Friday, April 2, 2010

Currency Affairs

I was delighted to hear a discussion on the radio today of an issue I tried explaining to a colleague recently: why China, a developing country, has so much money and currency reserves. I got pretty fumbled up trying to explain it. Such monetary and economic concepts can be difficult for me to thoroughly understand.

Here's the "Planet Money" report from NPR's Morning Edition that touched on the basics of US/China monetary policy this morning:

The United States government is also thinking about its financial relationship with China. Lawmakers from both sides of the aisle are calling for Treasury secretary Timothy Geithner to declare that China is manipulating its currency. Geithner will deliver a report to Congress about two weeks from now.

In the meantime, lawmakers like Ohio Democrat Tim Ryan are saying things like Chinese currency distortion is putting a lot of Americans out of work. And if you're wondering what a decision by the Central Bank of China has to do with workers in Ohio, we have an explanation from Alex Blumberg of our Planet Money team.

ALEX BLUMBERG: To understand why American lawmakers are so upset about Chinese currency policy, it helps to follow the money. So let's start with someone pretty typical - an American businessman who gets stuff made in Chinese factories.

Listen to the Report or Read the Rest of the Report
The rest of this story is a discussion of how and why Chinese factory owners turn the US dollars they earn into Chinese RMB. This part of China's "high savings rate" isn't discussed too often.

I read a very thorough overview of this same process a couple days ago in James Fallows' book - Postcards From Tomorrow Square: Reports From China. The chapter - The $1.4 Trillion Question - has a very detailed explanation of how dollars wired to factory owners in China end up being converted to dollars and, often, treasury bills. Very well-presented information. The book is a collection of Fallows' Atlantic Monthly China articles over the past few years. I'm enjoying it a lot.

Another one of the chapters in the book also dealing with economics and finance - China Makes, the World Takes - has an insightful take on the US' view towards China and the "currency manipulation" that was discussed in the NPR article above.

From pages 104 and 105 of the book:
American complaints about the RMB, about subsidies, and about other Chinese practices have this in common: They assume that the solution to long-term tensions in the trading relationship lies in changes on China's side. I think that assumption is naive. If the United States is unhappy with the effects of its interaction with China, that's America's problem, not China's. To imagine that the United States can stop China from pursuing its own economic ambitions through nagging, threats, or enticement is to fool ourselves. If a country does not like the terms of its business dealings with the world, it needs to change its own policies, not expect the world to change. China has done just that, to its own benefit - and, up until now, to America's.
Fallows is right on in this passage.

China is a sovereign nation. I don't understand why US politicians feel as though their opinion has any sway on Chinese currency policy. It shouldn't and, it appears, doesn't matter what the US says. Even if the rest of the world and China would benefit from a shift in policy, it's only the Chinese government's decision to revalue its currency. It's not as if the US thinks about other countries before it acts.

I understand that US politicians huffing and puffing about China are may very well just be politicking. But even if they know that their words aren't going to affect China and are simply dissing China's "manipulation" for votes, I still don't like it. Such China-bashing is allowing Americans to feel as though we don't have to change and that our problems are being caused by others. That is just not true.

Whether I approve of what US politicians are or aren't saying, there's no doubt that the US/China political rhetoric on this topic is important. And speaking of the US/China relationship, just preceding this discussion on NPR this morning was an interview with Zachary Karabell, the author of Superfusion who I interviewed this past fall. I felt pretty cool having interviewed the same guy who was being interviewed on Morning Edition! (I am still grateful that Karabell gave me the time to have such an in depth interview with him a few months ago).


Ramesh said...

I submit that US politicians actually should stop pestering China to revalue its currency simply because it is in the US's own interests. The way China keeps its currency artificially low is that it buys all the dollars and sells RMB. This has two huge implications. China's reserves of the dollar keeps going up and up. Besides financing the US deficit it also forces them to lock up their reserves in low yielding US dollar instruments. On the other hand the flood of RMB this unleashes is partly responsible for sriving up asset bubbles which are happening all over China in the property and stock markets. This is preventing investments in healthcare and education that China desperately needs. So from a purely competitive position the US is not losing out. No country can manipulate its currency for any length of time without bearing a consequence (after all there is no free lunch). China will pay a stiff price for this policy. Even in the two odd years I have been here in China, I have seen how uncompetitive on costs China is becoming. Its no longer the lowest cost economy in the world - its costs are rising fast. This is being hidden because the currency is undervalued, but when it rises, as it inevitably will at some point, China's deteriorating competitiveness on costs will show up even more brutally.

I strongly believe it is in China's own interest to let its currency keep sliding upwards. Buy not doing this China is shooting itself in its own foot.

Mark said...

I agree with what you're saying, Ramesh. I said that even if China were to benefit from a shift in value, it's still not America's decision.

To me, it just seems pointless for US politicians to direct so much energy into one of China's own policy decisions. Even if such pressure could ultimately help affect change, which I don't believe it will, the US has enough problems of its own to correct.

The two consequences of an under-valued yuan you mention are certainly not positives for China. The Chinese must see things differently though since they are continuing down this path of $1 = about 6.8RMB.

It's interesting that you note that China's costs are already starting to rise rapidly.

Unknown said...

Going to sound Friedman-esque here, but fundamentally America had chosen to utilize the cheap loans it enjoyed for decades for wars, ipods and inflating the real estate, instead of investing wisely in America - in education, infrastructure, health care, social security, clean energy, etc...

Perhaps free market doesn't work too well with a total "hands-off" asleep-at-wheel manner, because we are living in a competitive world with living and thinking people, not just a bunch of blobs of "systems" that behaves predictably.

Lloyd Lofthouse said...

I attended a panel that Karabell was on at the 2010 Los Angeles Festival of Books. The topic was "China: The Next Super Power". The other two on the panel were Robert Baum and Jeffrey Wasserstrom. All three knew what they were talking about.

Karabell said that the US Debt that China has in treasury bills is a risk--an anchor--CHina cannot afford to have the US economy hurting.

The panel also talked about the topic you focused on in this post. I took several pages of notes during the talk and will be writing posts about them on my blog. The first one will appear Friday, April 30, afternoon.

Mark said...

@Lloyd - That sounds really interesting. I look forward to seeing what you write about the talk.