Rise of the RMB

Trust me, I’m a congressman

China’s position on renminbi appreciation needs explaining. Here goes…

Hard currency debate: American politicians are blaming the country’s problems on a weak renminbi

Two Rs have been in the news in the past week or so. They are, of course, Rooney and the renminbi. The English footballer wants to leave Manchester United and is reputedly looking to up his value by 100% (in salary terms, anyway). And just like Wayne, the talk around the renminbi is also of an increase in value – in this case US and European policymakers are keen on a rise of between 20% and 40%.

A bidding war may soon ensue for Rooney, but a far more serious conflict could be on the cards over the renminbi. As the rhetoric ratchets up, a trade war could loom if China proves intransigent on the issue, and refuses to allow a major appreciation of its currency.

As reported in WiC80, the US House of Representatives has voted in favour of a bill that could enable Congress to label China a ‘currency manipulator’ – and punish the world’s second biggest economy with trade sanctions. And with the November 2 mid-term elections fast approaching, the mood in the US has become increasingly politicised. Perhaps the only thing both Republicans and Democrats can agree on is that China’s currency is to blame for any number of America’s problems – and there’s solid political capital in repeating that mantra as often as possible.

The New York Times recently reported: “With many Americans seized by anxiety about the country’s economic decline, candidates from both political parties have suddenly found a new villain to run against: China.” It added that – in a single week – at least 29 candidates had unveiled advertisements suggesting that their opponents had been too sympathetic to China, and that as a result Americans have suffered.

In the US campaign context the debate about the yuan is often being framed in very simple, black and white terms. It goes like this: the yuan is undervalued, and that’s hurting American jobs and the economic recovery. China is keeping it cheap because its leaders are protectionist and mercantilist, and they want to grow their economy at America’s expense. The currency gives China’s exports an unfair advantage. Without it the Chinese would buy more American goods, and Americans themselves would buy more stuff made in the US, creating jobs. Buying less from China would also see the country’s trade deficit reduced.

The Chinese position on its currency is more nuanced. That being the case it’s harder to communicate, and definitely less sound bite-friendly. Beijing can’t claim – like some American politicians – to have ‘fast and easy solutions’. But what exactly is the Chinese position?

The Southern Metropolis Daily – recognising how interconnected the US and Chinese economies have become – notes that a ‘currency war’ would be a “lose-lose” situation for both countries. It cites the cautionary advice of Yi Gang, China’s deputy central bank governor: “If you’re playing the currency war or trade war card, you need to think twice about who you are really fighting against.”

The newspaper quotes a significant statistic: according to the US China Business Council, American firms earned $150 billion in revenues from China in the past year. Just ask the bosses at GM, for example, who have been selling cars in China in record numbers (a fact that has allowed the American auto firm to bounce back from its US taxpayer-funded bailout faster than many had anticipated).

During the first seven months of 2010, US exports to China were up 36% year-on-year. At the same time, China’s exports to the US grew by 21%. As such, China has become America’s third-largest export market and now accounts for 6.8% of the country’s total overseas sales.

To the Chinese, this tends to suggest a fast-growing Chinese economy is good for the US. But if China is pushed into a dramatic currency appreciation, its own economy is likely to suffer, say Chinese leaders, which ultimately won’t be good for the US, or the rest of the world.

Besides, even if a revalued yuan makes Chinese goods more expensive, it does not follow that they will necessarily be replaced by US-made alternatives. Other emerging markets are just as likely to cash in (see WiC46 for examples in the steel industry).

Wen Jiabao, the prime minister, has been hopping from country to country trying to communicate these messages. In Brussels he sought to engage with the EU: “I say to Europe’s leaders: don’t join the chorus pressing to revalue the yuan. If the yuan isn’t stable, it will bring disaster to China and the world. If we increase the yuan by 20-40% as some people are calling for, many of our factories will shut down and society will be in turmoil.“

Wen’s cataclysmic vision of “disaster” is one where export-driven factories close en masse, leading to huge unemployment and ‘social unrest’.

