The U.S.’s True Intention in Escalatingthe War over the Exchange Rate

The U.S. Senate held a procedural vote on Oct. 3 and decided to deliver the proposal named “2011 Currency Exchange Rate Regulatory Reform Act” to the whole Senate for a final vote. Although it did not specifically mention the renminbi, the outside world generally thought that it mainly aimed at the renminbi’s exchange rate. Its motivation was to push Congress to adopt legislation and urge the executive branch to use “the undervaluing of the renminbi” as the reason to impose high punitive countervailing duties on Chinese products being exported to the United States (see the Oct. 6 Xinhua Daily Telegraph). China’s Ministry of Foreign Affairs, the Ministry of Commerce and the Central Bank immediately declared their positions and took a tough stance against the proposal. China’s Ministry of Foreign Affairs stated that this proposal used the so-called imbalance of currency as an excuse, elevated the issue of exchange rate, adopted protectionist measures, seriously violated the World Trade Organization’s rules, and severely disturbed Sino-U.S. economic and trade relations.

Objectively speaking, in recent years, China has been exerting efforts to promote trade balance. The percentage of China’s general accounts surplus within the gross domestic product has been steadily going down. In 2007 this percentage was 10.1 percent; in both 2009 and 2010 it was 5.2 percent. In the first half of 2011 it was 2.8 percent. China’s imports and exports have become more and more balanced and matched the level of the exchange rate. The trade surplus’s proportion within the domestic GDP has lowered to 1.4 percent — internationally recognized as reasonable. However, some Democratic and Republican congressmen who participated in this proposal claimed that renminbi was undervalued from 25 to 40 percent, and this allowed Chinese companies’ possession of “unfair advantage on price competition” in international trade. The renminbi’s appreciation can be seen by every one in the world. Since the beginning of this year, the renminbi’s exchange rate against the U.S. dollar already risen to around 4 percent. On Sept. 30, the renminbi’s exchange rate against the U.S. dollar went up 6.4 percent and created a new historical high. All of these facts were acknowledged by many entrepreneurs and government officials in the U.S. But why does the U.S. Senate still want to stir up a war over the U.S.-China foreign exchange rate?

Some editorials said that it was all about ballots. All congressmen and senators need to fight for the public’s attention and grab ballots at the dawn of the U.S. general election. Based on my observation, this action by the U.S. Senate was tightly linked to the difficult domestic political situation. In terms of U.S. domestic politics, the “trouble” causing the largest headache was still the “Occupy Wall Street” demonstration, which has captured the world’s attention. Having lasted for three weeks, it is still going — becoming more radical as it grows in size. Demonstrations aimed at financial systems, small or large, have appeared from the West Coast to the East Coast, in cities like Los Angeles, San Francisco, Denver, Chicago, Washington and Boston. The latest movement launched was the “Occupy Universities” movement, which appealed to all college students throughout the U.S. to join the street demonstration on the afternoon of Oct. 5. According to information published on the official website of “Occupy Universities,” 75 universities and colleges nationwide have responded; they will join the street demonstration on Oct. 5.

Even though Wall Street suffered a huge blow during the financial crisis in 2008, it did not convince the U.S. government to strive and “reform Wall Street;” rather, the government extended assistance and injected huge amounts of financial aid. Wall Street accepted the government’s aid on the one hand, and on the other hand, continued to distribute big bonuses without any delay. In 2008, people who worked for Wall Street’s financial industry received big bonuses up to $18.4 billion in all, equaling the financial industry’s peak period in 2004. Because Wall Street was the initiator of the financial crisis, it was broadly criticized by all sectors in the U.S. after news of the bonuses was exposed. The Bush administration publicly issued a stern warning against such action. Obama, the newly elected U.S. president at the time, said on Jan. 29, 2009 that while the American tax payers took out their money to save the financial industry, Wall Street’s financial institutions still distributed big bonuses amounting to $20 billion. It was irresponsible and “shameful behavior,” and it angered people. It conflicted with long-held mainstream moral values.

Of course, the main blasting fuse that directly caused the demonstration in New York was the stubbornly high unemployment rate. Based on the latest employment figures released by the U.S. Department of Labor, in August the number of people who are employed went down in 30 states, and New York’s employment numbers decreased the most, as employers in New York laid off 22,000 employees that month. People know that having a job is one of the human rights in the U.S. Once the number of people who are employed went down, the issue of employment became a matter for human rights organizations. Every union in the U.S. would target this issue and conduct activities everywhere.

There are 40 million people living under the poverty line in the U.S.: That is almost one in six Americans. Because the employment rate is decreasing, and the economy is in a downturn, New York City Mayor, Michael Bloomberg, was deeply worried and publicly stated that if the U.S. government did not adopt measures to expand employment, then street disturbances would happen in the U.S. — just like the ones occurring in Egypt and Spain. Now, the fever expressed by “Occupy Wall Street” is spreading, confirming Bloomberg’s prediction.

It should be said that since becoming president, Obama has proposed to temporarily reduce income taxes to stimulate spending and domestic demand in order to resolve America’s employment issue. But people saw that when this plan was first presented, it immediately met Republican resistance. Republican leaders declared that Obama’s plan to raise rich people’s taxes would hurt business and other local for-profit organizations. “Occupy Wall Street” is aimed at Wall Street — an objective so clear that it need not be explained. As the declaration of “Occupy Wall Street” said, we constitute the 99 percent, the ordinary people who can no longer tolerate the greed and corruption of the 1 percent. It also said that it was Wall Street that influenced the U.S. Congress and the partisan struggles between the two parties. On the surface “Occupy Wall Street” points at Wall Street, but it actually points at money in U.S. politics. However, the Democratic and Republican leaderships neither want to think nor talk about this perspective. This was destined to be a tragedy. The significance of “Occupy Wall Street” is that it is sharply and clearly aimed at Wall Street, and the slogan of “taking over Wall Street” implicates the U.S.’s political and economic systems. Some U.S. congressmen worry most that “Occupy Wall Street,” which is sharply pointed at Wall Street, could spread all over the country and lead to real troubles.

When it comes to resolving difficult situations in U.S. domestic politics, some government officials like to play the trick of blaming China, and the U.S.-China exchange rate and trade balance are their favorite subjects. As long as there is surplus in China’s trade, they can easily place the responsibility for the undervaluation of the renminbi and the manipulation of exchange rate on China, thereby shifting attention away from domestic difficulties and forcing China to accept punitively high tariff duties. Therefore, there is reason for saying that the U.S. Senate’s war over the exchange rate is a case of “publicly repairing the narrow footpath placed over a cliff, but secretly taking a different route.”

However, such methods are so old that even American and world economists do not believe them. Stephen Roach, Chairman of Morgan Stanley Asia, thinks that the renminbi’s appreciation would do more harm than good to China’s economy and world trade. The U.S.’s countervailing and anti-dumping measures aimed at the renminbi’s exchange rate would only accelerate trade friction. Nobel Prize-winning economist Michael Spencer thinks that sticking with the renminbi exchange rate is based on a shallow understanding of the evolving Chinese economy and the U.S.’s structural economic problems. He pointed out that it is beneficial to the world economy that China’s economy keeps growing, that the renminbi’s blank and radical appreciation would be harmful to China’s and world’s economy. In the peaceful demonstrations of “Occupy Wall Street” during the last few weeks, people expressed that they “don’t want to be controlled by the greed and corruption of 1 percent of the population”. This should be carefully introspected by the Americans.