so we don’t get blamed.
But we probably will be anyway. And it is unacceptable to have American manufacturers and people who depend on them be sacrificed for China’s industrial policies. It’s an adjustment that’s going to take place anyway. Might as well be now when the US economy requires stimulus.
Is the goal of China a seat at the table or to be perched on a throne?
Unlike many, I don’t see China as much of a threat. For one they can’t even feed themselves. Secondly, you can’t control the world unless you control oil. China is nowhere near controlling oil.
While much of the blogosphere and msm announce the sky is falling with every tick in China’s divestiture of USD’s, the price of oil rockets up.
In other words China shoots itself in both feet.
China made a play in the Middle East when Iran sought to set itself up as a satellite and protectorate. We created a wall extending from India through Pakistan to Afghanistan to deny China an overland route into Iran.
We have invoked the Carter Doctrine. It’s not about money kids. It’s about oil. What powers us.
When people argue for national interest, the earth is sinking.
In the meantime (“near-term”) the US manufacturing and technology base is bleeding to death, so that if something is not done soon enough the US economy will be truly broken. If any manufactured product can be made in China and sold in this country for less than the cost of raw material there will no longer be a self-sustaining manufacturing base – the supply chain, including of engineers and scientists will vanish. As odd as this may sound to people in the elite Wall Street-Washington financial/media/government circles, you cannot have a modern economy without manufacturing, though on second thought these people probably consider China to be part of their economy which means that the non-elites (bottom 95%? of the US) will just have to get used to Chinese level wages. Of course that raises a question: Who’s going to make our weapons?
Any remedy taken, “yuan remdiation” or bilateral action such as selective tariffs, has risks attached to it such as destabilization of China’s internal politics or of US-Chinese realtions, but a decision to just wait for the perfect solution is a death sentence for the US economy with the exception of the elites who’ll always have their millions and their nice homes. I suppose they’ll enjoy all the cheap help.
I think the opening shots may have been fired when the NYTimes (mouthpiece of record of the financial elite) recently stated explicitly that China was manipulating its currency. But keep in mind that the people running this country (Corporate America/Wall Street and most our elected officials who are on their payroll) actually like the present arrangement with China as they are making lots of money from it, and so are in complicity with the Chinese government.
A question I have is: What is actually going on among our elites behind closed doors? Are there any factions whose members truly want to correct the trade imbalance, while other seek to perpetuate the current arrangement? Is all this public talk about China’s currency manipulation just theater to soothe the public rage during these terrible (for the non-elite) economic times?
“I suppose they’ll enjoy all the cheap help.” Until they find themselves on the wrong side of the latest weapons, and have no effective legal say over control of IP or any P, or the enforcement of contracts. Win-Win!
Citizens from an nation of bankrupt borrowers telling citizens of a economy of savers and lenders how to value their currency sounds odd. Even presumptuous.
Especially since we gave the same advice to Japan 25 years ago with the result that, after they actually took our advice, we saw our indebtedness increase and their economy crater, permanently.
“To be sure, Congress could threaten bilateral action but this is a blunt weapon that can easily cause a great deal of collateral damage.”
————–
Evidently, Sen. Reid doesn’t agree or is too stupid to know any better:
By Doug Palmer
WASHINGTON (Reuters) – Senate Majority Leader Harry Reid urged Chinese President Hu Jintao to address his country’s huge trade imbalance with the United States through a “significant revaluation” of China’s currency.
“I know China is committed to moving to a free floating currency eventually. But China’s currency policy has been causing major distortions in the world economy for too many years already, and is continuing to do so now,” Reid, a Democrat, said in a December 9 letter released on Friday.
“In the mean time, I hope you would consider a significant revaluation to bring the value of the RMB in line with economic fundamentals, and after that, to return to a more robust version of the ‘managed float’ that your government previously maintained,” Reid said.
http://mobile.reuters.com/mobile/m/FullArticle/CPOL/npoliticsNews_uUSTRE5BA3TN20091211?src=RSS-POL
More Reid:
“Finally, your currency policy is not in the long-term interest of China: it creates inflationary pressure, promotes over-investment, and feeds asset bubbles within China. In short, it is one of the most serious economic problems in the world today,” Reid said.
Ia m starting to think that the 21st century is going to be all about the zero sum game. What we may need to stay ahead of that is good old fashioned closed border industrial policy.
