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
China was the
United States' largest supplier of goods imports in 2010 - goods imports from China totaled $365 billion, a 23.1 % increase ($68.6 billion) from
2009, and up 841% over the last 16 years.
The U.S. goods and
services trade deficit with China was $219 billion in 2009 – in 2010 just the U.S. goods trade deficit with China was $273 billion.
U.S. exports to China accounted
for 7.2% of overall U.S. exports in 2010 while U.S. imports from China accounted for 19.1%
of overall U.S. imports during
the same time period.
The American Congress
is facing a restless, very concerned, and increasingly
vocal American public. Lawmakers in both the Senate and House are blaming China for the loss of
US jobs and are pushing for legislation
(Currency Exchange Rate Oversight
Reform Act of 2011) that would force China’s currency, the
Yuan, to rise against the
US dollar. If approved by Congress,
the CEROR Act would force
the US Treasury Department
to formally tag China as a currency
manipulator, this would allow the US Commerce Department to impose duties and
tariffs on imports.
With elections in
2012 and the Obama Administration vulnerable
– this author believes President Obama is deeply vulnerable
to a 2012 election threat
from the GOP fielding their heir apparent Mitt Romney or the incredibly charismatic Rick Perry - there exists the possibility that President Obama will try to penalize
China for its large bilateral
trade surplus with the
U.S.
Obama has promised
repeatedly to get tough on China over its currency practices. James Zhang, from
the University of Newcastle in Australia,
says a 20 percent rise in
the Yuan would contract
the Chinese economy by 12
percent.
- Tuesday
6 October 2009 1 USD = 6.8312 CNY
- Wednesday
6 October 2010 1 USD = 6.6994 CNY
- Thursday
6 October 2011 1 USD = 6.3751 CNY
China’s Problems
Capital 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-asset investments rose 25 percent year-on-year to hit 18.06 trillion Yuan (2.83 trillion U.S.
dollars) during the first eight
months of 2011.
China is able to invest so much
into FAI because, in
addition to the inflow of foreign
direct investment (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. 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.
“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,
clothe 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 elections and nothing is more important to a politician
than getting reelected.
This dispute over Chinese
currency reevaluation is just the harbinger,
the tip of the ice-burg, 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
Conclusion
The US has, so
far, been cautious of pushing
China too hard on the revaluation
issue, that might change.
“China has been very
aggressive in gaming the trading
system to its advantage
and to the disadvantage of other
countries, particularly the United States. Currency manipulation is one example of it." President Obama at a recent news conference
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 should be on everyone’s radar screen. Is it on yours?
If not, maybe it should be.
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