The Administration is again trying to jawbone the Chinese into revaluing their currency, i.e., floating it in the expectation that it will rise against the US dollar and make our exports to China more attractive. So on the one hand we have this giant communist country, growing rapidly, very nationalistic and whose leadership is not uninclined to gin up external conflict (in part to deflect domestic attention from its own authoritarianism); and on the other hand we have some short-sighted American pols trying to buy votes from stakeholders in US manufacturing companies. (Our recent boosting of textile tariffs is part of the same pattern.)

Politicians and exporters always want to run a weak-dollar policy, but it’s bad for importers, investors (remember who buys our bonds?) and most everyone else. We are attempting to contain China militarily and diplomatically while provoking it economically. That’s just stupid.

UPDATE: Larry Kudlow reprints an excellent NY Sun editorial on this topic.

UPDATE 2: Austin Bay puts the Chinese-currency controversy into geopolitical context, arguing that our anti-China economic moves are payback for China’s easing of pressure on North Korea in the context of the multi-party talks there. He may well be correct about the Administration’s motives, but I am skeptical that it is wise for us to respond by economic means. Indeed it may have been unwise of us all along to assume that China shares our interest in restraining NK, and to depend on China to do our work there for us (as Arthur Waldron argued in part in his article in Commentary a couple of years ago).

UPDATE 3: Brad Setster’s post on this topic is excellent, as are many of the comments on his post. (via Tyler Cowen via Chris Masse)

12 thoughts on “Stupid”

  1. Are you sure it’s just economics?

    When I heard this today, I thought payback for the Norks.

  2. may be provoking China economically but seems to me that the American public and Wallyworld type box stores are supporting China economically.

    I have never supported tariffs of any type. I figure that tariffs are the same as business subsidies which only serve to prop up the marginal producer and encourage them to remain marginal producers. Seems to me that business has allowed labor and government to price them out of business. Not much can be done to solve this problem until labor understands that business is in business to make a profit-not to provide them with a high paying job. And, of course the idea of wanting $100,000 a year in wages and benifits but expecting box store prices will have to go also.

  3. Johnathan, thanks for keeping China on your front burner.
    NRO’s the Corner features Stanley Kurtz’ scolding of Thomas P. Barnett (author of The Pentagon’s New Map) for his “soft” approach to China. According to Barnett, if we only stress “interconnectivity” all will be well.

    The genesis of Kurtz’ broadside was Barnett’s takedown of Robert Kaplan’s recent piece in the Atlantic Monthly, “How We Would Fight China.” Kaplan is using fighting words and that got Barnett’s nickers in a knot.

    To your point, “We are attempting to contain China militarily and diplomatically while provoking it economically. That is stupid.” You appear to agree with Barnett when you assert it is unwise to provoke China economically.

    I think a little provocation may be called for right about now. It makes sense to throw a lit fire-cracker in the ‘Dragon’s” direction just to see what its intentions really are. The quiet, skulking, proxy-based conflict we have been engaged in since Korea may have the appearance of “peace”, but it is saccharin for its lack of real resolution. And the costs of the ongoing conflict represent an immeasurable tax on us U.S. taxpayers.

    The administration’s efforts to convince China to let its currency float free of the dollar are designed to chasten China’s Communist leaders. By exposing its economy to the fluctuations of currency markets, the Chinese government will be forced to face the grinding economic inefficiencies that their socialized system generates. A seconday effect would be to make China’s leaders more accountable to its business interests and international markets.

    Greater political and cultural liberalization would follow, too. The “Falun Gong-Show” could then become a nationally syndicated hit with reruns broadcast in English on the BBC!

  4. From what I know of Barnett he is way off on China and I do not agree with him. My point is that by encouraging revaluation and imposing tariffs we are hurting the wrong people, including ourselves, for light and transient political reasons. We should be encouraging Chinese economic development and discouraging authoritarianism and military adventurism. We help ourselves by encouraging China to democratize and become more productive, not by being gratuitously hostile.

  5. Question:
    Are there no negative consequences for us having a currency pegged against ours being undervalued?

  6. Reuters (Shanghai) reported on China’s launching of a new foreign exchange dealing system today:

    “…that allows domestic trading in currencies other than the yuan, a milestone in the country’s effort to reform its tightly controlled currency regime.

    The system, allowing trade in China in eight more currency pairs, came as the U.S. Treasury warned that Beijing could be labelled a manipulative trading partner unless it took swift steps toward a more flexible yuan.

    The China Foreign Exchange Trade System (CFETS) said the new system hosted trading in the U.S. dollar against the euro, yen, Hong Kong dollar, British pound, Swiss franc, Australian dollar and Canadian dollar, plus the euro versus the yen.”

