There is a nice tune by ‘The Platters’: Oh Yes I’m the great Pretender / Oh Yes I am a great Manipulator. So who manipulates who: is it Mr. Yuan or Mr. Green? Realistically, to be fair to all, every country in the globe, at some point in time manipulates its currency. There is hardly any Central Bank who doesn’t intervene either directly or indirectly when its currency starts to skyrocket or skydive beyond a certain ceiling or floor. That’s just the way it is.
A country like China has a mighty wand on its hand though. Since the country runs a huge Trade Surplus, it can most likely afford to buy dollars in the open market to keep the demand for dollars high, and push the dollar price upwards relative to the Yuan. This thus keeps the Yuan undervalued. And this is of maximum benefit to them since China’s engine of growth is exports. Thus the lower the value of the Yuan, the more profitable it is for China’s exporters on all ends. For example, if $1 buys 10 Yuans, and an exporter sells a Chinese shirt for $10, he pockets 100 Yuans. But if $1 was worth only 5 Yuans, the exporter would only pocket 50 Yuans. Thus this is the main reason why it is in the best interest for China to act as the “great manipulator” of its currency if she so likes, and since she can, then she simply does. And is there really anything wrong with this, should this not be “free market” competition? A country seeks its comparative and competitive advantage and maximizes on it.
On the other hand though, one of the direct consequences of keeping the local currency undervalued is “inflation”, and China has already in 2008 faced ‘super high’ inflation rates. But it seems the lesson has not been learnt. It thus simply operates on ‘short term’ greed rather than long term sustainability, perhaps Japan would come as a good reminder and example for China to examine.
Now on the other side of the globe, the US is the most impacted. Some may propose that China’s undervalued currency is actually beneficial since it boosts US investment and goods would be cheaper for domestic production. But this is small minded and short sighted: small change and small fry to the “big fish” that China is having a big chunk of. While the US languishes and suffices with a little piece of crumbs on the side, China continues to build a fortress of its most single major money earner: ‘trade’. And they ensure they maximize on it on all points. In fact, it may even be rational to argue that the US is not flooded with China’s cheap, under quality exports because they are ‘cheap’, but rather because China has the upper hand by artificially keeping its currency undervalued. If this was not the case, obviously China would not be in a position to compete with American produced goods on the level of being “cost competitive” or cheaper. Thus the minor benefits outweigh the costs to the US. – Period.
Unfortunately, some may argue that the US is not in a ‘level playing field’ to even try to muster too many words against China. The US runs huge trade deficits and to an extent it depends on China as its main client at its Treasury Bond auctions. So as the cliché: Who pays the piper plays the tune. If China got so mad and decided to stop showing up at these auctions, then US in its precarious situation at this time, its fragile economy just “building up” some steam would have to resort to further ‘quantitative easing’. That is more printing of the super greenback on a massive scale that would unleash a massive inflation.
So on all points, it may be better for the US to keep China as its ‘best friend ever’. Unless of course, they want to hold the bull by the horn, take it by its balls and stand on its ground like a real Spaniard macho in a bull ring. Then it would be standing on its feet and really taking forward what the great Greenback once was and what the US as the major global player and still is, should be. With the world economy just showing recovery and in lieu of other trading partners, it is only fair that China should be pressured to maintain a level playing field.
Regardless of what others may argue, this is not an internal matter at all. This is international trade and so the US as any other country should have the right to comment and pressure if necessary on how a country can so ‘trickily and deceitfully’ and directly and indirectly and outrightly and shamefully push in your face how it ‘manipulates’. It is obvious as it is true and any little sense of common sense can see with quantitative concrete evidence its obvious currency exchange fixes and “patterns”.
The example of Japan again should be an “eye opener” for them and a lesson learnt that lower exchange rate is counterproductive for such countries in the long run. The reason being high local inflation will spur up asset prices and citizens needing to meet contingencies will invest in them by borrowing. Then the market stagnates and prices fall, financial institutions call for their money and the price busts sends the economy into a downward spiral. Wake up Yuan! In addition, simultaneously, the oil prices go up, then the economy is in a ‘double whap’ and the only recourse is retracting and revaluing the currency which should have been done in the first place. So the big party comes to a big standstill and it reverts right back to point number one which would have made life easier for its citizens in running their daily lives and avoiding such troubles. This is what you call free market competition, you say: it is plain ignorance, hypocrisy, deceitfulness and stupidity! Wake up Mr. Yuan.
