How Will the Sino-U.S. Currency Battle End?

America is raising the RMB issue, pressuring China again this year, and China is adopting a strong attitude. Both parties are fighting fiercely, and a negative outcome for the two countries is inevitable. A U.S. diplomat said privately that the U.S. realizes that maintaining “face” is very important to China, so pressure could be counterproductive. Though China’s attitude remains tough, the rise in the RMB has already been obvious, which is the silver lining America really wants.

Since the beginning of this year, the U.S. has been exerting pressure on China from all sides, which makes us believe that America will not give up easily. At the same time, Chinese officials also have responded strongly. America knows better than any other country that the currency’s effect is very limited in adjusting Sino-U.S. trade. On the surface, America is launching an exchange rate battle, but the real motive is to achieve the following six goals.

First, in terms of the economy, America wants China to open up its market. During a previous currency battle in 2007, former Secretary of the U.S. Treasury Henry Paulson accidentally revealed that the true intention was to open Chinese financial markets. Luckily, China withstood that pressure, or the current financial crisis would have had a greater impact on China.

Second, America wants to enhance the dollar’s hegemony. America once used the currency as a stick to beat Japan, which caused Japan to fall into economic depression for more than a decade. The currency weapon has withstood the test of time as a global strategy. In the financial crisis, everything is negotiable but the currency battle is unavoidable.

Third, America wants to divert the focus of the public away from the domestic arena to score political points. The U.S. fiscal deficits are huge and its economic policy achievements are scarce. The government is still searching for the right engine to drive the economy; deflation is still going on and the unemployment rate is rising, leading to domestic resentment. With the mid-term election around the corner, the Obama administration has to find a way to divert the public’s attention, and it hopes to score in terms of public opinion and image, with RMB as the victim.

Fourth, America wants to evade international debt obligations. The stable exchange rate between the RMB and the dollar renders America unable to gain the greatest advantage. In other words, America’s aim is to evade the debt by lowering the value of the dollar, thus redistributing global assets.

Fifth, America wants to hold the moral high ground on the economy. As America pressures China, it also can become the spokesperson for Europe, Japan and developing countries competing with China.

Sixth, America wants to control China. Since China joined the World Trade Organization, it has become an increasingly influential voice within the international community. America perceives this development as a threat to U.S. hegemony, which illustrates America’s containment mentality.

Dispute over the Exchange Rate “Front” Fuzzy

Despite powerful reasons for America and China to struggle over currency, divergence of opinion exists even within the two countries. The British Financial Times deemed the dispute over the exchange rate “front” fuzzy.

In America, Republicans and Democrats differ on this issue. The Republicans represent the interests of transnational corporations, most of which benefit from economic globalization. Their manufacturing factories are in China and other developing countries, while the products are mainly sold in America and other developed countries. Increasing customs duties, taxes and trade barriers would lower the dollar’s exchange rate, which would lead to a global trade war. This change in the global economic structure would have an enormous negative impact on transnational corporations.

Disagreements also exist within U.S. business circles. Wal-Mart and other large U.S. retailers understand that appreciation in the RMB will raise the prices of imported clothing and toys. Many U.S. companies rely on China to maintain their own economic growth. If the Obama administration labels China as a currency manipulator and Congress raises the tariff on Chinese products, the result would be a heavy blow to American transnational corporations, which are relying on the Chinese market to make up for weakness in domestic and European markets.

In China, opinions on whether the RMB should rise also differ. The Chinese Department of Commerce generally is against any policies that can make RMB rise or harm exportation. Analysts believe that China’s powerful National Development and Reform Commission will veto floating of the exchange rate, but will agree to the introduction of a more flexible exchange rate policy. The Bank of China, whose task is inflation control, also hopes the RMB becomes more flexible. With the government, academia and business interests so divided on this issue, the real risk of a “rate war” is greatly reduced.

Currency Battle May End Peacefully

Obama hopes that Hu Jintao will visit America officially in June; until then the battle will not commence. Triggering a trade war to force a re-evaluation of the RMB would only hurt both sides. Compared to five years ago, both countries are more interdependent, and China is America’s biggest creditor, so stakes are high for the U.S. government.

There are signs that China is considering adjusting the RMB exchange rate. Douglas H. Paal, Vice President of the Carnegie Endowment for International Peace, said during an interview, “it seems increasingly likely that China will permit a small but significant one-time appreciation of the yuan pegged to the dollar after the phase out in favor of being pegged to a basket of currencies.” In this manner, China could retain autonomy and control currency reform without negative impacts to Chinese exportation and the job market. This move would also relieve political pressure on the U.S. mid-term election and serve as a mutually acceptable solution.