Op-Ed Contributors

America's huffing about yuan does nothing

By Liam Halligan (China Daily)
Updated: 2010-03-17 07:52

Excerpts from a March 13 column in the Telegraph headlined "The more America huffs about the yuan, the less China will do about it":

A test of true character, perhaps, is the extent to which one is prepared to blame oneself. As such, the Western world's response to this self-made "credit-crunch" has highlighted the hypocrisy of our so-called leaders, their refusal to face reality and, above all, their lack of character.

When the subprime crisis first hit, Henry Paulson, then United States Treasury Secretary, said "this financial crisis was caused to a large extent by a failure to address the rise of the emerging markets and the resulting global imbalances". Last autumn, European Central Bank boss, Jean-Claude Trichet, argued that "imbalances have been the root of present difficulties".

Even Barack Obama has stooped to play the blame game. "We cannot follow the same policies," the president said on a recent trip to Asia, "that have led to global imbalances."

The implication is that subprime, and the deepest Western recession in generations, wasn't our fault. It was entirely unrelated to widespread financial fraud, political myopia and lax regulation. Central banks kept interest rates too low for too long. Western consumers went on a debt-binge and our governments spent like crazy - but all that was nothing to do with us.

It was their fault - China and all those other upstart emerging markets. They produced things the rest of the world wanted, ran big trade surpluses and accumulated reserves. As a result, the Western world was "flooded" with Eastern savings, "forcing us" to keep on borrowing and spending.

You probably find this analysis deeply suspect - illogical and even crass. That's because it is. Yet, the arguments above convey, in essence, the "advanced" nations' position towards the emerging markets of the East. Among Western governments and the glove-puppet economists who serve them, the "global imbalances" line - despite its patent absurdity - is pretty much conventional wisdom. As such, this tawdry, blame-shifting nonsense is repeated ad nauseum in official speeches and diplomatic missives.

This is the context in which Beijing and Washington are now discussing the future value of China's currency, a debate that turned pretty nasty. It sounds like a technical subject, one for currency dealers and other Wall Street denizens, but the outcome of this growing row is of vital importance to every country on earth.

China is the world's most populous country. The manner in which America and the broader Western world engage with China doesn't reflect that reality. The West acts as if our relative decline is China's fault. In doing so, our political leaders demean themselves and us while making the outcomes we want less likely.

When it comes to China, the West needs to face the truth. The more America calls for China to revalue the longer Beijing will take to do it. Chinese politicians are as unlikely to buckle in the face of Western pressure as their Western counterparts would be given a tongue-lashing from Beijing.

Given the importance of the export sector for continued high growth and jobs, this again makes it impossible to Beijing to be seen yielding to pain imposed by the West.

It's also not clear that China's currency is "under-valued" by all that much. Despite the peg, the yuan is 20 percent higher than in 2005. This flies in the face of claims that the fall is America's share of global exports - from 23 percent to 18 percent over the last five years - has happened because the yuan hasn't been allowed to rise. But, then again, blaming foreigners is easier than restructuring clapped-out, bloated and heavily-subsidised Western factories.

Last week we also learnt that China's exports rose 46 percent during the year to February. Inevitably, this has also been presented as "evidence" of China's foul play with the yuan. Yet this export rise is from a very low base - with February 2009 being the epicentre of the subprime storm. More significantly, Chinese imports rose 45 percent over the same period.

During the first two months of 2010, in fact, China's trade surplus fell by 51 percent - with the gain in exports being out-weighed by an import surge. This hardly suggests the yuan is "way too low".

On Thursday, Obama weighed in, calling on China to adopt a more "market-oriented exchange rate". The US Treasury Department, meanwhile, has set a mid-April deadline to decide whether China truly is a "currency manipulator", warning that America could impose new levies on Chinese products if that's judged to be the case.

The president is playing with fire. For one thing, his country is being kept afloat by China's willingness to keep buying US government debt. Obama really should tread carefully. At the same time, the US is now at risk of sparking what could be an all-out trade war.

The reality is that America's "weak dollar" policy - its long-standing practice of allowing its currency to depreciate in order to lower the value of its foreign debts - amounts to the biggest currency manipulation in human history. At the same time, the US has, for years, shamefully stalled on various rulings passed by the World Trade Organization that show America to be breaching global trade rules.

Chinese inflation is now at 2.7 percent - close to the official 3 percent target. Beijing will eventually allow the yuan to rise, but in its own time and in order to tackle inflation and not because of US pressure. America needs to act smarter and get its own economic house in order. Obama has decided instead to lash out at China in a desperate attempt to placate a US electorate increasingly mindful of their president's failings.

(China Daily 03/17/2010 page9)