While the Beijing papers worry about macro-economic and political consequences of the yuan’s possible revaluation, media in other, more economically dynamic regions of the country are concerned with the more immediate impact it would have on pocketbooks. On Oct. 17, Chen Xu, a columnist with Shanghai’s independent Oriental Morning Post, wrote that even though domestic politics are behind the U.S. push for currency revaluation:

It is impossible for the Beijing government to succumb to the external political pressure to appreciate the RMB and thereby harm their own export industry in the current global economic turbulence.

The editorial is mostly polite, until the end, when he sharply noted: “Beijing isn’t interested in the attitudes of Americans regarding this issue.”

That last point is almost certainly a blustery overstatement, and the proof is in the English: More than any other important Sino-U.S. issue in recent memory, China’s English-language newspapers have commissioned and translated currency-related editorials that speak directly to American audiences. Take, for example, a prickly editorial by Tao Wenzhao, a senior researcher with the Center for U.S.-China Relations at Beijing’s elite Tsinghua University. Hewrote:

Economic globalization has expedited international competition, as well as industrial structural adjustments in the U.S. Labor-intensive industries have become “sunset industries,” and the U.S. is outsourcing its manufacturing to other countries, including China.

Thomas Friedman wrote an Op-Ed in the New York Times titled “Imagined in America” where he urged that America must rethink the way it develops its economy.

We are never going to get those labor-intensive assembly jobs back from China — the wage differentials are far too great, no matter how much China revalues its currency. We need to focus on multiplying more people at the high-value ideation and orchestration end of the supply chain, and in the manufacturing processes where one person can be highly productive, and well paid, by operating multiple machines. We need to focus on “Imagined in America” and “Orchestrated From America” and “Made in America by a smart worker using a phalanx of smarter robots.” In total value terms, America still manufactures almost as much as China. We just do it with far fewer people, which is why we need more start-ups.

But we also need to stop thinking that a middle class can be sustained only by factory jobs. Thirty years ago, Hong Kong was a manufacturing center. Now its economy is 97 percent services. It has adjusted so well that this year the Hong Kong government is giving a bonus of $775 to each of its residents. One reason is that Hong Kong has transformed itself into a huge tourist center that last year received 36 million visitors — 23 million from China. Their hotel stays, dining and jewelry purchases are driving prosperity here. The U.S. Commerce Department says 801,000 Mainland Chinese visited the U.S. last year, adding $5 billion to the U.S. economy. More Chinese want to come, but, for security reasons, visas are hard to obtain. If we let in as many Chinese tourists as Hong Kong, it would inject more than $115 billion into what is a highly unionized U.S. hotel, restaurant, gaming and tourism industry.

Another idea officials here offer is that the United States invites Chinese firms to invest in toll bridges, toll roads, and rail systems across the United States, in partnership with American companies. They could build them, and operate them for a set number of years, until their investment pays out, and then transfer them to full U.S. ownership. It may be the only way we can rebuild our infrastructure.

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Post tags: currency evaluation, currency exchange rate oversight reform act, netizens, online opinion, rmb
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The Obama administration backed away on Friday from a showdown with Beijing over the value of China’s currency that would have caused new frictions between the world’s only superpower and its largest creditor.

The Treasury Department delayed a much-anticipated decision on whether to label China as a currency manipulator until after the U.S. congressional elections on November 2 and a Group of 20 leaders summit in South Korea on November 11.

Washington and the European Union accuse China — set to become the world’s second-largest economy after the United States this year — of keeping the yuan artificially low to boost exports, undermining jobs and competitiveness in Western economies.

James Fallows weighs in at his Atlantic blog:

Many, many notes from Chinese readers, and some from Americans too, have included an assertion like this one (from a person with a Chinese name): “If I’m not mistaken, the goal of forcing the value of RMB up is to increase the american export [to China].”

Let me put this tactfully: NO NO NO NO NO NO NO. As I’ve tried to argue over the years – for instance here, here, here — this isn’t the problem, and for that problem (American exports and jobs) whatever the RMB does will not necessarily be the solution.

The problem for the world’s economies is chronic imbalance: too much production, reliance on exports, over-investment (yes, it’s possible) and under-consumption in some countries, mostly China; and too much consumption, reliance on debt and imports, and over-consumption, in some other countries, mostly the US. You can’t and don’t balance those accounts on a purely bilateral basis — mandating that America sell more to China, and China less to the US. That’s like thinking you lose weight by just concentrating on what you have for lunch. You balance them by ensuring, overall, that China’s economy comes into a less distorted relationship with the rest of the world’s — and America’s, from its opposite type of distortion, does too.

