China and Its Predatory Currency Policy

Mercantilism is alive and well in China this article reveals. China is now the world’s third largest economy although well down the leader board in per capita terms. Chinese monthly economic figures for exports, industrial production, and investment will be reported today.

A massive three-dimensional policy stimulus from low interest rates, deficit fiscal spending and intervention to maintain a highly undervalued yuan has the Chinese economy revving back to pre-global downturn speeds in a hurry. Re-pegged against the dollar since July 2008 at roughly 6.83, the yuan has followed the greenback southward in 2009 against almost all other world currencies. The last thing the global adjustment process needs is for the biggest surplus economy to have a depreciating currency.

China’s rapid buildup of liquidity from this policy could fan future domestic inflation and makes an international monetary system that revolves around the dollar even more unstable. Governments around the world have tried to reason with Beijing officials to become enlightened and let the yuan climb. Incremental competitive pressure on U.S. industries has actually been less severe than for Euro-land participants or China’s Asian neighbors like South Korea.

President Obama visits the region next week and will try to cajole China to budge. He’ll hear plenty of criticism in return about America’s increasing predisposition to impose trade barriers, neglect the dollar, and exert no leadership in restarting multilateral trade negotiations. As for yuan policy, Chinese officials will do what they’ve always done, hear what they wish and disregard the rest.

A fundamental impediment is the absence of any real leverage by others to influence Chinese policies other than the cumbersome process of raising complaints with the World Trade Organization. But as noted, there’s plenty of blame to go around. A tit-for-tat run of trade grievances could backfire.

Disclosure: No Positions

Comments

[prairiedog555:]

All I know is they have it better than we do in many respects, or at least are moving in the right direction.
Funny, I have an associate in mainland China and speak with her frequently.
They are constantly moving to the right, getting more freedom, free enterprise, decentralizing authority to provinces. They also hang bankers that cheat customers.
While US is moving left, big government power, less freedom.
Who would have thunk it?

Nov 11 06:14 AM

[Dave Wrixon:]

You wait until you are paying $1500 a barrel for crude because China is pursuing a Strong Yuan policy.

Be careful what you wish for!

Nov 11 08:49 AM

[rlirph:]

Each country has its own best interests in its policies. It is great to see the China government has finally done something good for its own citizens, that is improving their quality of lives, even though they are still decades behind us. You can sense that their people are happier now than ten years ago. Can you say the same thing about us? We are facing the same old problems when I was in college forty years ago - twin deficits - fiscal and trade deficits. We are unwilling to have fiscal discipline (government and citizens) and unwilling to sacrifice (like drive a smaller car or to save) that has led us to our present situation. Unfortunately we have forty years to create the problems. The problems will not go over overnight...

A US Expat Living In Guangzhou

Nov 11 08:50 PM

[Ben Gee:]

China does not have a huge trade imbalance with most developing countries. If you remove China's trade surplus with US and EU, China has a trade deficite. If the yuan is allow to rise, it may help US and EU with their trade balance with China, but how will a rising yuan affect developing countries?
1. China's help with the building of infrastructure will be more expensive.
2. Chinese capital goods that help with development will be more expensive.
3. Resourses that are sold to China will bring in less yuans.
4. Inexpensive Chinese consumer goods that improve the standard of living will be more expensive.
A rising Chinese currency may help the developed world at the expense of poor countries. Will that make the world a better world?

Nov 13 08:58 AM