U.S. Public Assault on Renminbi Peg Likely to Backfire

In what looks to be a central line of attack in the quest to re-balance the global economy, the Treasury Department has ratcheted up the rhetoric against China’s currency peg. The Treasury’s semiannual report to Congress slammed the Chinese for their lack of exchange rate ‘flexibility,’ but stopped well short of accusing the Chinese of currency ‘manipulation’ as Tim Geithner had claimed during his confirmation hearings before Congress.

Bloomberg reports:

“Both the rigidity of the renminbi and the reacceleration of reserve accumulation are serious concerns which should be corrected to help ensure a stronger, more balanced global economy consistent with the G-20 framework,” the report said. “The Treasury remains of the view that the renminbi is undervalued.”

China’s foreign-exchange reserves, the world’s biggest, surged in the third quarter as an economic recovery attracted speculative capital and a weak dollar boosted valuations of its yen and euro assets.

Record Reserves

The holdings climbed about $141 billion to a record $2.273 trillion, the People’s Bank of China said this week. That was less than the unprecedented $178 billion gain in the second quarter.

If Treasury is looking to burnish its populist credentials, making these statements to Congress where protectionist and populist sentiment is running high is certainly the place to do it. The question is: what’s your endgame?

Right now the US dollar is looking weak despite Mr. Geithner’s advocacy for a stronger dollar. If you ask China for more exchange rate flexibility, you clearly are not serious about a strong dollar – and everybody knows it.

Here’s how I see things playing out:

• Congress looks at this report and concurs that the key to ending slower global growth is to correct global imbalances via a Chinese currency revaluation. Fair enough.
• However, individual Congressmen, looking to reassure jobless constituents ahead of the midterm elections, will escalate by presenting bills to ‘punish’ China if no actions are taken.
• China will be aghast at this and, in a further escalation, start making noises about ditching the dollar.

At this point, the question is how does this get resolved. To date, bilateral U.S.-Chinese economic tensions have escalated and led to protectionism. Further escalation will yield unpredictable results and will be destabilizing. Chinese officials cannot be seen by their domestic constituency caving to American pressure. This would undermine their authority and create problems domestically. Therefore, a public frontal assault on the renminbi peg is likely to backfire.

Like Stephen Roach, I see protectionism as the largest threat to global recovery. Let’s hope the Administration is aware of the dangers.

Comments

[Michael Clark:]

Protectionism is inevitable, like leaves falling off the trees in Autumn. Let's not be naive, China's currency peg is an act of protectionism as well. EVERY country in the world tries to protect itself when it is in danger, just as EVERY individual tries to protect himself when he is threatened.

Global focus during expansion; national focus during contraction. The global economic system is down the tubes for awhile. Don't pray that there won't be protectionism, pray that there won't be World War III -- that's the biggest question.

Oct 18 03:56 AM

[Dave Wrixon:]

I think it a case of being careful what you wish for.

If the Peg goes then along with it goes US economic hegemony. The Dollar would drop like a stone. The US Fiscal and Monetary policies would become untenable. There would be massive capital flight from the US resulting in economic meltdown within the US, but actually make money much more available elsewhere. This would tend to power the emerging economies and even stabilize Europe. which would be financed to take up much of the drop in consumer demand. But and this is the big But, most of US industry would still remain uncompetitive.

Frankly, I think China could live without the peg, but could you? And wouldn't the US simply end up trying to peg its currency to the Euro of the Yuan anyway?

Oct 18 05:17 AM

[Swiftcreek1:]

In the long run the Chinese don't give a rats ass about the U.S. so long as we remain useful idiots. (One could make a good argument that the same statement applies to the near term as well.)

While we're sitting here screwing around with "health insurance reform" and "Cap and Tax" the Chinese are expanding cash reserves, locking up supplies of strategic commodities around the world, spending tens of billions of $ on infrastructure improvements, and expanding into new markets.

Don't think for a hot second that Health Care and Cap and Trade are benevolent ideals. The words from the talking heads in D.C. aren't worth the CO2 exhaled when uttered. For D.C. this is about revenue generation for the Government to try to cover up for it's spending spree and exercise control over the populace.

The Chinese are actively pursuing expansion all over the world. They have no qualms about stealing technology or violating patents. If they can't adequately reverse engineer a product line they find a way to buy the company.....i.e. our own Milwaukee Tool Company, and several furniture companies.

The Chinese are playing a high stakes game to dethrone the U.S. as the preeminent economic power on the planet and are suceeding because the happy bunch of dimwit lawyers in Washington are collectively too stupid or ideologically blinded to get it.....

We broke the Soviet Union through economics (granted they were on the cliff's edge anyhow and we just pushed them over) and the Chinese learned the lesson well. They are doing whatever they need to do to make sure that their economy will survive and thrive. They don't care about what's economically "fair" or "balanced", they want to be where we were at the end of WWII.

