Why America Should Just Shut Up

America is making far too big a fuss over the Chinese currency. They would be well advised to keep still.

The time for soothing silence is over. Perpetual complaining by the U.S. Congress that China should revalue its currency finally ceased for several months. That was early in 2009, when the global financial crisis hit hard. There were fears at the time that nations would go defensive and a wave of protectionist measures would follow, which might plunge the world into a deep recession. Congressional representatives kept their mouths shut.

But China’s economy has revived and is running smoothly. Meanwhile, unemployment in the U.S. shot up, recently reaching 9.7 percent, and the Congressional hue and cry has resumed. Observers think the U.S. is preparing to officially accuse China of currency manipulation — a charge that could further strain the already tense relationship between the two nations.

The Chinese Renminbi has been de facto pegged to the dollar since July 2008, and the Americans haven’t tired of complaining to the Chinese since then. But they would be better advised to keep quiet. As long as Beijing feels it is being driven into a corner, there’s no hope of China changing course. China is pursuing its own interests and feels its exchange rate policy “contributes to the stabilization of the global economy,” as their Central Bank Chief, Zhou Xiaochuan, recently stated.

Beijing is Aware of the Advantages

That doesn’t mean that China isn’t aware of the advantages of such a revaluation. A stronger and more flexible Renminbi would solve several of China’s current problems; for example, their rising inflation that recently reached a 16-month high. High food prices continue to be dynamite in a country where many still live below the poverty line. A stronger currency would give them more purchasing power. At the same time, profits would sink for exporters and excessive investment would be reduced. On balance, China’s domestic demand would increase following revaluation — a goal the Chinese government has already announced. Plus, China would also garner a good deal of Western goodwill.

No Magic Bullet

The politicians and economists in Beijing are fully aware of these advantages. The reason they still vehemently oppose revaluation is obvious: A stronger currency is not a magic bullet. In order to get a sustained boost in domestic consumption, China’s entire social system would have to be turned inside out. Old age and health care programs have to provide sufficient security so that people don’t put all their money into savings but begin spending on consumer goods.

Tax and business reforms are equally necessary to prevent the enormous profits from ending up in the hands of just a few once again. Before Beijing has solved these problems, it will hesitate to close off its main source of income, namely, exports. Whether America likes it or not, they’ll have to wait until China reaches the point it thinks is the right time to loosen exchange rates.

Americans should keep in mind the fact that a stronger Renminbi is not a panacea for their own economic problems. The jobs America has lost will never return because it has ceased producing those things — like furniture, toys and running shoes — that are now the mainstays of the Chinese export trade. If the Renminbi increases in value, American consumers will end up paying for it with higher prices. Instead of getting bogged down in disputes with China, America would be better served by making efforts toward building up a competitive export industry, because Prime Minister Wen Jiabao turned thumbs down on the U.S. again just this weekend when he announced that China itself would make the decision as to when to revaluate its currency.