How Do You Solve a Problem Like China?
by Martin Denholm, Senior Editor, Investment U
Friday, April 16, 2010
The more things change… the more they stay the same.
During the eight years of his presidency, George Bush and his administration had Chinese premier Hu Jintao on speed dial.
More often than not, item No. 1 was the yuan. Namely, appealing to China to let its currency float on the free market, so it trades at a fairer valuation.
And just like Batman’s phone would flash when Commissioner Gordon was on the line, Mr. Hu saw it coming every time…
“Thank you for calling – and for your continued interest in our currency affairs. But we won’t be adjusting it anytime soon. We like it just the way it is.”
Barack Obama is now hearing the same refrain. And he just did so again…
Could China’s Stubborn Currency Stance Spark An All-Out Trade War?
In response to another bout of U.S. pressure to raise the artificially low value of the yuan to a more “market-oriented” rate, the China News Service reports Jintao’s policy: “Outside pressures will not advance reform.” However, China “is firmly committed to the direction of reforming the exchange rate regime.”
Nice idea. But it’s clear that it will do so in its own sweet time.
Meantime, the problem remains the same: While the yuan is low, it gives China a competitive advantage in the export market – particularly over its Asian neighbors, which also send cheap goods to the United States and Europe. And a mass of cheaper exports also fattens up China’s already bloated trade surplus.
But it’s clear that the United States isn’t prepared to simply sit back and wait for China to act. According to the BBC, a Treasury Department report that was due for release to Congress this month could have labeled China as a “currency manipulator.” That would have allowed the United States to impose official trade sanctions on China.
However, the release of the report was postponed, with Treasury Secretary Timothy Geithner then embarking on a whistle-stop visit to China in advance of the meeting between Obama and Jintao last week. It would appear that the overall diplomatic goal for now is to prevent a potential trade war between the two nations amid an increasingly strained relationship.
And then there’s China’s consistently red-hot economy…
Another Quarter… Another Double-Digit Growth Performance
While some nations are still struggling to generate economic growth (hello, Europe), China is having no such problem.
Figures just released show that Chinese GDP blasted higher by an annualized rate of 11.9% during the first quarter.
To a casual onlooker, that would appear to be good news. But China is faced with the unusual situation of heralding the strong performance in public, but expressing quiet exasperation behind closed doors.
Following economic stimulus efforts, which included massive investment spending, China is now backpedaling. With growth that high, in addition to the previous blistering quarters, the fear is that the economy is overheating and inflation will kick higher. For example, China’s home prices climbed at the fastest rate in four years in March.
Quoted on the BBC, Michael Pettis, a professor at Peking University Guanghua School of Management, says: “It has turned out to be very hard for Beijing to rein in investment spending. The worry is that these seemingly strong growth numbers may reflect a surge in investing that turns out to be very wasteful in the longer run.”
In turn, that has triggered speculation that China might either raise interest rates, or move to revalue the yuan altogether.
But China can point to the fact that consumer price inflation and producer price inflation came in at 2.2% and 5.9% in March, respectively, versus estimates of 2.7% and 6.4%.
And the response to yuan revaluation is stubborn: “On the exchange rate problem, the biggest headache we face isn’t the economic problem, rather it’s that this problem is being highly politicized. China should still maintain stability in trade policy and exchange rate policy,” states Commerce minister, Yi Xiao Zhun.
Obama managed to persuade just enough people to get his healthcare reform bill passed. He and his administration are going to need the same powers of persuasion to coax China into relaxing its stance on the yuan.
Best regards,
Martin Denholm
Related Investment U Articles:
- How the Yen-Yuan Agreement Benefits the United States
- Is China Overplayed or Ripe for the Investment Picking?
- Currency Manipulation Tops G20 Agenda, As China’s Trade Surplus Soars
- Investing in China’s Rising “Social Safety Net”
- The Redback vs. The Greenback: A Global Financial Revolution Begins…
One Response to “How Do You Solve a Problem Like China?”
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Please use fair language. China is not a problem. In fact if not for the strong Chinese economy, the world would have sinked into another dark recession thanks to you greedy Americans. The failure of the Americans to negotiate with the Chinese officials over the issue of the RMB probably is closer to the truth than stating that China is a problem.
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