The U.S. could stop all this crap tomorrow.....It would be painful, but in the end we would be stronger and better positioned for the future. What really needs to happen here isn't politically palatible. We should dump a million gallons of "Slimfast" on the Federal Budget, tell state governments to get their shit together, lower corporate tax rates and let our manufacturers do what they do best. Build the best products in the world and sell, sell, sell based on QUALITY.

Consumers aren't stupid in emerging markets. They actually understand that buying a good product once instead of a crappy version six times actually saves you money. We, on the other hand, seem to have forgotten that simple fact. The explosive growth of Walmart is ample evidence of that simple truth. I still remember the days when we referred to K-Mart as "Came Apart" and then it was cheap Japanese crap.....We didn't learn our first lesson very well did we?

In short.....The Chinese tie their currency to the dollar for economic reasons. The net effect of a weak dollar makes their products cheaper in markets with a stronger currency i.e. Europe. Right now it is to their advantage for selling in other established markets for the dollar to remain weak. It hurts them in the purchase of raw materials, but they can price that into their finished goods which will still enjoy a price advantage due to dollar weakness.

They will end the Dollar Peg when we are no longer useful idiots. This can happen one of two ways. We can allow our government to bankrupt the country and wreck our currency completely......Or we can simply quit being idiots and get back to being the best Capitalists on the planet......

A very strong dollar will hurt them far more than a weak dollar since they would lose the built in pricing advantage that a weak dollar tie provides. It would force them to look to boost domestic consumption to keep people working. In real terms our products would become more expensive all over the world, but the Chinese cannot compete with us in terms of quality when our industrial might is focused on building the best widgets on the planet. We don't need to be protectionist, we just need to prove to Average Joe consumer that buying a U.S. made widget for a few extra dollars is worth the added cost compared to buying someone else's widget.

I have all the faith in the world that our companies can do that, I'm just gravely concerned that the ideologues in the White House an on both sides of The Aisle don't have the vision to take a long term global economic view.

We've been complacent for far too long, thinking our economic position was a God Given Right. It's time to go back to work. Fifty years is a really long lunch break.

Oct 18 11:56 AM

[BIOWOLFF:]

Following that screed, I'll avoid veering into that old GOP invention of cap and trade.
. Sticking on point, Washington is saying what it must say about a strong dollar and stopping short of offending the Chinese, while doing all it can to deflate the value of the dollar for export advantage reasons.
The interesting question is: will China be able to maintain it's artificial peg of undervaluation to the greenback?

Oct 18 01:15 PM

[Value Added:]

Sure, a dramatic rise in protectionism is a threat to a global recovery. However, zero protectionism is a threat to a true U.S. recovery. I say "true" recovery, because the U.S. economy has been sick for about 20 years, hemorrhaging wealth, competitive ability, and assets via its trade deficits. Major symptoms are only now really being felt.

If the US is to really recover, it needs to find ways to protect its own interests. If it were to do so, the loudest complaints would come from those countries that are the most protectionistic now. The simple fact is that protectionism is, and has been, widespread around the world. It's time the U.S. wakes up and seeks balance.

Oct 18 01:24 PM

[LCACM:]

Since US is a trade deficit country, it cannot lose anything if Protectionism takes hold. On the contrary it will bring back jobs to the US. Not sure why Protecting jobs is bad when every nation is spending billions on Defense. In today's world, if a nation does not protect it's jobs and manufacturing base it will lack the wherewithal to Defend itself. So Protectionism is a strong component of national Defense.

Oct 19 07:27 AM

[Chance Deve...:]

China is highly protectionist. That is the whole cause behind them pegging their renminbi to our dollar - they keep their wages low so our jobs go to them.

As a result of America abandoning its protectionist ways, the American consumer wages are falling behind inflation. We have no big job booms coming: there will never be another next Big Thing because as soon as it incubates and is "born", the jobs will be moved TO INDIA OR CHINA.

You have one and only one possible way to get jobs back into America: tariff the crap out of China. Tariff India. And drop tariffs between the US and Europe (and maybe even Japan). Form a western democracy PROTECTIONIST trading bloc.

China is already facing a major recovery from this financial mess, while America is simply fading away. Have you not read our U6 unemployment rates as of late? 20%!

Edward Harrison, sir, can you or anyone else answer me this? What is worse, American protectionism or the threat of a Chinese-led hegemony where they call the shots by threat of selling off our dollars and debt?

It's time we goaded them into selling off. Bite the bullet. And let this serve as a lesson never to become addicted to another country financing us. Nationalism? Protectionism? Bah. All those words are meant to do is demonize the time honored tradition of taking care of your own family (or country) first and not letting others pick you apart.

And by any possible definition, China is picking us apart.

Oct 19 06:18 PM