Shell-shocked old Hank Paulson in late November went through the motions of the semi-annual Strategic Economic Dialogue with the Chinese. Maybe it was a relief just to get out of Washington for a short visit to Beijing even without the usual Communist version of sing-song girls. So he hit the repeat button on old mantras about how helpful both parties were to each other.
An official and required report of the Treasury to Congress claims that no major trading partner, including China, fell below the standards that would label them a currency manipulator. But there weren’t many analysts around who believed it. Even in the Treasury itself, Washington couldn’t quite get their songsheets together. In May a report to Congress said “…the pace of appreciation needs to continue in order to address the continuing substantial undervaluation of the RMB and the risks China is creating for itself, the Asian region, and the world economy in which China is playing a greater role. Treasury has been reinforcing that message to Chinese authorities on a frequent basis both bilaterally and multilaterally and will continue to do so.”
Six months later, another Treasury report finds that China allowed its currency to appreciate a total of 6.2 percent against the dollar in the first half of 2008, just short of the 6.4 percent gain in the entire year in 2007. But in the last couple of weeks of November before Paulson’s meeting, the yuan slipped back to its lowest level in about five months, the report went on to say. [Were the Chinese trying to tell Paulson something in numbers instead of ideographs?]
Translation from Washington bureaucratese? “The Chinese are mucking around with their currency to the U.S. dollar and the whole world trade community’s hurt and we keep asking them to stop it. But they won’t.”
The Congressionally mandated U.S.-China Economic and Security Review Commission – once the darling of the Taiwan lobby but now a dumping ground for Hill staffers – annual report in late November put it bluntly [if with not much documentation and therefore, apparently, little hope]: Congress should enact legislation to stop China’s currency manipulation. How?
It isn’t that Beijing is operating in a moneychangers’ vacuum. The Chinese government is doing everything it can to help its export sector. That’s because it is losing jobs at a rapid pace with the current global shutdown. That includes intervening to keep the yuan stable against the dollar instead of permitting it to continue to rise, even at the glacial pace for years it had informally promised the Bush Administration it would permit. That would make exports more expensive. With exports accounting, the mythmakers in Chinese statistics say, for a third of any growth in the Chinese economy, the reason is obvious.
Of course currency manipulation isn’t the whole story of this cat and mouse saga. Some observers have argued that the yuan is now probably so undervalued that only a massive – and therefore destabilizing – revaluation would really cut into China’s cheaper export prices for manufactured goods. That may be even harder with reports Beijing’s still cloudy $1.7 billion “stimulus” package – everybody has to have a stimulus package these days, the most fashionable policy around. A significant [and secret, of course] part is going to go into new export subsidies to back up the cheaper yuan.
Besides, the Chinese are buying American debt – and Washington is about to roll up vast news sums of that for export. The Chinese, long the largest holders of U.S. Treasury securities [along with its East Asian neighbors and the Persian Gulf sheikhdoms], continue to buy more. [With a $43.6 billion increase in holdings of U.S. treasury securities in September, China's overall holdings amounted to $585 billion with.Japan cutting its holdings to $573 billion from $586 billion in August.] What else could they do with the foreign exchange they are piling up with their mercantilist policies? Besides, for the first time in history, the Treasury has gone into minus interest rates for its securities. That means the world, generally, still thinks that the U.S. promise to pay the bearer on demand is more valid than other possibilities around the globe.
The guesswork – Chinese financial policy is such a tangle of propaganda, ineptitude, corruption and stealth that one can never be quite sure about even the estimates of the dismal scientists – is that the Beijing financial warriors have been more active recently. It looks like the Chinese have been using their massive foreign exchange reserves [now nearing $2 trillion in other people’s, mainly U.S., debt] to hammer the rate of the ren min bao [yuan] to the dollar. Cheaper Chinese currency to the American dollar, of course, theoretically fuels Chinese exports now as it has all through the boom period
The honorable experts have already been shaken and chastened by the latest [always suspicious] statistics on those exports. At a still magnificent $114.99 billion, they declined in November 2.2 percent from a year earlier, the sharpest fall since 1999, and, morosely, are predicted to continue to fall and bounce on the bottom for at least another year or so. Of course, the Chinese currency manipulation tends to keep out imports, anything but the industrial components and raw materials, especially energy. They are needed for the export machine, ironically, largely in the hands of the Western and Japanese multinational corporations who bundle and brand them to market. The worldwide collapse of commodity prices, particularly in metals and oil, also helped trim the import bill. So the trade balance recorded a new record: 40.1 billion yuan, $5.8 billion, well over the previous record of 35.2 billion yuan set in October.
