MATHEW INGRAM
Globe and Mail Update
The South Park animated movie advised everyone to "blame Canada" for their problems, a satirical tagline that came complete with a catchy jingle. But it seems that both the U.S. and many European countries would rather blame China for their economic problems. Why? Because China's currency is too low, they argue, and this subsidizes the Chinese economy at the expense of both the U.S. and the EU. The pressure has been building on Beijing to revalue the yuan, but so far China has said that it doesn't see any good reason to do so ― and it may just be right.
While economic growth has slowed in the U.S. and elsewhere over the past two years, China has been roaring ahead by most measures (although official data from China leaves something to be desired). That in turn has created a growing trade imbalance, something that has become uncomfortable politically for U.S. President George W. Bush. The trade deficit between the United States and China rose by almost 25 per cent last year to more than $100-billion (U.S.) and has almost doubled over the last five years.
In the past, trade with China consisted largely of low-cost, labour-intensive products such as clothing, shoes, toys and so on, markets that most U.S. companies weren't terribly concerned about. More recently, however, a growing part of China's export business is made up of high-tech products such as computers, office equipment, consumer electronics and so on. That is something that has U.S. manufacturers ― and the senators and congressmen who represent them ― very worried.
In July, a coalition of senators sent a strongly worded letter to U.S. Treasury Secretary John Snow about what they see as China's manipulation of its currency, which is known as the yuan outside China, but called the renminbi or "people's currency" inside the country. Dick Gephardt, who is seeking the Democratic nomination for president, has criticized the Bush government on the issue, and Mr. Snow is expected to raise it with the Chinese finance minister when they meet next month.
Also in July, European Central Bank president Wim Duisenberg spoke out about what he called "the imbalance that exists in the world in the large and fast growing economies in Asia" that link their currencies to the U.S. dollar, despite the broad differences between their economies and that of the U.S. Most economists took this to be a thinly veiled reference to China, the largest and fastest-growing region in Asia.
The yuan is "pegged" at a fixed rate of 8.28 yuan to the dollar, a figure that some observers of Chinese culture might notice is hardly a coincidence: the number 8 is considered lucky in China because it sounds like the word meaning "prosperity." The number 828 effectively means "prosperity and more prosperity" ― and that is exactly what the low yuan has brought to China so far. As trade has increased with the U.S. and the rest of the world, the economy has grown by leaps and bounds.
Unfortunately for manufacturers in the U.S. and other countries ― including Canada ― much of that growth has come at the expense of industrial growth elsewhere, since China's currency provides a competitive advantage that other countries can't match. By fixing the exchange rate, critics argue that China is effectively manipulating its currency to keep it artificially low so that its goods will cost less. According to some estimates, the yuan may be undervalued by up to 50 per cent.
If this sounds familiar at all, it should. In the 1970s and 1980s, the U.S. put pressure on Japan to revalue the yen, arguing that the low value of the currency was hurting the U.S. manufacturing sector, and under the 1985 Plaza Accord Japan agreed to increase the value of the yen. Some economists say this increase in valuation played a large part in the bubble that later developed in the Japanese economy, a bubble that eventually burst and left Japan in the doldrums for more than a decade.
Needless to say, China isn't in a hurry to suffer that kind of fate ― and has made it plain that it doesn't think its growing economy should be sacrificed for the benefit of the United States or Europe, or even Japan for that matter. As Xiao Guoliang, an economist at Beijing University, put it recently: "If they are sick, why let China take the pills?" Chinese officials have also pointed out that the United States was more than happy to have China maintain its peg in the late 1980s, when a currency crisis was spreading through Asia. In that case, China's peg was a bulwark against further panic.
Some economists have also pointed out that China's trade imbalance benefits the Untied States to a large extent, since many of the companies that take advantage of the low yuan to do their manufacturing in China are subsidiaries of U.S.-based (and Europe-based) companies. The U.S. benefits in another way as well from China's prosperity: it is a huge buyer of U.S. dollars and U.S. bonds, and that is something the Bush government can't do without, since it has to finance a $350-billion deficit.