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Post tags: currency revaluation, G20, rmb, U.S. relations, U.S. Treasury
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Last weekend China announced a change in its currency policy, a move clearly intended to head off pressure from the United States and other countries at this weekend’s G-20 summit meeting. Unfortunately, the new policy doesn’t address the real issue, which is that China has been promoting its exports at the rest of the world’s expense.

In fact, far from representing a step in the right direction, the Chinese announcement was an exercise in bad faith — an attempt to exploit U.S. restraint. To keep the rhetorical temperature down, the Obama administration has used diplomatic language in its efforts to persuade the Chinese government to end its bad behavior. Now the Chinese have responded by seizing on the form of American language to avoid dealing with the substance of American complaints. In short, they’re playing games.

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“We are seeing more durable stability in the economy and the financial system is substantially in better shape,” Geithner told reporters Saturday en route to Beijing, his first trip here since taking office in January. “But we have a ways to go, and we need to keep working in the U.S. and with other major economies to restore conditions for a sustainable recovery.”

[...]“I will of course make it clear that we are committed to a strong dollar, that we are committed to bringing our fiscal deficits down over the medium-term to a sustainable place,” the Treasury chief told the Chinese press, according to a transcript Treasury first provided U.S.-based reporters on Saturday. “We believe in a strong dollar. A strong dollar is in the U.S. interest.”

Geithner added in that briefing that the Federal Reserve is “completely committed to keep inflation low and stable over time.” The U.S. “will do anything we need to do to make sure that we bring down our fiscal deficits and improve the strength of the US economic fundamentals,” he said.

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Geithner travels to China for the first time this weekend. He’s scheduled to visit with a string of Beijing leaders, including President Hu Jintao. As a reality check for the significance of this reception, imagine that Wang Quishan visited Washington next week. Wang, who as China’s vice premier is Geithner’s counterpart, would certainly see Geithner, and doubtlessly Larry Summers, head of President Barack Obama’s National Economic Council. But would he get a meeting with Vice President Joe Biden? How about Obama himself? Probably not. Yet in addition to Hu and Wang, Geithner is scheduled to meet with Chinese Premier Wen Jiaboa.

The Chinese will have to explain why they are so interested in Geithner. But an interesting subtext is that it is Geithner who delivered the administration’s most stinging, high-level remark aimed at China. In his Senate confirmation hearing in January, Geithner said in reply to a written question that China is deliberately suppressing the value of the renminbi, the country’s currency. Geithner’s staff later said the reply was a mistake, yet it attracted much attention, and he had much explaining to do for weeks after – China is by far the largest international holder of U.S. debt, and may be relied on to finance much of Washington’s deficit for years to come.

In contrast to his combative tone during his confirmation hearings, analysts expect that Geithner will not raise the issue of currency revaluation on this trip.  Instead, he will encourage China’s leadership to transition its export-led economy to one supported by domestic consumption.  From The Wall Street Journal:

Treasury Secretary Timothy Geithner heads to Beijing this weekend to urge Chinese leaders to fundamentally alter the export-oriented economy that has created years of trans-Pacific trade tensions.

[...]That means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn’t mean starving later.

[...]That will also require, in the U.S. view, allowing China’s currency to move more freely against the dollar. But Mr. Geithner is unlikely to hector Beijing about the yuan very much during this visit.

Read more about the expected agenda for Geithner’s China talks on The Wall Street Journal’s China Journal blog.

Greg Robb at MarketWatch reports in-depth on the political backdrop for Geithner’s visit – the complicated and often uncomfortable relationship between the world’s two largest economies in the current global recession:

The theory went that with the U.S. consumer tapped out, China would focus on building up its own domestic consumer market. But experts say this hasn’t happened, at least to the extent required.

Instead, Chinese exporters have doubled down on the return of the U.S. consumer and have increased their capacity. Exporters appear to have political muscle in China to block meaningful reform.

At the same time, the U.S. budget deficit is projected to reach record levels for the next several years.

“We’ve got to hope China still has an appetite for our debt,” given the “ocean of red ink” coming down the road, said [Timothy Adams, who also served in the Bush Treasury].

See also the Telegraph for an editorial on the inevitable growing pains of restructuring the China-U.S. economic relationship.

Update #1: This article from The China Post offers more in-depth analysis of the strength of Geithner’s bargaining position and the deal he intends to push:

Though the crisis has given Geithner a weak hand, treasury officials said he will seek to push this bargain:

The U.S. will work to reduce its budget deficits once the crisis ends, urge Americans to save more and shrink the trade deficits. To replace diminished U.S. spending, the Chinese will be asked to step up spending and stop saving so much. The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don’t feel pressured to save so much.

