US: China currency policy threatens global reforms
P. PARAMESWARAN
June 11, 2010 - 12:59PM
               
US Treasury Secretary Timothy Geithner said Thursday that China's refusal to revalue its currency impeded global economic reforms, as he faced calls from lawmakers for retaliatory action.
"The distortions caused by China's exchange rate spread far beyond China's borders and are an impediment to the global rebalancing we need," Geithner told a congressional hearing on the US-China economic relationship.
Under the rebalancing effort, global leaders have agreed that steps should be taken to strike a balance between the huge trade surpluses in Asia and a massive buildup of debt in wealthier countries.

"Reform of China's exchange rate is critically important to the United States and to the global economy," Geithner said, addressing US lawmakers' complaints that Beijing keeps the yuan undervalued against the dollar for a trade advantage.
Facing election-year pressure, lawmakers from both sides of the political aisle have vowed to launch legislative action in two weeks to punish China over its currency policy, which they say has led to massive job losses and factory closures in the United States and fueled a ballooning trade deficit.
Geithner said it was "very important for China to understand" that the legislative move enjoyed "very broad bipartisan support."
Lawmakers on Thursday also sent a petition to the US Department of Commerce calling for investigations into the impact of alleged Chinese currency manipulation on the American paper industry.
In a letter to Commerce Secretary Gary Locke, they sought a ruling on whether Beijing's currency policy provided an "unfair subsidy for Chinese paper products that should be remedied through trade measures."
"America can no longer afford to be complacent. We no longer have the luxury of pursuing failed approaches," said Democratic Senator Max Baucus, who chaired the congressional hearing.
"We must rethink the US-China economic relationship. We must act, not just talk," he added.
Baucus and other lawmakers criticized Geithner for delaying a Treasury report to Congress due in April that could have labeled China a currency manipulator.
Geithner had indefinitely postponed the release of the mandatory report in a bid to use both bilateral and international force to pressure China to revalue the yuan. Beijing has not budged.
Chinese President Hu Jintao said last month that his country would adjust its policy at its own pace while emphasizing that Beijing was committed to the exchange-rate reform.
"The time is long past for the Treasury Department to admit publicly what everyone else already knows -- namely, that China is manipulating the value of its currency in order to gain an unfair advantage in international trade," said Republican Senator Chuck Grassley.
"I worry that, by delaying the report, Treasury has raised expectations that won't be met."
Geithner signaled that Washington had not lost hope for action by China, citing the upcoming summit of the Group of 20 in Toronto on June 26-27 to be attended by China, the United States and other key economies.
"We want to make sure that we are using every effective means to encourage them to move, including taking advantage of the fact that the leaders of the G20 meet in Canada later this month," he said.
The latest US trade data Thursday showed the US deficit with China expanded by 14.3 percent to 19.3 billion US dollars in April.
Last year, the deficit rose to a whopping 227 billion US dollars.
China injected some flexibility into its currency in 2005 following US pressure, but when the global financial crisis erupted in 2008, it repegged the yuan to around 6.8 to the dollar.
© 2010 AFP
This story is sourced direct from an overseas news agency as an additional service to readers. Spelling follows North American usage, along with foreign currency and measurement units.


Link here:
http://news.smh.com.au/breaking- ... -20100611-y26r.html

1. China can't and won't budge on this.
2. The US Treasury putting a spin by saying China is manipulating its RMB when all it wants is a substantial discount on its debt with China
3. Simple solution - place trade sanctions on all Chinese made products
4. This will ultimately lead to more expensive goods in the US
5. The US should start manufacturing toys and crap again but has no means to do so

Trade sanctions would simply backfire, as what happened with the car tyre's issue. China always implements "tit for tat".

This is a very tricky thing, and it would be interesting to see how it works out.

This is true but then who has more to lose? US parents not being able to afford toys for their kids or the crap they buy from Walmart? The Chinese have an alternative to crappy GM cars. With aircraft, there's always Airbus. The only thing of true value the US has to offer is weaponry and they will never sell this to the Chinese.

[ Last edited by  geoduck at 11-6-2010 11:50 ]

USA is already protectionist the BP oil leak has shown this, the 1921 Jones Act states that anything shipped to the USA must be carried on a USA registered ship.