China has been the third-largest export market for the U.S., and has been a major buyer of commodities – much of that from the U.S. and such other [until now] booming economies as Australia. Even India is going to be hit as a major exporter of iron ore with China’s purchases falling by 7.9 percent in November. [Crude wasdown 1.8 percent.] But that is likely to dramatically decline with the level of production in China.
All of this is leading to a galloping deflation in China – prices are falling everywhere. That’s good news for the ticket punching bureaucratic hacks at the Politburo in Beijing since the cost of living – particularly a sharp rise in food prices – was threatening back in the late spring to get out of hand. Theoretically it would also help the exporters to keep their prices down, if for no other reason, than growing unemployment has further strengthened the hand of the slave markets for industrial labor in the Pearl River Delta and Shanghai industrial complexes.
But the question is whether all this falderall will really help maintain the stability of a fragile Chinese politcal economy. Keeping export prices at an artifically low level – now with the help of worldwide deflation – may not do the trick. The question is, to use Maynard Milord Keynes metaphor, whether continuing to hold prices down for Chinese exports to the U.S. [the EU and Japan] will really push the hanging string of rapidly diminishing U.S., Euro and Japanese demand. With consumption patterns retracting in the U.S., Europe and Japan, at an alarming rate, nobody may want that new widescreen LCD/Plasma TV even at a bargain price. In fact, there may not be a market for that new Intel microprocessor measured in millionths of a millimeter even if we can use it to replace most of the tower of a PC or produce tiny little accelerator to fit inside your ear. Not for a while.
Most businesspeople in China "didn't imagine that these events in the U.S. would affect them," Li Qiang, chief statistician of the National Bureau of Statistics, told the Financial Times. "For most of the last 18 years, the economy has been continually growing, so they've gotten used to it." Curious, since everyone knew all the time they had been living on exports and had created only a relatively small internal market largely for a pampered elite partial to Guchi and Armani. In China, of course, that includes tens of millions of people. But in the coastal city of Yuyao, the Ningbo Wanglong Group, a food company, claims that years of rapid expansion have made it one of the world's largest producers of preservatives for food and feed. But the combination of continuing adulteration and poisoning scandals in Chinese foods, domestic and export have frightened away customers at a time of general decline in demand. That reflected in toys and other goods has resulted in growing unemployment including graduates of Chinese universities who had for some time been having trouble finding employment.
Ironically [or perhaps characteristically] there are no reliable estimates of Chinese unemployment, certainly no statistics. But anecdotal evidence is that the always rampant undereployment and unemployed in the economically stagnant countryside is now getting an addition, returning workers from declining industrial production. The 640 million question is, of course, how far will this go. Economists are already scaling back estimates of Chinese gross development product, from the slightly over 9 percent of the last quarters, to as low as 5 percent. It’s long been believed that anything less than double digit growth or thereabout does not absorb even a modicum of the growing labor force in China’s 1.3 billion. Large unemployment could mean trouble for Beijing’s rulers; incidents of social unrest including pitched battles with police have been growing. There may not be a lot American policy can do about helping a regime which has refused so adamantly to move politically toward more flexible policies.
President-elect Obama spoke out during the campaign against what he called unfair Chinese trade practices and currency manipulation. But Lawrence Summers, tapped to be Obama’s White House economic director, last year told the Congress they should go easy on China's currency policies. Fed banker Timothy F. Geithner who will slip into Paulson’s worn shoes as Treasury secretary in January, has lived in China, studied Chinese, and sat in the New York Fed where this problem of foreign currencies was uppermost. He may even have thoughts about how to approach it. Ken Lieberthal, a former National Security Council adviser on Asia under President Bill Clinton and who advised Hillary Rodham Clinton and then Obama during the presidential campaign, has made soothing noises about calming what he calls "mutual distrust about both sides' intentions [which] has grown." He claimed that on a recent trip to Beijing, he found many officials and ordinary Chinese who believed in one of those 9/11 conspiracy type theories: the United States purposely triggered a global financial crisis to thwart China's growth. Maybe Lieberthal, to introduce a little realism, had better remind the Chinese that their Paramount Leader Deng Xiaoping, who started the modernization, said that it didn’t matter what color a cat was in this cat and mouse economic game, as long as it caught mice.