Was China Currency Appreciation Ever the Solution to U.S. Economic Woes?

Includes: CYB, USD
by: Disruptive Investor

The United States, losing its AAA rating is just another aspect of the country’s economic and financial woes. In one of my previous articles, I discussed how it has been a lost decade for the United States, in more ways than one. Just as an example – eight million jobs were gained from 2003-2007, while an equal number of jobs were lost in 2008-09.

Looking back, was there any one thing, which, having been different, could have saved the U.S. economy from the turmoil it is going through?

The U.S. Treasury has threatened to label China as a currency manipulator in the recent past. According to U.S. officials, the fixed value of the Chinese Renminbi (Yuan) against the Dollar was used to gain unfair trade advantage. Further, many analyst and economist argue that the significant global trade imbalances, which contribute to U.S. crisis, have been as a result of the Renminbi pegged against the U.S. Dollar.

This article investigates if Renminbi appreciation was the solution (to some extent) to the current economic problems in the United States.

As per my study and understanding, Renminbi appreciation would have had no meaningful impact on changing the current quagmire the United States finds itself in. I would first look at the volume of imports from U.S. to China and the bilateral trade deficit between the two nations in order to ascertain the impact of currency revaluation. From 1999-2010, the share of Chinese goods among total U.S. imports has increased from 6.9% to 16.1%. During the same period, the share of Chinese imports among total U.S. consumption expenditure has increased from 1.3% to 3.6%. In terms of trade deficit, the number has increased from USD67 billion in 1999 to USD263 billion in 2010. What is important to note here is – the U.S. multilateral trade deficit in goods grew from 2.5% of GDP in 1994 to peak out at 6.5% of GDP in 2006. However, of this, the deficit with China was 18% of the total deficit in 1994, increasing to 28% of the total deficit in 2006.

(Click charts to enlarge)

What this proves is that United States, in general, lost in competitiveness in the global goods market. This was irrespective of the currency peg, which one exporting country had with United States. Further, the Chinese Renminbi has appreciated 21% against the U.S. Dollar since 2005. However, during this period as well, the U.S. imports from China remained robust. What this tells us is – due to cheap labor cost and increased competitiveness, Chinese goods were still significantly cheaper, even after a 21% appreciation of the Renminbi. At the same time, poor lending standards, artificially lower interest rates and the housing bubble aided consumption in the United States.
Therefore, if it was just the question of labeling China as a currency manipulator, I would rather blame the ultra expansionary monetary policies of U.S. policymakers than the pegging of the Renminbi against the U.S. Dollar for any crisis we are experiencing today. Another important pattern in global trade, as observed by the CBO was – an increase in exports from China to United States was accompanied by a relative decline in exports from other Asian countries to the United States. The reason was that China had transformed itself to more of a point of assembling. Therefore, raw material and other goods flowed from rest of Asia to China, which in turn assembled the final product to be exported. The CBO report says that only 20-30% of the value of Chinese exports was subject to any impact of Renminbi revaluation. The Dollar value of the remaining 70-80% of the exports would remain unaffected due to currency revaluation. What this also means is - If the Renminbi was allowed to appreciate, the price increases of the end product could be offset by gains from availability of cheaper raw material (imported from rest of Asia). Therefore, any significant revaluation as well would not have impacted the trade patterns and the over consumption in U.S. Having said this, I do believe that the Renminbi will continue to appreciate against the Dollar in the long-term. Currency appreciation might be one of the best tools the Asian countries have at their disposal to fight inflation exported by the United States.

In conclusion, it might not be fair to label China as a currency manipulator. Further, Renminbi revaluation (even a decade before), might not have helped the U.S. economy be in any better shape than it is today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.