Forced Renminbi Appreciation Could Cause Second Crisis
Published in Sohu
(China) on 8 April 2010
by Zhang Tingbin (link to original)
Is America going to slip up twice on the issue of the renminbi exchange rate?
Sino-American relations seem to be verging on confrontation over the renminbi exchange rate. Since the end of last year, everyone in the American camp has been berating the renminbi as “undervalued” or “rigged” and urging for it to rise in value or to be made a floating currency.
With regard to this new round of international pressure on the appreciation of the renminbi, China’s attitude is clear and unwavering: the vast majority, from the Premier down to scholars and the general public, are clearly opposed to raising the currency’s value because of pressure from abroad. That is to say, there is limited space for the Chinese to compromise or make concessions. But if America is not willing to concede either, then both sides could well end up fighting fire with fire in a fierce trade war.
In choosing which course to follow with regard to this issue, I believe we must make rational decisions on the three following points.
1. Can America afford a serious trade war with China?
I conclude that if the U.S. sticks stubbornly to its course, forcing the Chinese currency to appreciate, and a serious trade war breaks out between China and the U.S., then America is very likely to bring about a second tidal wave of financial crisis, so much so that the dollar may even crash.
After the financial crisis completely broke out in October 2008, America’s principal methods for turning the crisis around were: 1. “Freezing” the bad debts of financial organizations, and 2. Relying on a “helicopter drop of money.” Indiscriminate distribution of the dollar provoked false recovery of the stock market and GDP, but real estate and unemployment rates simply did not improve.
Only “reindustrialization” can allow America to regain its competitive edge, but, because it is like trying to get overweight people to lose weight and regain their health anew, it would require ten years of ceaseless effort; and naturally, one cannot count on the lives of the obese being any easier once the hard working (Chinese) suppliers have been done away with.
I believe that forcing the renminbi to appreciate can only result in four outcomes: 1. America will implement a 27.5 percent customs duty on Chinese imports, and as China’s bargain buys disappear from the American market, the U.S. inflation rate will immediately rise dramatically; 2. China will retaliate in its trading with America, blocking American imports and causing mass unemployment for American workers; 3. If my previous assertions are correct, then China will also levy punitive taxes on American assets in Chinese businesses, making a fairly large dent in the profit margins of U.S. listed companies, causing U.S. stocks to plummet and doing serious harm to investors’ interests; 4. In retaliation, China will dump huge amounts of U.S. national debt and Fannie Mae and Freddie Mac bonds, and it will be difficult for America to avoid crisis over these debts.
In summary, this could only result in further serious damage to America’s already fragile finances and economy and cause a second crisis. The long-term internal and international stability required for America’s “reindustrialization” would be completely destroyed, and the U.S. would forfeit its chance to recover its competitive edge.
Although it is easy to place the blame for the financial crisis elsewhere, the result of such a decision is often terrible. America has already tried this once; at the start of 2006, I warned of the side effects of this tactic in my article “Risk and Opportunity in 2006: America Concerned as China Speeds Ahead.” If America (as of 2006) is worried about the pain of undergoing surgery itself and chooses instead to place blame for the crisis elsewhere, using threats to force a rise in the value of the renminbi, then cheap Chinese goods, which have been a contributing factor in America’s low rate of inflation of the last few years, will “bite back”; the U.S.’s rate of inflation will rise sharply, and the real estate bubble will burst again. If it places the blame on Iran, then the $100 per barrel oil price high predicted by Goldman Sachs could become a reality. A high oil price would accelerate inflation in the U.S., and would become another fuse for the American financial crisis. Both of these scenarios turned out to be accurate predictions; the U.S. standard inflation rate rose to 5.25 percent, and in 2008 the subprime lending bubble burst.
Today, America looks set for a repeat performance of that tragedy: If it forces through a rise in the Renminbi it will force an increase in its own inflation rate; if it resolves to place sanctions against Iran, it will provoke a sharp and sudden rise in the price of oil. What people find incomprehensible is why must America stumble twice at the same hurdle? Moreover, America is currently far weaker than it was last time.
2. If the renminbi continues not to rise, is China in the wrong?
China is not necessarily in the wrong. The current controversy on whether or not the renminbi is undervalued is a debate conducted within the context of America’s designs. This kind of “you assume I’m wrong, and then I prove I’m not” debate puts the other party in the dock from the very start.
The logic of a fair and equitable debate would be as follows:
1. In accordance with the regulations of the WTO, it is a nation’s sovereign right to make decisions pertaining to the exchange rate of its currency, hence China may choose to fix or float its currency. Therefore, the notion of China’s so-called currency manipulation is a false premise.
