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PORTSIDE  October 2010, Week 4

PORTSIDE October 2010, Week 4

Subject:

Money Wars: Beating Up On Beijing?

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Date:

Tue, 26 Oct 2010 21:44:59 -0400

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Dispatches From The Edge

Money Wars: Beating Up On Beijing?

By Conn Hallinan

Submitted to portside by the author
October 25, 2010

Are the U.S. and China on a collision course? Consider the
following:

During the 2010 mid-term elections, some 30 candidates for
the House and Senate are blasting China for everything from
undermining America's financial structure to fueling the U.S.
unemployment crisis.

The Obama Administration is accusing China of manipulating
its currency to sabotage the U.S. exports trade, and the U.S.
House of Representatives just passed a bill to slap huge
tariffs on Chinese goods unless Beijing allows the renminbi,
China's currency, to appreciate.

A recent Financial Times article on the failure of the
International Monetary Fund (IMF) to resolve the currency
issue says, "The hostility between Washington and Beijing has
escalated into something resembling trench warfare." Last
year a CNN poll found that 71 percent of Americans thought
China was an economic threat, and 51 percent of those polled
thought Beijing represented a military threat as well.

If one adds to the above the growing tensions with China in
the South China Sea and the Taiwan Straits, some kind of dust
up seems almost inevitable, though any "collision" would be a
diplomatic one. But a major diplomatic fallout between the
world's two largest economies has global implications.

What is going on here? Is China indeed manipulating its
currency to beggar the U.S.? Does it bear some responsibility
for the high jobless rate and the inability of the American
economy to recover from the deep recession?

The answer is both yes and no, and thereby hangs a tale.

The U.S. charges that China is deliberately undervaluing its
currency, the renminbi, which makes Chinese export goods
cheaper than its competitors and thus undermines other
countries exports.

China is indeed manipulating its currency, although it is
hardly alone. In one way or another, Brazil, Japan,
Switzerland, Thailand, South Korea and others have recently
acted to keep their currencies competitive. Nor is currency
manipulation something new. During the 1980s the Reagan
Administration and Japan jimmied their currencies to deal
with a huge trade gap. Indeed, the current free market
orthodoxy regarding currency is a recent phenomenon in world
finances, a reflection of the "Washington Consensus" model
that has dominated institutions like the IMF and the World
Bank for the last two decades.

How one sees the current dispute depends on where one sits.
With U.S. unemployment above 10 percent, Americans are
focused on policies that will bring that rate down. But from
China's point of view, any major upward evaluation of the
renminbi would simply transfer U.S. jobless rates to China.

Since it would also reduce the value of the dollar, it would
lower the value of the massive debt the U.S. owes China. "And
that, to the Chinese, would feel suspiciously like a
default," says Stephen King, chief economist for HSBC.

In short, a lose-lose deal for Beijing.

From the Chinese side of the equation, the U.S. is
essentially trying to unload the consequences of the economic
meltdown that Wall Street caused onto them. And they dispute
the fact that the huge trade surplus is all that relevant to
the current crisis.

According to Avinash D. Persuad, chair of Intelligence
Capital Limited, even if China's $175 billion trade were to
somehow vanish, it would only have a 0.25 percent impact on
global GDP. "The Chinese economy is one quarter of the U.S.
economy, and at the peak of the U.S. trade deficit, China's
surplus was less than a third of it. David may have toppled
Goliath, but he couldn't carry him," says Persuad.

Exports have certainly been important to China, but they have
only accounted for 10 to 15 percent of growth over the past
decade. The main engine for Chinese growth has been
investment. According to the World Bank Growth Commission, of
the 13 countries that have enjoyed 7 percent growth rates
over the past 10 years, all had high investment rates. These
countries suppressed consumption by keeping wages low,
allowing them to amass enormous pools of capital to pour into
upgrading infrastructure or subsidizing industry.

The Chinese economy is booming-it never fell below 8 percent
growth during the recession-but it has some vulnerabilities.
The Chinese recognize that they need to shift their economy,
away from an over reliance on exports to one based more on
internal consumption,. To this end, private wages and
consumption have been growing at a respectable 8 to 10
percent yearly. The thinking is that as consumption goes up,
China will absorb more of its own products, and thus the
trade deficit will go down.