Dutch shell oil has 2 of 5 ships in the world which can stop dead the BP oil leak they were built in Asia and fly under the dutch flag. US companies simply can't afford to build such ships with the high costs in the USA.

But because they fly under a dutch flag the US government has refused to allow them to help.

I think the currency market is screwed up and distorted due to the hedge fund trading and bank trading on the carry trade.  None of the trading has any positve impacton ecnomies and it's does not get to tecreal value of the currency.   Rather it promotes instability in economic policy.  I cannot fault china for keeping it's rate steady until such time as the government sees fit for it econoc purposes to change it.  There needs to be reform of the global currency trading market.  Therein lies tons of wasted economic value.

Cheap RMB means less damage costs for mongers like us....That's a good news, isn't it?

O.K. . . . so the U.S. should do the same?

Or to put it in a different light: only China should have a say in the Dollar/Reminbi exchange rate?

Either let the market set the rate or both governments should have a hand in fixing it artificially (which is a lousy, but fair, idea).

China is the third largest economy on the planet and more dangerously protectionist than any of the top 10.  To let it persist in ignoring its WTO obligations as well as continuing to manipulate its currency and its pricing is only to make the global economy less stable.

Are you suggesting that China should let it's currency float freely? This would cause global economic chaos. Also, what of China US$1 trillion plus surplus? China will not forfeit US$300-400 billion worth of hard earned money. They were forced by the US to buy US$ treasuries and now the US$ wants to pay them back 60 cents on the Dollar? I don't think so.

Dont think China was forced by US to buy T-Bills, China thought (mistakenly, now it seems) that they were a safe bet.

I thought an expert opinion on this topic might help resolve things in peoples minds. I don't pretend to be an expert on this topic, but Alan Kohler is a respected financial commentator in this country. This is from a newsletter he sent out in March so I don't have a link as such.



China playing with fire
By Alan Kohler

March 15, 2010

PORTFOLIO POINT: A trade war with the US would ruin China’s economy, and therefore Australia’s.


Chinese Premier Wen Jiabao is playing a dangerous game by upping the ante in the Cold War of words with the United States over exchange rates. And it’s a game in which Australia, and Eureka Report members, are more than interested spectators: we are on the field, in danger of being trampled by elephants blinded by rage.

China seems to have persuaded itself that it’s already a superpower that doesn’t need anyone else, least of all yesterday’s superpower, America. Over the weekend Premier Wen lashed out at the world over the pressure on China to let its currency rise: “We oppose all countries engaging in mutual finger-pointing or taking strong measures to force other nations to appreciate their currencies”.

He claimed the yuan is not undervalued and accused other countries that are trying to get their currencies to fall, of “protectionism”.

This escalating conflict between the US and China is by far the most important and dangerous development for Australian investors in 2010, far more significant that the bankruptcy of Greece or the prospect of a crazy political bidding war in Australia as the 2010 election approaches (both of which are quite significant, let’s face it).

China is not as strong as it thinks, and is extremely vulnerable to a trade war with the United States. It is not, as is often believed, the financial equivalent of the Mutually Assured Destruction (MAD) that underpinned the nuclear standoff of the Cold War between the Soviet Union and America. This relationship is far more one-sided: China needs America far more than America needs China.

China’s domestic market – that is, the average wealth of its vast population – is not yet sufficiently developed to support the massive investment China has now made in production. There is massive over-capacity in China even with the American market open to it; if the US West Coast ports were closed to it, China’s economy would go into a deep recession and its demand for our iron ore and coal would collapse.

This is an especially delicate moment for Australia on this score because negotiations are getting under way for new contract benchmark prices for iron ore and coal. In each case, the spot prices are about double last year’s contract prices because of Chinese buying.

That buying has not been driven by consumer demand for products, either domestic or export. It has occurred because of debt-funded stimulus spending by the Chinese government designed to maintain GDP growth and keep its citizens employed.



In other words, the increase in iron ore and coal spot prices have been associated with the increasing over-capacity of the Chinese manufacturing sector.