2. The notion of the “international free market” provides the theoretical foundation for denouncing “fixed currency as illegal manipulation”; a free market ought to allow for the free flow of all elements in productivity between countries. Let us assume that the “international free market” is paramount and supersedes national sovereignty, that capital can flow freely between countries, and that the rates of exchange between sovereign currencies are determined automatically by the market, then, as labor is an element in productivity, it should, like capital, be allowed to flow freely. So if America demands the freedom of China’s capital exchange rate, then it must at the same time open up its labor market unconditionally. If it does not, then the U.S. is “illegally manipulating the international labor market.”
If America talks about a “free market” in relation to the flow of capital, but about “national sovereignty” in relation to the flow of labor, then I would ask the U.S. to prove that this is not a case of double standards!
3. Stability in the exchange rate between the renminbi and the dollar is profitable to both China and the U.S.
It must be conceded that the current trade relationship between China and the U.S. is lopsided, and we must turn this around to restore the balance. This distortion manifests itself in the following facts: China supplies cheap goods and America consumes them; China is a depository for America’s debts; China is exchanging a steady supply of cheap goods for U.S. dollars. In a nutshell, China is all work and no play, while America is all play and no work.
Therefore, we must make both countries recover to normal, healthy conditions. America should make appropriate reductions to wages and welfare provisions, increase savings deposits, and implement the process of reindustrialization; and China should gradually lower tax refunds on exports, raise workers’ incomes, raise the price of its natural resources, and convert its foreign currency income for internal consumption. However, the deep-seated, core problem shared by China and the U.S. is that those with power and capital enjoy too much wealth, which intensifies the division in society between rich and poor, which is especially difficult to deal with.
During this process, which will take at least ten years, China and the U.S. must be on high alert against the potential of financial speculation to create a financial tsunami in currency, and must fight against, or intervene to break off such a course of events. In this respect, it would be wisest to implement a fixed exchange rate between China and the U.S., as this would best serve the interests of the citizens of both countries, although this will certainly be vilified by financial corporations. In June 2007, I particularly emphasized this point in my article, “The Age of the China-U.S. G2: The Renminbi and the Dollar on a Tightrope.”
In order to create the necessary conditions abroad for America’s reindustrialization, China could agree to maintain a 3 percent annual rise of the renminbi against the dollar in the next three to five years (this 3 percent will cover the annual cost of funds for international hot money). What must of course be stressed is that, this is not a case of China pressuring the U.S., but a wise and mutually beneficial decision, which will reflect China’s sincere desire to settle the issue.
Finally, I would like again to use a section from my article from two years ago to conclude: “Over the next few years, China and the U.S. will find it difficult not to cross swords over this issue, ever competing as they try to get their bearings, but I am convinced that they will nevertheless be able to make compromises and take a mutually beneficial path.”
Sino-American relations seem to be verging on confrontation over the renminbi exchange rate. Since the end of last year, everyone in the American camp has been berating the renminbi as “undervalued” or “rigged” and urging for it to rise in value or to be made a floating currency.
With regard to this new round of international pressure on the appreciation of the renminbi, China’s attitude is clear and unwavering: the vast majority, from the Premier down to scholars and the general public, are clearly opposed to raising the currency’s value because of pressure from abroad. That is to say, there is limited space for the Chinese to compromise or make concessions. But if America is not willing to concede either, then both sides could well end up fighting fire with fire in a fierce trade war.
In choosing which course to follow with regard to this issue, I believe we must make rational decisions on the three following points.
1. Can America afford a serious trade war with China?
I conclude that if the U.S. sticks stubbornly to its course, forcing the Chinese currency to appreciate, and a serious trade war breaks out between China and the U.S., then America is very likely to bring about a second tidal wave of financial crisis, so much so that the dollar may even crash.
After the financial crisis completely broke out in October 2008, America’s principal methods for turning the crisis around were: 1. “Freezing” the bad debts of financial organizations, and 2. Relying on a “helicopter drop of money.” Indiscriminate distribution of the dollar provoked false recovery of the stock market and GDP, but real estate and unemployment rates simply did not improve.
Only “reindustrialization” can allow America to regain its competitive edge, but, because it is like trying to get overweight people to lose weight and regain their health anew, it would require ten years of ceaseless effort; and naturally, one cannot count on the lives of the obese being any easier once the hard working (Chinese) suppliers have been done away with.
I believe that forcing the renminbi to appreciate can only result in four outcomes: 1. America will implement a 27.5 percent customs duty on Chinese imports, and as China’s bargain buys disappear from the American market, the U.S. inflation rate will immediately rise dramatically; 2. China will retaliate in its trading with America, blocking American imports and causing mass unemployment for American workers; 3. If my previous assertions are correct, then China will also levy punitive taxes on American assets in Chinese businesses, making a fairly large dent in the profit margins of U.S. listed companies, causing U.S. stocks to plummet and doing serious harm to investors’ interests; 4. In retaliation, China will dump huge amounts of U.S. national debt and Fannie Mae and Freddie Mac bonds, and it will be difficult for America to avoid crisis over these debts.