When pushed, the Chinese state media is just as capable of a belligerent tone on the currency issue as Fox News.

Take, for example, the ever-strident Global Times which told its readers: “Do not expect the Chinese government to surrender. If it has to choose between millions of Chinese jobs or pressure from several US politicians, the decision is not difficult.”

When such comments – with their militaristic undertone – are read in the West they don’t help China’s cause. A more useful strategy is to use the Western media to express a few more rational home truths. Again, Premier Wen is leading the initiative. In a recent cover story interview with TIME he didn’t dodge Fareed Zakaria’s question on yuan appreciation, but explained why it wouldn’t solve the problem. “The trade balance between our two countries is mainly structural in nature,” said Wen. “Many Chinese exports to the US are no longer produced in the US, and I don’t believe that the US will restart the production of those products – products that are at the low end of the value-added chain. Even if you don’t buy them from China, you still have to buy them from India, Sri Lanka or Bangladesh. And that will not help resolve the trade imbalance between our two countries.”

From the Chinese standpoint the ‘structural’ nature of the trade deficit means the solution is not the currency, but China buying more American goods. To this end it sent a trade delegation to the US led by Wang Chao, the vice minister of commerce. The ministry’s spokesperson explained that this was to demonstrate China’s good faith in the trade relationship. In fact it was “pledging to boost bilateral economic ties by purchasing more goods from the US”.

Of course, offering the Chinese more big ticket items to buy helps – hence President Obama’s recent waiver on the sale of C-130 cargo aircraft was a sensible step from Beijing’s perspective.

Buying time

The overarching strategy of China’s leaders is to buy time and take a gradual, go slowly approach to currency revaluation. Ye Tan, a senior financial commentator, has stated that policymakers are now very aware of avoiding Japan’s mistake in 1985, when it agreed to a stronger yen at the Plaza Accord. That led to two lost decades of growth, he says, not something that China wants to repeat. Instead it wants to show “the stamina for sustained and healthy development for a century”.

Beijing hopes that rises in minimum wages, welfare reforms and the rapid development of western China will all contribute to growing domestic consumption. Ultimately that is the structural rebalancing that is required; lessening the role of exports in fuelling GDP growth, and seeing it import more from abroad.

The problem is that – unlike the apparently quicker fix of revaluing the currency – this will all take time. While China is not a country inclined to beg, the reality is that it is now pleading for time from the international community.

US politicians, for their part, are not listening. In that climate, the Chinese have also waded into the blame game: accusing the US of running an interest rate policy that is exporting speculative ‘hot’ money flows to emerging markets. A fresh round of quantitative easing in Washington, China’s politicians say, will only exacerbate the problem.

That logic explains China’s unanticipated move to raise its interest rate by 25bp this week. Conveniently it distances Beijing from America’s policy of monetary easing – allowing it to up its rhetoric on why this self-interested strategy benefits the US but not others. And at a practical level it is also an attempt to quell a housing bubble in its own economy.

In this environment there is a real sense of worry about what may come next. “Both China and America must act wisely,” warned Felipe Larrain, Chile’s finance minister, in a recent Financial Times op-ed.

The easy (and popular) option for US congressmen will be to lash out at China and label it a currency manipulator. The Obama administration has managed to curtail previous efforts to do this, although it must get more difficult each time the motion is raised. China will no doubt already be planning its reprisals – perhaps suspending its purchases of US government debt.

TIME magazine columnist Zachary Karabell sees it all in dark terms. He says blaming China’s currency for America’s current problems is “misdirected and even dangerous”. In this week’s issue he points out to his stateside readers: “The idea that the US is not responsible for its own economic stagnation, housing bubble and unemployment is a black-is-white, up-is-down view that only insecurity can breed.”

Karabell’s conclusion: that restraint is required – especially from trigger-happy US politicians, who could start a trade war.

“We can take the cue from our fears and plunge the world into chaos. Or we can act like the great nation we profess to be and tend zealously to our own problems rather than looking abroad for dragons to slay,” he writes.


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