As President Obama finishes up his visit in China, economists continue to ponder how to address one of the most crucial aspects of Chinese-American relations: China's currency policy towards the United States. As
China buys bushels of dollars while keeping its currency undervalued, analysts consider how to correct the resulting trade imbalance. In varying
tones of concern and outrage, economists explain why this is so
important and what we can do about it.
- Fighting the Undervalued Yuan Christian Science Monitor's Dean Baker proposes a solution. "Just as China can set a value of its currency against the dollar, the US government can set a value of the dollar against the yuan. The Chinese government currently supports an exchange rate at which the dollar can buy 6.8 yuan. This high value of the dollar makes US goods uncompetitive relative to China's. To make US goods more competitive, the US could adopt a policy through which it will sell dollars at a much lower price, say 4.5 yuan," he writes. "It would send an important signal that the US government is in control of its dollar destiny: Washington has the ability any time it chooses to push the dollar down to a more reasonable level against the yuan. "
- 'Ugly Confrontation' on Rigged Currency The New York Times's Paul Krugman fumes that China undervalues their currency such that our eventual recovery will work greatly to their advantage. "Despite huge trade surpluses and the desire of many investors to buy into [China's] fast-growing economy — forces that should have strengthened the renminbi, China’s currency — Chinese authorities have kept that currency persistently weak. They've done this mainly by trading renminbi for dollars, which they have accumulated in vast quantities." Meanwhile, U.S. "policy makers haven’t been able to generate enough spending, public or private, to make progress against mass unemployment. And China’s weak-currency policy exacerbates the problem, in effect siphoning much-needed demand away from the rest of the world into the pockets of artificially competitive Chinese exporters. [...] Looking forward, we can expect to see both China’s trade surplus and America’s trade deficit surge."
- 'Help Them Help Us' The New Republic's Noam Scheiber urges us to consider China's domestic politics. "[S]olving these problems isn't quite as easy as 'getting tough' with the Chinese. It also takes some thinking about how we can help them help us, if you'll pardon the cliche." He explains, "The problem is that investing in export-led growth, as they have for years, is a self-perpetuating cycle. It creates powerful domestic constituencies that go nuts every time you try transitioning to a different model. For example, one of the reforms China has flirted with is lowering the valued-added-tax rebate it uses to subsidize exporters. But the backlash has been intense," he writes. "I think the Chinese leadership also understands that withdrawing stimulus too abruptly would be a disaster, because it would send us right back into recession and make us less likely to pay them back. But, here again, they face huge political constraints at home."
- How We Make It Worse In the New York Times, Niall Ferguson and Moritz Schularick lament the economic relationship they describe as "Chimerica" and its role in the problem. "Given the bursting of the debt and housing bubbles, Americans will have to kick their addiction to cheap money and easy credit. The Chinese authorities understand that heavily indebted American consumers cannot be relied on to return as buyers of Chinese goods on the scale of the period up to 2007. And they dislike their exposure to the American currency in the form of dollar-denominated reserve assets of close to $2 trillion. The Chinese authorities are 'long' the dollar like no foreign power in history, and that makes them very nervous."
- But U.S. Maintains Upper Hand The Telegraph's Ambrose Evans-Pritchard insists China isn't so mighty. "It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want. If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots."
- U.S. Shackled By Domestic Politics Dave Schuler of Outside the Beltway shakes his head at the political calculations that push our politicians to make the problem worse rather than betters. China's currency manipulation "has been abetted by American politicians of both parties who’ve shrewdly observed that borrowing [from China] has been politically less painful than raising taxes or curtailing spending," he writes.
- Risks for Asia In U.S. Reaction The Wall Street Journal warns that our reaction could cause disastrous bubbles in Asian economies. Asian nations "are getting a huge dollar liquidity kick from the carry trade, in
which people borrow U.S. dollars at exceptionally low U.S. interest
rates and invest them for higher returns elsewhere. As a result, Asia's stock markets are outstripping U.S. and European bourses by a country mile," they write. "The risk is more asset bubbles and misallocation of global capital."