In summary, this could only result in further serious damage to America’s already fragile finances and economy and cause a second crisis. The long-term internal and international stability required for America’s “reindustrialization” would be completely destroyed, and the U.S. would forfeit its chance to recover its competitive edge.
Although it is easy to place the blame for the financial crisis elsewhere, the result of such a decision is often terrible. America has already tried this once; at the start of 2006, I warned of the side effects of this tactic in my article “Risk and Opportunity in 2006: America Concerned as China Speeds Ahead.” If America (as of 2006) is worried about the pain of undergoing surgery itself and chooses instead to place blame for the crisis elsewhere, using threats to force a rise in the value of the renminbi, then cheap Chinese goods, which have been a contributing factor in America’s low rate of inflation of the last few years, will “bite back”; the U.S.’s rate of inflation will rise sharply, and the real estate bubble will burst again. If it places the blame on Iran, then the $100 per barrel oil price high predicted by Goldman Sachs could become a reality. A high oil price would accelerate inflation in the U.S., and would become another fuse for the American financial crisis. Both of these scenarios turned out to be accurate predictions; the U.S. standard inflation rate rose to 5.25 percent, and in 2008 the subprime lending bubble burst.
Today, America looks set for a repeat performance of that tragedy: If it forces through a rise in the Renminbi it will force an increase in its own inflation rate; if it resolves to place sanctions against Iran, it will provoke a sharp and sudden rise in the price of oil. What people find incomprehensible is why must America stumble twice at the same hurdle? Moreover, America is currently far weaker than it was last time.
2. If the renminbi continues not to rise, is China in the wrong?
China is not necessarily in the wrong. The current controversy on whether or not the renminbi is undervalued is a debate conducted within the context of America’s designs. This kind of “you assume I’m wrong, and then I prove I’m not” debate puts the other party in the dock from the very start.
The logic of a fair and equitable debate would be as follows:
1. In accordance with the regulations of the WTO, it is a nation’s sovereign right to make decisions pertaining to the exchange rate of its currency, hence China may choose to fix or float its currency. Therefore, the notion of China’s so-called currency manipulation is a false premise.
2. The notion of the “international free market” provides the theoretical foundation for denouncing “fixed currency as illegal manipulation”; a free market ought to allow for the free flow of all elements in productivity between countries. Let us assume that the “international free market” is paramount and supersedes national sovereignty, that capital can flow freely between countries, and that the rates of exchange between sovereign currencies are determined automatically by the market, then, as labor is an element in productivity, it should, like capital, be allowed to flow freely. So if America demands the freedom of China’s capital exchange rate, then it must at the same time open up its labor market unconditionally. If it does not, then the U.S. is “illegally manipulating the international labor market.”
If America talks about a “free market” in relation to the flow of capital, but about “national sovereignty” in relation to the flow of labor, then I would ask the U.S. to prove that this is not a case of double standards!
3. Stability in the exchange rate between the renminbi and the dollar is profitable to both China and the U.S.
It must be conceded that the current trade relationship between China and the U.S. is lopsided, and we must turn this around to restore the balance. This distortion manifests itself in the following facts: China supplies cheap goods and America consumes them; China is a depository for America’s debts; China is exchanging a steady supply of cheap goods for U.S. dollars. In a nutshell, China is all work and no play, while America is all play and no work.
Therefore, we must make both countries recover to normal, healthy conditions. America should make appropriate reductions to wages and welfare provisions, increase savings deposits, and implement the process of reindustrialization; and China should gradually lower tax refunds on exports, raise workers’ incomes, raise the price of its natural resources, and convert its foreign currency income for internal consumption. However, the deep-seated, core problem shared by China and the U.S. is that those with power and capital enjoy too much wealth, which intensifies the division in society between rich and poor, which is especially difficult to deal with.
During this process, which will take at least ten years, China and the U.S. must be on high alert against the potential of financial speculation to create a financial tsunami in currency, and must fight against, or intervene to break off such a course of events. In this respect, it would be wisest to implement a fixed exchange rate between China and the U.S., as this would best serve the interests of the citizens of both countries, although this will certainly be vilified by financial corporations. In June 2007, I particularly emphasized this point in my article, “The Age of the China-U.S. G2: The Renminbi and the Dollar on a Tightrope.”
In order to create the necessary conditions abroad for America’s reindustrialization, China could agree to maintain a 3 percent annual rise of the renminbi against the dollar in the next three to five years (this 3 percent will cover the annual cost of funds for international hot money). What must of course be stressed is that, this is not a case of China pressuring the U.S., but a wise and mutually beneficial decision, which will reflect China’s sincere desire to settle the issue.
Finally, I would like again to use a section from my article from two years ago to conclude: “Over the next few years, China and the U.S. will find it difficult not to cross swords over this issue, ever competing as they try to get their bearings, but I am convinced that they will nevertheless be able to make compromises and take a mutually beneficial path.”