Why the US shouldn’t pressure China on currency issues

US China Currency US-Chinese relations have been rocky at best and outright hostile at times. The Chinese got pissed of at the US’s decision to sell military arms to Taiwan and then at Obama’s meeting with the Dalai Lama. Then there was the row over censorship in the wake of Google’s pull out. The latest spat has been over China’s supposedly undervalued currency. To be fair, there is an almost unanimous international consensus that the RMB is undervalued. This however is irrelevant. Regardless of this, the US should not be trying to pressure China for a RMB rise.

First, those who are calling for the move are hardly reliable. Sure, they have their share of Nobel economists and awards. But muddled amongst their claims were that China and Hong Kong were both currency manipulators. C. Fred Bergsten, director of the Peterson Institute for International Economics, a think-tank in United States said in a Congress hearing that

“Several neighboring Asian countries of considerable economic significance — Hong Kong, Malaysia, Singapore and Taiwan — maintain currency undervaluations of roughly the same magnitude in order to avoid losing competitive position to China.”

True, Hong Kong has a peg to the USD since 1983, and the government has had to control the currency to maintain that peg, but maintaining a peg is hardly currency manipulation. And if a peg is to be maintained, its rather difficult to manipulate a pegged currency! The total irony of it all is that Treasury Secretary Timothy Geithner paid a visit to Donald Tsang and other prominent financial people during his stopover in Hong Kong just this week. The HKD-USD peg has been around for almost 30 years, as long as Bergsten has been out of the government and out of touch with reality. John Tsang, Financial Secretary of Hong Kong put it quite nicely :

“This is a sign of rising protectionism and this kind of absurd voice will continue to be heard. Hong Kong’s peg to the U.S. dollar has been in effect for over two decades, how could we have manipulated our currency in that period?”

Even if we assume their claims are correct, what’s the real problem? Is the US-China trade imbalance a result of currency manipulation or a more fundamental issue with the US economy? Understandably, the currency plays a part, but the underlying problem is not the RMB but the lost of competitiveness of US products. Made in US just isn’t that cool or in demand anymore. US goods are expensive in comparison to almost all countries, that’s the underlying problem. Changing the RMB value won’t change the price of US products. Until something is done, the trade imbalance will still occur.

There really is no better indicator of the US’s lack of competitiveness than the fact that a trade imbalance would occur even if the RMB raised its value. Many Chinese goods would still be cheaper than US goods. Even if they aren’t US goods won’t be the cheapest because Indonesia, South east Asia, India, Brazil and other countries will still be cheaper than Made in US. In fact, Saudi Arabia’s multilateral merchandise surplus of $212bn in 2008 dwarfs China’s $175bn surplus. Has the US cried about Saudi Arabia? No. It wants the oil. Would RMB revaluation do anything to the Saudi Arabian surplus? No. What does Bergsten want to do then? Ban all foreign goods?

Chinese or foreign goods would still be in high demand. There just aren’t US made replacements. So instead of spurring on the US economy, all the currency revaluation does is to drag the US economy even further with now more expensive goods. I’m sure those who are struggling with a mortgage and who have lost a job would really like that Bergsten!

China's currency appreciates over time. A trend that's unlikely to change

China's currency appreciates over time. A trend that's unlikely to change

Even if you ignored everything I said before, even if you suck up to the US’s arguments… the reality is it won’t happen. The US has been barracking China for months and years on end. It took a high profile upcoming Obama trip coupled with a Geithner visit to even cause RUMORS of a revaluation. If one does occur, its likely to be around 2-3%, intended only to appease the US and as a sign of good will.
Sadly for the US, the chips are with China. They’ve been able to ignore the US for long enough to be able to do it again.

If there’s one thing the Chinese leaders care quite personally about, its to ‘save face’. Chinese leaders don’t want to look like they are bowing to US pressure. That’s why it was a smart decision for Geithner to postpone the announcement of a report on Chinese currency. It gave the Chinese breathing space to take decisions slowly. Let’s hope Congress doesn’t go crazy again with attempts to put legislation against China.

In typical Chinese fashion, they’ve advocated ‘slow and steady’ changes. They’ve already allowed the RMB to appreciate over 20% in the last few years. Its a trend that looks set to continue after a short break thanks to the financial crisis which the US largely caused. US calls are unlikely to speed up or slow down any Central Government decisions. In short, it has no effect.

In fact, numerous sources in both countries admit that RMB appreciation is both desired and needed. The only thing is China won’t allow themselves to appear to have been bullied into it. That’s why any US pressure will only be rebuffed and will only delay any intended action. If the US keep quite, then change might actually occur.

All-in-all, I would hardly trust those calling for a change. The problem isn’t with the currency but rather with US competitiveness. And even if we did blame the RMB, it wouldn’t change. So why should the US pressure China? It doesn’t work, its wrong and its bad for the US consumers.

Additional Resources

Here are some of the websites and commentary I’ve been using for those who want to get more information.

A Chinese perspective from China.org.cn: http://www.china.org.cn/opinion/2010-04/06/content_19755070.htm
Economist reporting from, wait for it… Hong Kong!: http://www.economist.com/business-finance/displaystory.cfm?story_id=15864670
CNN analyzes Congress’s actions: http://edition.cnn.com/2010/BUSINESS/04/07/china.geithner.currency.ft/index.html
Bergsten’s absurd claims rebutted: http://www.breitbart.com/article.php?id=D9ELGDQG0&show_article=1
Economist Joseph Stiglitz argues against US protectionism: http://www.guardian.co.uk/commentisfree/cifamerica/2010/apr/07/united-states-china-currency-manipulation
Time analyzes Geithner’s surprise Beijing stop: http://www.time.com/time/world/article/0,8599,1978666,00.html
China Daily reports on meetings: http://www.chinadaily.com.cn/china/2010-04/09/content_9705057.htm
“Is China resuming Yuan appreciation?” from China Daily: http://www.chinadaily.com.cn/china/2010-04/08/content_9704610.htm