Geithner is expected to point out that U.S. consumers already are rebuilding their retirement savings. The Chinese have pledged to redirect their economy to boost domestic growth. But many private economists question how serious China is about it.

Analysts said they expect Geithner and the Chinese to pledge to do all it takes to end the recession. Both sides know any hint of discord between the world’s largest and third-largest economies probably will unsettled [sic] financial markets.

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As the US economy slumps, lawmakers have renewed a push to punish China for what they see as currency manipulation that costs US jobs. Their prospects appear bleak at a time when the US is seeking Chinese help in confronting crises around the world.

In the aftermath of North Korean nuclear and missile tests, the administration of US President Barack Obama wants China, a veto-holding permanent member of the UN Security Council, to use its leverage as North Korea’s only major ally to push Pyongyang to return to nuclear disarmament negotiations.

[...]Another reason the Obama administration probably will oppose currency legislation is China’s role as the biggest holder of US government debt, Republican Representative Ed Royce said.

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At key points then, China shied away from the decisions that would have allowed it to avoid accumulating so many reserves. China’s leaders probably didn’t intend to accumulate $2 trillion in reserves, but they weren’t willing to make the policy choices needed to change China’s growth trajectory either.

And now China has a problem. Its dependence on exports meant that it ended up importing unemployment from the rest of the world just when China’s own property boom soured. And it so happened that the costs of relying on exports for growth became obvious at the same time that the costs of accumulating more reserves than China needs also became very visible.

China’s leaders likely hoped big investment gains would help offset their currency losses. Now, though, they realize that they bought equities and other risk assets at the top of the market, and thus added to their losses. China’s leaders have noted the criticism that has been directed at the CIC. They now that fessing up to additional losses won’t be popular.

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China is playing a growing role in discussions over solutions to current economic problems. Much of the talk has focused on money — whether Premier Wen Jiabao’s concerns about the value of China’s U.S. treasury investments, or the People’s Bank of China’s paper floating the idea of a de-dollarized international monetary system. Up to now, one limit to China’s ability to contribute to global monetary reform has been its own currency policy, particularly the fact that the yuan is not convertible. However, now there are tentative signs that’s starting to change.

Beijing has signed currency swap agreements with six central banks: Hong Kong, Indonesia, Korea, Malaysia, Belarus and most recently Argentina. These swaps permit those central banks to sell yuan to local importers in those countries who want to buy Chinese goods. This is particularly useful for importers struggling to obtain trade finance as a result of the financial crisis. As such, it’s consistent with China’s desire to participate in the Group of 20′s efforts to support trade financing.

China has long wanted its currency to play a more important role in the global financial system. These swap arrangements come in the context of that broader policy aim. The broader policy goal also has a more practical function in reducing currency exposure and transaction costs for Chinese exporters. The rise in the yuan’s value relative to the dollar in early 2008 was a reason why some Chinese exporters went bankrupt. The ability to settle trade in yuan would reduce this risk in the future.

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As if the dollar didn’t have enough problems, Timothy Geithner took China’s bait yesterday and said he was “quite open” to its suggestion this week to displace the greenback with an “international reserve currency.” The dollar promptly fell and stocks followed, before the Treasury Secretary re-emerged to say “the dollar remains the world’s dominant reserve currency. I think that’s likely to continue for a long time.

Mr. Geithner is learning on the job, and yesterday’s lesson is that it isn’t smart to fool with currency markets when you are already tempting fate with a gigantic U.S. reflation. Treasury and the Federal Reserve are flooding the world with dollars to break the recession, and the world is rightly getting nervous. The solution floated by Chinese central bank governor Zhou Xiaochuan — an increased role for the International Monetary Fund — isn’t desirable. But his warning about the dangers of dollar weakness and exchange-rate instability is still worth heeding.

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With $1.2 trillion in foreign-exchange reserves and the pool growing by more than $1 billion every day, China casts a giant’s shadow over the global financial markets, even if it has mostly used the money to pile up American Treasury bonds. The announcement on May 21st that it would invest $3 billion of its reserves in Blackstone, a New York-based private-equity firm soon to issue shares, shows that it is prepared to barge into murky private markets as well as liquid public ones. It is not the only inscrutable country to be cosying up to the inscrutable private-equity industry. Around the world, a secretive society is emerging of governments flush with foreign assets, some of them petrodollars, that are increasingly calling the shots in international finance. The Blackstone deal is likely to stir others to invest their money even farther away from prying eyes than they do already.

Technorati Tags: Blackstone

(...)
Read the rest of The World’s Most Expensive Club – The Economist (71 words)

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