China's new five-year plan is trying to do exactly this.
Shifting some of the economy away from the wealthy coastal
areas toward the more depressed inland part of the country
will help alleviate some of the wealth gap between city and
country, and encourage urbanization in the interior. All of
these moves will increase consumption.

 If China were to suddenly raise the value of its currency,
 however, it would tank a number of export industries and
 flood China with unemployment. Since the jobless have no
 money, consumer spending would fall, setting off yet another
 round of layoffs and plant closings. This is, of course,
 exactly what Americans are discovering.

Beijing has begun raising the value of renminbi-it has risen
2.5 percent since June-but the slow pace has not satisfied
Washington.  The Americans are making other demands as well.
For instance, the U.S. would like China to lower its interest
rates, which the Americans argue would encourage consumption.

But as Michael Pettis, a professor of finance at Guanghua
School in Beijing University and a senior associate at the
Carnegie Endowment, points out,  "This would be terrible for
China. Lower interests rates and more credit will fuel a real
estate boom and boost both capital-intensive manufacturing
and infrastructure overcapacity-all without rebalancing
consumption."

From China's point of view the problem is not its currency,
but the lack of controls over American finance that can lead
to tsunamis of money flooding into underdeveloped countries.
In 1997, waves of international investment money poured into
Thailand, tanking the currency  and spreading a recession,
the so-called "Asian Flu," throughout the region. The Thais
took action Oct. 12 to block a similar "hot wave" of money
pouring into the country by imposing a 15 percent withholding
tax on capital gains and interest payments on government and
state-owned company bonds.  Besides Thailand and South Korea,
other countries in Asia, including Singapore and Taiwan, have
also intervened to keep their financial ships on an even
keel.

Europeans are blowing hot and cold on currency intervention.
Last year and this past winter and spring, the EU had good
reasons for remaining quiet about the subject of undervalued
currencies. The Euro lost 17 percent of its value vis-à-vis
the dollar over the Greek financial crisis, which had the
effect of powering up European exports, in particular, by
Germany.

Germany-the world's second biggest exporter after China-is as
much concerned about the dollar as the renminbi. "We expect
the U.S. to continue its policy of printing money," Aton
Borner, president of the German exporters' association, BGA,
told the Financial Times. "This will trigger a currency
devaluation spiral that will hit Europe the most." The dollar
has dropped 20 percent against the Euro since June, and
German exports have fallen for two months in a row.

The Europeans are certainly concerned about the currency
crisis, although they are a good deal more sotto voice than
the Americans.  "It's not helpful to use bellicose statements
when it comes to currency or to trade," says French finance
minister Christine Lagarde.

Governments that don't take care of their own during an
economic crisis will eventually pay a price at the polls.
Brazilian Foreign Minister Celso Amorim is certainly
concerned about defending Brazil's currency, but he is
careful about applying pressure as a way of finding
solutions. "We have good coordination with China, and we've
been talking to them," he said, adding, "We can't forget that
China is our main customer."

China charges that the U.S. is scapegoating it for problems
that the U.S. created for itself, and there is certainly a
strong odor of China bashing these days, even from
intelligent and thoughtful people like Paul Krugman, Nobel
laureate and New York Times columnist.

Krugman says that while he wants to avoid "hard ball
policies," he says "China is adding materially to the world's
economic problems at a time when those problems are already
severe. It is time to take a stand." Krugman suggests the
U.S. should put a 10 percent surcharge on imports from China,
a move more likely to ignite a global trade war than bring
China to heel.

Last weekend's meeting of the G20, representing the world's
leading economies, firmly rejected an American proposal aimed
at the Chinese (and also the Germans) and opted for a less
confrontational approach. The meeting in Seoul, South Korea
essentially asked everyone to play nice. Whether they will or
not remains to be seen. The subject is sure to come up again
in November when G20's heads of states get together.

The solution is not a quick re-evaluation of the currency,
says the Carnegie Endowment's Pettis, but "statesman-like
behavior, in which the major economies agree to resolve their
trade balances over several years."

"Statesman-like behavior" is not exactly what is coming out
of Washington these days.

_____________________________________________

Portside aims to provide material of interest
to people on the left that will help them to
interpret the world and to change it.

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