Concern #2: China's Predatory Currency Policy

November 10, 2009

Mercantilism is alive and well in China, now the world’s third largest economy although well down the leader board in per capita terms.  Chinese monthly economic figures for exports, industrial production, and investment will be reported tomorrow.  A massive three-dimensional policy stimulus from low interest rates, deficit fiscal spending and intervention to maintain a highly undervalued yuan has the Chinese economy revving back to pre-global downturn speeds in a hurry.  Re-pegged against the dollar since July 2008 at roughly 6.83, the yuan has followed the greenback southward in 2009 against almost all other world currencies. The last thing the global adjustment process needs is for the biggest surplus economy to have a depreciating currency.  China’s rapid buildup of liquidity from this policy could fan future domestic inflation and makes an international monetary system that revolves around the dollar even more unstable.  Governments around the world have tried to reason with Beijing officials to become enlightened and let the yuan climb.  Incremental competitive pressure on U.S. industries has actually been less severe than for Euroland participants or China’s Asianl neighbors like South Korea.  President Obama visits the region next week and will try to cajole China to budge.  He’ll hear plenty of criticism in return about America’s increasing predisposition to impose trade barriers, neglect the dollar, and exert no leadership in restarting multilateral trade negotiations.  As for yuan policy, Chinese officials will do what they’ve always done, hear what they wish and disregard the rest.  A fundamental impediment is the absence of any real leverage by others to influence Chinese policies other than the cumbersome process of raising complaints with the World Trade Organization.  But as noted, there’s plenty of blame to go around.  A tit-for-tat run of trade grievances could backfire.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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