If you go to buy say a toothbrush or a TV is better be made here otherwise you ain’t getting it.
And yes this screws the other guy. Thats OK as he is trying to screw us anyway.
Do it gradually and carefully and watch the US economy fly sky high
And one more thing. If you have a production surplus, stop trying to push it on some other country. Cut the work week instead and shift a little of the economy to leisure. A good chunk of the economic troubles we are having are caused by overproduction.
The parts of the world that have our former standard of living and can afford to pay us enough for our goods all have a production surplus and population aging . Let them deal with their own problems (and defense too but thats another matter)
And before anyone mentions it, the US is a net importer with a lot of lost industry. We we not in this bag (the worlds consumer) this play would be plenty stupid.
SJ. “On the other hand, if China steadfastly refuses to appreciate the renminbi in any significant manner, the damage when the exchange does eventually move could be even greater.”
They have steadfastly refused to do something real about it so why the “if”?
SJ. “We should not fear China – our problems are about ourselves, not anyone else.”
Absolutely it takes two to tango and if the US had not adopted the principle that debt is always good if it comes cheap this problem would not be what it is.
SJ. “China should likewise mostly fear the unintended consequences of their own misguided policies.”
Absolutely when the tango two dance stops, both partners suffer.
But a tango might be the wrong simile since in fact the China renminbi and the US debt seem more to have entered into a frantic polka, dancing faster and faster by the moment, and where the dancers cannot stop until someone falls and the music stops.
But let me also remember all there are other parties to this problem. Arvind Subramanian and Dani Rodrik have argued that it is the poor emerging countries that really pay for a weak renminbi, and I much agree with them. Since Mexico being a much freer country than China has not the same possibilities to manipulate its currency it is Mexico who has really suffered seeing China lure away many of those jobs that were presumed to be theirs when signing Nafta. It is Mexico should be screaming out loud.
yes, read this.
Mind you that US export to China is rising a lot faster that Chinese export to the US in the recent year. A lot of Chinese would point out the mind boggling saturation of US brands in China, including Daily brrage of Chevy, Buick, Coke, Tylenol, Colgate, etc. TV commercials. The Chinese trust American brands a lot more than Americans trust Chinese brands by a light year. The best selling auto in China is no longer European but none other than GM, which sold well over a million vehicles in China last year.
But on a darker matter, China’s 2007 ASAT and 2010 anti missile tests ought to underline that the US no longer holds regional hegemony in Asia. On military technology front China is acquiring parity vs the US just as fast as on manufacturing, trade, and economy. China has more college engineering grads than we have grads, and our grad schools are awarding science and engineering PhDs to the best and brightest around the world, who happened to be more and more Chinese. Recent articles about Chinese alternative energy may have surprised many, but such would be only the tip of the iceberg for many more things to come, as a result of this lopsided technological man-power advantage.
Therefore, it is all the more interesting to ponder: why has China been so benign and reticent about our continued “pressuring” acts, including Obama’s reception of Dalai Lama, arms sales to Taiwan, tyre and pipe tariff, and perhaps Graham-Schumer tariff in the future, even in light of rapidly declining trade imbalanceness?
I submit that we may not fear China for what the Chinese have done but for what Americans have done to the Chinese and have not done enough to solve our own problems. The trajectory of China is not just or peer equal, but our superior, within a generation. Both sides may hold the power for mutual annihilation, but why not endeavor on something safer and more more constructive together for the whole mankind instead. It may not be counter-intuitive to our sole-superpower mentality and habits, but I’m sure it’s the best thing to do.
more locally centered economies would achieve such an effect, although that would stand in stark opposition to the legislature as market system in place now…
Where would inflation be if we force the Chinese to revalue the Yuan? If we do this, would it make equal sense to force the appreciation of the Japanese Yen and the Korean Won by another 100%? That way, we can export a lot of stuff, especially the Japanese have a lot more buying power than the Chinese anyways, and also Japan should be so happy that its economy will appreciate by another big amount to stay ahead of the Chinese economy as still the No.2 of the world.
Don’t count on bubbles and inflation in China. China has been able to manage bubbles and inflation more effectively than we do, at least since Vice Premier Wang Qishan’s era. China has been able to head off recent asset bubble problems by installing frequent bumps in transaction volume acceleration. By comparison, the US has been too slow and too bogged down, and too easily caught up by catastrophic events such as the recent financial crisis. Therefore we ought not to be overtaken by our hegemon mentality when dealing with China, instead it’s better to be cautious with due respect and reciprocity.