BHP Billiton and Rio Tinto need to be mindful that increasing the contract price by the full extent of the spot price increases would put more pressure on the Chinese economy and worsen any crash caused by a trade war with the US.

In about a month, the US Treasury will formally rule whether China is a currency manipulator, which would trigger trade sanctions under US law. With unemployment at 9.7%, and the broader measure of unemployment, called U6, which includes the under-employed, at about 17%, the issue may not be put to one side this time, especially after Wen’s inflammatory comments at the weekend.

It is simply not true that China’s foreign currency reserves of more than $US2 trillion – an outcome of years of currency manipulation producing trade surpluses – give the Communists the strength to outmuscle the United States, and to threaten selling US government bonds and thereby destroy its economy.

This is the basis of the idea that China and America are in a Mutually Assured Destruction stand-off which means neither will do anything that turns the Cold War into a hot one.

Ambrose Evans-Pritchard, writing in the London Telegraph, points out that only two nations in history have amassed such a stash as China has now, equal to 5–6% of GDP: the US in the 1920s and Japan in the 1980s. Each time preceded a Depression.

In fact, Michael Pettis of Beijing University argues that reserves of that size are a weakness, not a strength. “The … reserves cannot be used in China. They cannot go to pay doctors’ salaries, to build bridges, to lower taxes or to subsidise consumption. They can only be used to purchase or pay for things from outside China.”

China manipulates its currency by buying and selling US dollars, not by passing a law that sets the value of the yuan and making it a crime to trade a different value. The Peoples Bank of China simply offers to buy or sell unlimited amounts of yuan at the desired rate.



This means that if it wants to set a certain value for the Chinese currency, it must take the opposite position to the market. Since the rest of the market is a net seller of US dollars, China must be a buyer – all the time.

And this means, according to Pettis, that the PBoC has a balance sheet consisting of dollar assets on one side and yuan liabilities on the other.

“Here is where things get interesting,” he says. “China’s reserves are often thought of as if they were a treasure trove available for spending. They are not. They are simply the asset side of the mismatched balance sheet. If the PBoC wanted to ‘spend’ $100, for example, to recapitalise a bank, it could do so, but this would automatically create a $100 hole in its balance sheet – it would still owe the RMB [renminbi, or yuan] that it borrowed originally to purchase the $100. To put it another way, the reserves are not a savings account, free for the PBoC to spend as it likes. Reserves are effectively borrowed money.”

It means China cannot use its reserves without increasing its indebtedness. And although China can theoretically exert influence on the US because it is its largest creditor, America’s power to shut down the Chinese economy by closing its ports to Chinese imports is far greater.

It’s true that, in general, a retreat into protectionism now would be a very bad thing. The common wisdom is that the protectionist Smoot-Hawley tariff in 1933 worsened the 1930s Depression and made it Great. That may be true, but tariffs have a far worse effect on surplus countries than deficit countries; it just happens that the surplus country then was the United States, and tariff did, indeed, devastate its economy.

A trade war now between America and China could ruin China’s economy, and therefore Australia’s.

This is no longer a distant theoretical threat, but an increasingly real one because after the weekend display from China’s leadership it’s clear that they are becoming deluded.

Wen Jiabao said China’s biggest threat is inflation and that the survival of the Chinese Communist Party is at stake. “If there is inflation plus unfair income distribution and corruption, it will be strong enough to affect our social stability and even affect the stability of state power,” he told yesterday’s press conference.

He is, typically for a politician, taking a narrow view based on his own party’s interests. Inflation is not a serious problem for China and given the overcapacity built up over the past 12 months is very unlikely to become one.

The biggest problem is the Communist Party’s increasing arrogance and belligerence.

Yes, I am.  Or to put it another way: why is it fair for only one side of a trade relationship to determine the exchange rate of BOTH currencies.  Either the two countries decide together, or let the market independently decide.

A stronger yuan is better for Chinese citizens as it gives them more spending power.  It's worse for the Chinese elite because it makes their businesses slightly less competitive, but so what?  So China grows at 6% GDP instead of 10% every year?  Big fucking deal.  Give workers in China a decent weekend off every week, and a little more dough in their pockets!

