[Marxism] WSJ on "China frenzy"
marvgandall at rogers.com
Fri May 20 05:59:57 MDT 2005
(The Wall Street Journal on mounting anti-China hysteria in America directed
at an "undervalued" yuan. The Journal wants an end to US government pressure
for a revaluation, fearing a higher yuan could cause a depression in China,
weakening a major growth engine for world capitalism. The Journal says there
is no economic justification for altering China's dollar peg, which would
have little effect on the US trade deficit. It blames the anti-China
"frenzy" on Congress, which is under pressure from uncompetitive American
businesses and US workers seeking protection from cheap Chinese imports. The
WSJ wants the Bush administration to focus instead on breaking down down the
barriers shielding China's financial system from takeovers by US and other
foreign banks eager to dominate the burgeoning Chinese home market.)
Feeding the China Frenzy
Wall Street Journal
May 20 2005
Treasury Secretary John Snow intoned some classic bureaucratic cant in
saying Tuesday that the U.S. may someday charge China with unfair currency
manipulation -- but not just yet. The markets breathed a huge sigh of
relief. A currency/trade war with China at least has been postponed.
But back to Mr. Snow's statement, which demonstrates how decisions of huge
importance to the global economy are so often founded on ill-judged
premises. Said the Treasury Secretary: "Addressing imbalances in the global
economy is a shared responsibility among the major economic regions of the
world." We're all for global cooperation if it means reinforcing good
policies. But this Treasury effort amounts to an ultimatum that if China
doesn't revalue it will soon be cited as a "currency manipulator."
This U.S. quarrel with China has far more to do with U.S. politics than with
any objective or scientifically based assessment of "imbalances" in the
global economy or some shared "responsibility" of major nations to correct
them. It has a great deal to do with the yammering about China that's coming
from Senate protectionists like Democrat Chuck Schumer and Republican
Lindsey Graham. The Treasury exchange rate report the Secretary was
introducing is a requirement of U.S. law, the Omnibus Trade and
Competitiveness Act of 1988, through which the U.S. Congress tasked Treasury
with trying to decide what constitutes "fair" exchange rates.
Even if shifting exchange rates had a major bearing on terms of trade, a
highly dubious proposition, there is no such thing as perfect "balance" in
the global economy. If allowed to function freely, it is a dynamic system
with constantly shifting patterns of trade and investment. Interference by
political tinkerers always risks slowing it down and retarding its ability
to produce new jobs and relieve global poverty.
As it happens, the dollar-yuan exchange rate has been an island of stability
in this dynamic system, just as the euro serves that function for Europe.
The yuan has been fixed at 8.28 to the dollar since 1995. This stability has
given foreign investors the confidence to build factories in China, fueling
its years of rapid growth. The U.S.-China relationship has contributed to
global economic growth -- which reached nearly 5% last year -- and has
increased the possibility that China will evolve into a responsible
But the U.S. has been ragging China for a year now to "revalue" the yuan on
the presumption that this would raise the price of Chinese imports to the
U.S. and "cure" the U.S. trade deficit with China. This is the triumph of
politics over experience. Any reduction in the quantity of Chinese exports
would be offset in part by their higher price. And while China's exports
might fall, so would its imports as its economy slowed due to deflationary
pressure caused by revaluation.
Stanford Economist Ron McKinnon recently reminded the world that this was
precisely the experience of Japan as the yen was going to 80 to the dollar
from 360 in the 25 years after 1971. "The ever-higher yen from 1971 to 1995
led to even bigger Japanese trade surpluses," Mr. McKinnon writes.
Economists Steve Hanke and Michael Connolly have warned on this page that a
revaluation or float of the yuan could do similar deflationary damage to
Rapid economic growth has created the superficial impression that China is
some kind of "miracle" economy, much as Japan Inc. was similarly lauded in
the 1980s. It is nothing of the sort. The stable connection to the dollar
has brought in hundreds of billions in foreign investment, which has been
put to good use by an industrious Chinese population and the business skills
of the so-called overseas Chinese who have exploited this productivity.
But China still is a fragile economic and political system. The Chinese
Communist Party has been unwilling, or unable, to reform the banking system
because it is the party's means of bestowing political favors and thereby
retaining support. Banks "loan" money without any expectation of ever being
repaid. Because the banking system is so weak, China is making only small
progress in removing controls on cross-border capital movements for fear of
subjecting the banks to fatal foreign competition. Thus China piles up
billions of U.S. dollar securities, sterilizing the inflationary pressures
on the yuan by issuing bonds to Chinese banks. Until China frees up the
capital account, it is in no position to float the yuan.
We have repeatedly urged China to move faster to eliminate the exchange
controls on capital, and it will eventually have to do so in its own
self-interest if it is to safely deconstruct the house of cards it has been
building. The U.S. Treasury no doubt understands this, but feels it needs to
do something to fend off Congress and therefore it shouts about the value of
But far from deterring the protectionists, Treasury is only feeding them. By
conceding their mistaken economic argument, it is forcing itself into a
corner where it may end up damaging both the U.S. and Chinese economies. If
you're worried about "imbalances," give some thought to the "imbalance" that
would occur if China goes into the tank.
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