For the Chinese revaluation of the yuan is a non-starter. Wen Jiabao himself stated that it’s unfair, and if it’s to be done it’d have to be in a gradual and orderly mannger. In Zhou Xiaochuan ‘s recent remarks on PBoC toolkits he mentioned that China ought to give inflation more leeways. Yao Jian, vice minister of trade and commerce, recently admits that China may run a trade deficit by mid 2010. And volumes of repeated central government policies since late 2008 asked economic reform and restructuring (so that more weight would be given to consumption than export).
The Chinese mandarins are smart enough to recognize that it’s time to re-orient its economy with domestic consumption at the center — the soft global demand for Chinese manufacturing may not worth its 2009 export subsidy of some 650 billion yuan, and for the first time in history there is enough capital and increase in demand for capital in this ex-socialist state for consumer loans than increase in bank forex account. More over, the one-child policy has finally forced a turning point in redistribution of GDP, and secular wage inflation seems in the offing.
On the trade front, China has been quietly signing free trade pacts with countries around the world, including with Asean and Taiwan, and currency swap deals with 6 countries and regions.
Therefore, it’s amply clear what China’s intentions are regarding its trade and currency policies. It would probably continue to bide time vis-a-vis any confrontational US initiatives on trade, national debt, or currency exchange rates while protecting favorable environment for its economic reform and restructuring. In its effort no doubt China would continue to increase import from the US, and maintain a proportional amount of US treasuries in its forex reserves.
What the US policy makers ought to do is not to be sidetracked by the currency and trade issues, instead focus on the more formidable task of how to face up to the full spectrum competition posed by China’s rise in the 21st century. It’s an American problem, not a Chinese problem.
“On the other hand, if China steadfastly refuses to appreciate the renminbi in any significant manner, the damage when the exchange does eventually move could be even greater.” I wonder how do you back up this statement? The Chinese have maintained a dollar peg for more than 16 years, and only recently revalued for 15% between 2005 and 2007 in a gradual and controlled manner. Through this 16 years there was at least two US bubble bursts, an Asian Financial Crisis, and at least another bout of Latin America banking crisis.
We have a fiat currency and we could print at will, but why can’t they have a command financial system that could loosen or tighten liquidity with a pen stroke? In fact they not only have dealt with bubbles well, they have deployed bubbles deftly. They have so many monetary, financial, industrial, trade, and macro-economic instruments in their economic management arsenal, and they have been climbing a very steep learning curve using them over the years.
Over the course of the last year the calendar is littered with precision bubble management policies that US policy makers could only envy.
I would remind Prof Johnson that the US bank credit expansion has only began to take to take the path as its Japanese counterpart since the early 90s. And a generation of US young men and women are threatened by a similar secular debt service contraction. It behooves US policy makers to focus on what could be done to mitigate the hardship while enlisting China’s willing support, instead of China containment policies with questionable benefit to the Americans. We, not they, need all the help we could get.
China suspended its gradual appreciation of Yuan upon the on set of global subprime crisis as part of the globally coordinated stimulus measure to support global economy. I read that a Chinese senior leader has sounded that China was ready to resume the Yuan appreciation but as part of stimulus packeage unwind which requires global coordination also.
Will China’s purchasing power be greatly enhanced if the Yuan is revalued up substantially? Does that mean China could buy up even more commodities and oversea companies?
Be careful what you ask you.
Should China Fear Us?
By all means, China should. US government is run by banksters and military complex contractors.
No, the Chinese government has the RMB pegged to the dollar, so the RMB devalues as we print more dollars. If that were not so our enormous trade deficits with China would have driven the value of the RMB higher long ago.
The difference between China and other countries like Japan and Korea is that China pegs the value of the RMB/yuan to the dollar. So when the dollar goes up so does the RMB, when the dollar goes down the RMB automatically follows by government decree. The answer is not incremental percentage increases in the RMB, but incremental steps towards letting the RMB float and so eventually reach its true market value.
Didn’t Geithner make some relatively bellicose statements to this point a while back ONLY to be put in his place upon arriving in Beijing? The problem is that we have a Treasury Secretary that is a mouse masquerading as a lion. When he came across a real lion the costume dissolved quite rapidly. Our fiscal agent has ZERO CREDIBILITY!
we are the chinese best client.