Pretty cool analysis.  perception is china is buying US treasuries with their surplus cash, not financing it by borrowing of yuan.  Even though US may talk alot about china exchange yuan rate, it does seem very unlikely that the Us would do anything about by way of trade sactions.  Given Obamas track record though, he is a wild card who could make a mistak and declaring china a currency maniplator.  Just cant figure what obama and his people will do.   look at how they have mishandled global geopolitics so far.  Inlcuidng the Gulf fiasco.

Come on blaming Obama for the problems in the gulf of Mexico is a stretch. The problems in the gulf are the fault of BP with their good enough approach to safety and successive deregulation of all industries since Reagan.

The Chinese have no choice but to buy US$ bonds and assets. Same with the Japanese in the 80s. They are stuffed with US$s. In the past, the US will always remind China before each T-Bill Auction to buy more T-bills and if they don't the US will not be able to afford any more Chinese goods and trade sanctions will have to be imposed. The Chinese will always comply as they want stability and full employment among its workforce. Thus the US wanted everything they purchased to be funded by the Chinese. The purchase of these T-bills was what made credit so easily available in the US and Americans were going drunk on easy money. They bought things they couldn't afford such as properties until it all came crashing down in 2008 and now China has become the culprit and a currency manipulator. China by fixing their exchange rate with the US$ was protecting their investment in T-bills which the US urged them on in buying in the past. It was a trap.

The US is trying to push China to revalue its currency and rallying all other nations to do the same. It's like this, if I lend you $100 in good faith I expect to get back $100 but you want to pay back only $50 or $60 by putting a spin on the situation, accusing me of being a cheat and manipulator. As a borrower, it was my hard earned you took and I don't want to be repaid less than what I had lent to you.


If the currency was revalued, workers would be losing jobs with no dough , not having a decent weekend as you had stated. There would be malaise as the masses of unemployed would possibly cause nationwide riots and revolt. The world would be in a chaos as unrest in China will be bad for the rest of the world.

[ Last edited by  geoduck at 14-6-2010 08:26 ]

I suppose you would want some redneck Republican like Bush in the US White House again. You can always vote Sarah Palin in the next Presidential campaign. Yes, she would make a great president. Joking aside, look at the way Bush handled the Katrina disaster. He never did anything. Do you think the Republicans would do much better with this crisis in the Gulf? Obama has already made 3 trips down to the Gulf and sent in Federal Investigators to see if there is any accountability with BP executives. Bush will never think of prosecuting any executives. The former vice president Dick Chenney an oil man himself would have nothing of it. Chenny is EVIL. I say this because anyone who believed that torture such as water boarding is OK is EVIL. The Republicans are useless and their only specialty at the moment is finger pointing.

[ Last edited by  geoduck at 14-6-2010 08:21 ]

cant blame the US for the currency situation. also cant blame china.  the problem is the hedge funds and others who are in the "name of market pricing" are exploiting as much as they can the currencies to their own profit.  this may have not been a problem in the past before easy liquidity and global interconnected markets.  in the world we live today, giving the "market' the ability to determine absolutely the currency exchange rate is a mistake.  witness the devaulation of the euro.  it was buoyant because of traders, not fundamentals.  it would be great if the market were able to set pricing properly, but it has prvoen to be defective and counter to global objectives.

yes agree.  dont blame obama for the spill.  his response has been week, showing lack of leadership.  he was slow to recongzine this as an issue, and seemed content at first of trying to let this be a BP problem and not a US problem.  He did not want to take this on upfront because it was not in his agenda, distracts from his agenda, and maybe he saw taking it on as a sign the US was going to pay for it rather than BP.  then he would have to spend money on this on not his pet project agenda.  there seems to be US domestic concurrence that this was mismanaged, both liberal and conservative.  there does not seem to be anyone saying he did a good job on this.  it totally shows lack of experience on his part which seems emblematic of his adminsitration

Think people misconstrue his lack of response but he is working on it. Americans are used to people like George W. and Regan who act like the president but Obama is not acting, he is the President and have been working this. Obama has to be who he is and I for one don't want him to be phony. How would you think things would unfold if this was to happen under the Bush Adminstration?