Globe and Mail Update
The South Park animated movie advised everyone to "blame Canada" for their problems, a satirical tagline that came complete with a catchy jingle. But it seems that both the U.S. and many European countries would rather blame China for their economic problems. Why? Because China's currency is too low, they argue, and this subsidizes the Chinese economy at the expense of both the U.S. and the EU. The pressure has been building on Beijing to revalue the yuan, but so far China has said that it doesn't see any good reason to do so ― and it may just be right.
While economic growth has slowed in the U.S. and elsewhere over the past two years, China has been roaring ahead by most measures (although official data from China leaves something to be desired). That in turn has created a growing trade imbalance, something that has become uncomfortable politically for U.S. President George W. Bush. The trade deficit between the United States and China rose by almost 25 per cent last year to more than $100-billion (U.S.) and has almost doubled over the last five years.
In the past, trade with China consisted largely of low-cost, labour-intensive products such as clothing, shoes, toys and so on, markets that most U.S. companies weren't terribly concerned about. More recently, however, a growing part of China's export business is made up of high-tech products such as computers, office equipment, consumer electronics and so on. That is something that has U.S. manufacturers ― and the senators and congressmen who represent them ― very worried.
In July, a coalition of senators sent a strongly worded letter to U.S. Treasury Secretary John Snow about what they see as China's manipulation of its currency, which is known as the yuan outside China, but called the renminbi or "people's currency" inside the country. Dick Gephardt, who is seeking the Democratic nomination for president, has criticized the Bush government on the issue, and Mr. Snow is expected to raise it with the Chinese finance minister when they meet next month.
Also in July, European Central Bank president Wim Duisenberg spoke out about what he called "the imbalance that exists in the world in the large and fast growing economies in Asia" that link their currencies to the U.S. dollar, despite the broad differences between their economies and that of the U.S. Most economists took this to be a thinly veiled reference to China, the largest and fastest-growing region in Asia.
The yuan is "pegged" at a fixed rate of 8.28 yuan to the dollar, a figure that some observers of Chinese culture might notice is hardly a coincidence: the number 8 is considered lucky in China because it sounds like the word meaning "prosperity." The number 828 effectively means "prosperity and more prosperity" ― and that is exactly what the low yuan has brought to China so far. As trade has increased with the U.S. and the rest of the world, the economy has grown by leaps and bounds.
Unfortunately for manufacturers in the U.S. and other countries ― including Canada ― much of that growth has come at the expense of industrial growth elsewhere, since China's currency provides a competitive advantage that other countries can't match. By fixing the exchange rate, critics argue that China is effectively manipulating its currency to keep it artificially low so that its goods will cost less. According to some estimates, the yuan may be undervalued by up to 50 per cent.
If this sounds familiar at all, it should. In the 1970s and 1980s, the U.S. put pressure on Japan to revalue the yen, arguing that the low value of the currency was hurting the U.S. manufacturing sector, and under the 1985 Plaza Accord Japan agreed to increase the value of the yen. Some economists say this increase in valuation played a large part in the bubble that later developed in the Japanese economy, a bubble that eventually burst and left Japan in the doldrums for more than a decade.
Needless to say, China isn't in a hurry to suffer that kind of fate ― and has made it plain that it doesn't think its growing economy should be sacrificed for the benefit of the United States or Europe, or even Japan for that matter. As Xiao Guoliang, an economist at Beijing University, put it recently: "If they are sick, why let China take the pills?" Chinese officials have also pointed out that the United States was more than happy to have China maintain its peg in the late 1980s, when a currency crisis was spreading through Asia. In that case, China's peg was a bulwark against further panic.
Some economists have also pointed out that China's trade imbalance benefits the Untied States to a large extent, since many of the companies that take advantage of the low yuan to do their manufacturing in China are subsidiaries of U.S.-based (and Europe-based) companies. The U.S. benefits in another way as well from China's prosperity: it is a huge buyer of U.S. dollars and U.S. bonds, and that is something the Bush government can't do without, since it has to finance a $350-billion deficit.