    Jim Sinclair’s commentary on this event ends ominously:
    “In retrospect, the US hard line against China today opened the Pandora’s box that will in time eat the dollar to pieces. The Chinese are master chess players and their reaction will in time be known as the Yuan to Dollar ‘Check Mate.’ “

  7. I don’t think the US has anything to worry about as long as it runs a stable monetary policy. A weak-dollar policy is problematic for us because it kindles inflationary expectations and makes our investments less attractive. The Chinese trust our currency enough to peg their currency to it, so the notion that the Yuan will replace the US dollar in the near future requires a reversal of assumptions and seems highly unlikely. However much China is advancing economically, political instability affecting its monetary policy would come as no surprise. There’s a reason Chinese put their money into US T-bonds at low interest rates rather than domestic investments.

  8. I’m a novice observer of financial matters, but doesn’t this new move by China mean they (and even Japan) will no longer be buying Treasuries, will no longer need to hold Dollars? (I read somewhere that both China and Japan have already discontinued buying Treasuries since Jan 05.) My guess is that China already has and will probably now increasingly exchange their Dollars for bullion and other currencies. When the time is right for them, they may even do the unthinkable and peg the Yuan to a gold standard!

  9. Dear Jonathan, I found the link again for you. It’s here. There is a comparison of two charts entitled “Major Foreign Holders of Treasury Securities,” both issued by the US Treasury showing account balances. (The red figures in the 2nd chart for Japan, Mainland China, Caribbean Banking Centers and UK show retroactively-altered data going back 11 months.)

    Those 2 charts and the paragraphs just below the second chart describe the absence of Japan and China from Treasury auctions since Jan 05.

    “… America’s two major financiers – Japan and China – have completely stopped accumulating American debt. In fact, the data suggests that they have been completely absent from the bidding process at the debt auctions over the last 3 months….”

  10. BR,

    Thanks for the data. Of course you are right that the Chinese have not bought US treasuries recently, and I stand corrected on this point. Still they continue to hold large quantities of treasuries, which implies confidence in the relative stability of the US dollar. Sure, the situation could change, and I think it would be great if China were so stable politically and monetarily that investors had the same confidence in yuan that they now have in dollars, but I don’t think that’s the way to bet.

  11. J-
    I just hit on Kudlow’s blog where I read th New York Sun editorial you linked. It takes the same stand you do: Don’t force China to float its currency. It asks, ” Why would anybody in his or her right mind wish to meddle with [China’s] kind of economic performance?” (Are you and Kudlow mind-merging over lattes together in the mornings?)

    In the last graph the editorialist answers his own question.

    “[China] need[s] to address their human rights problems, end their persecution of religion, open up their polity to multi-party democracy, free their press, further liberalize their economy, and help America confront the nuclear threat emerging from North Korea*.”

    That old saying, “The way to a man’s heart is through his stomach.” applies here. In the face of China’s recently-escalated threats against our allies, Taiwan and Japan, and the editorialist’s list of outstanding reforms that China’s Communist leaders have failed to enact for decades, the best way to get to the heart of the leadership is through its economy.

    Kudlow’s text lays out just what the leadership should fear. Referring to the disasterous examples of Rubin’s delinking of the currencies of Thailand, the Philippines, Indonesia, Malaysia and S. Korea, he quotes:

    “Emerging currencies don’t float. They sink. Why is this? Because they have a history of instability. And those countries suffered the most, as foreign investment flows were immediately withdrawn. As such money left those countries, their economies shrank, unemployment rose, and in many places there was rioting.”

    Leaving aside the question of whether China’s currency can be called emerging (they are a thriving economic superpower now that throws a huge geo-political shadow as far from Beijing as Brazil and Nigeria), if America wants to effect change in that giant nation, we need to use every arrow in our quiver. It may be that just the threat of a forced “de-pegging” coupled with the threat of new tariffs, may be all it takes to scare the CCP into making the changes that Kudlow’s editorial calls for.

    I agree with Austin Bay. Why should we allow an intransigent, and hostile China to use our currency as a salve to the instability, that, were it not for the leadership’s bull-headed intransigence, China could have fundamentally solved twenty or ten years ago?
    * You wrote correctly, “it may have been unwise of us all along to assume that China shares our interest in restraining NK.” Kudlow’s editorial exhibits that same blind-spot. N. Korea has been an active proxy for China’s leaders ever since MacArthur crossed the 38th parallel.

  12. I don’t think people have carried out the causal chain far enough- a delinking of the yuan to dollar would have far reaching effects. Many have argued that it might even cause the dollar to rise as well. If, all of a sudden, Chinese goods are not so cheap, then why would the Chinese central bank sell all their dollars which are suddenly so valuable?

    Just a thought.

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