New Reality Slowly Setting In
It is no surprise that China’s political and economic power
has increased dramatically over the last decade. But what is surprising is the lack of recognition
from governments and citizens of the western world that China wields
substantial power during current negotiations.
This new reality can be seen from the United States Congress and the
White House’s continued pressure for a faster Renminbi appreciation which has
been effectively ignored by China. The
major reason for China’s delay is because many developing nations do not agree
with the United States’ low interest policy.
Keeping interest rates at 0.25% has caused investors looking for a higher
return to turn to developing nations for investment. The huge inflows of capital are causing
rampant inflationary pressures. Needless
to say, the United States government is not easily getting their way, since many would agree that the power lays with the creditor not the debtor. Therefore United States’ attitude towards
China (at least publicly) has a long way to go to catch up with the new
economic reality.
Largest Foreign Creditor: China
To save US economy from the brink in 2008, the United States
government had to take unprecedented actions.
The five trillion dollar explosion of public debt from 2007 to 2010 was
financed by the Fed as well as foreign creditors. China’s US treasury holdings have
almost doubled to $750 billion since 2008, surpassing Japan as the largest
holder of US debt. In December the Federal
Reserve past China as the largest holder of US treasuries as the FED’s balance
sheet increased from approximated $800 billion in the middle of 2008 to over $2
trillion by the start of 2009 (Rosenbaum, 2010). With the growing public debt not being
addressed in the United States, China has expressed the need to diversify their
foreign investments in other currency denominated assets (Reuters, 2011).
Eurozone Support
As one of the major creditors of the world, China has been
providing support to another important trade partner, the Eurozone. This initiative
has helped diversify foreign reserves by purchased sovereign bonds from
countries such as Greece, Portugal, and Spain.
Portugal and Spain had bond auctions on January 12th and 13th
which went better than expected based on China continued commitment to help
stabilize the region (Narioka, 2011). Prior to the auctions, Japan also has pledged
to support the Eurozone by purchasing European Central Bank notes that are raising
capital for the European Union’s financial-aid fund.
What happens if Renminbi is adjusted?
Is the Renminbi undervalued? If so, by how much? Is China
manipulating the Renminbi? Is the Fed manipulating the USD through quantitative
easing measures? Who is right and who is wrong?
These questions are going to be avoided since there are many arguments
from around the globe in support and defense of every position one could
take. Therefore, a hypothetical thought
experiment is proposed. Suppose the
Renminbi is 10% undervalued, and considering that Tim Geithner, the U.S. Treasury
Secretary, has recently stated that the Renminbi is “substantially undervalued”,
this estimate is reasonable (Katz, 2011).
What are the implications of an adjustment? From the United States government’s
perspective, an adjustment will make Chinese exports more expensive on the
world markets and therefore increase competitiveness of the United States’
export sector. This would in turn
increase jobs in the United States which have scarcely recovered since the 2008
downturn. This linkage between an
undervalued Renminbi and unemployment rate in the United States has been
exploited by Government officials and media which has lead to a rise in
anti-China sentiment. There is little
discussion surrounding the ramifications of an appreciated Renminbi; remember in
economics there is always a trade off.
What Manufacturing Base?
The US employment in the manufacturing sector is at 1950’s
levels (St Louis Fed, 2009). Most multinationals left the United States in
search for lower manufacturing costs in the developing world. Since the 2000
almost five million jobs have be lost in this sector. How long will it take the United States
economy to recapture manufacturing investment and train new workers? The expectation of quick and dramatic
increase of employment after the Renminbi peg is lifted has greatly been
overstated. This is not to say that an
increase in jobs will not occur, but it will take years for investment in
factories to translate into a sustainable job growth.
No Such Thing as a Free Lunch
The less desired implication of a reevaluation is simply
inflation. Basing this analysis on the
assumption of a 10% undervalued Renminbi, the purchasing power of Americans
with respect to China will decrease by 10%.
Take the world’s largest retailer as an example; Wal-Mart imports the
majority of goods from China. This in
turn allows the Americans to purchase inexpensive goods as a direct result of
China undervalued Renminbi. A 10% increase
in prices at local Wal-Mart stores will adversely affect the already struggling
low and middle class. Considering the
fact that over 14% of all Americas are currently enrolled in the Supplemental
Nutrition Assistance Program (aka food stamps), this inflationary pressure will
have dire consequences for the majority of the population (Food and Nutrition Services, 2011). This inflationary pressure will be felt also
in Canada as price increases will occur for all imported Chinese products. It should be now clear why this side of the
story is much less communicated, as it would result in awareness of the true
cost of a Renminbi reevaluation.
Works Cited
Food and Nutrition Services. (2011, January 5). SUPPLEMENTAL
NUTRITION ASSISTANCE PROGRAM: NUMBER OF PERSONS PARTICIPATING. Retrieved
January 14, 2011, from SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM:
http://www.fns.usda.gov/pd/29SNAPcurrPP.htm
Katz, I. (2011,
January 13). Geithner Says China Must Boost ‘Undervalued’ Yuan.
Retrieved January 15, 2011, from Bloomberg:
http://www.bloomberg.com/news/2011-01-12/geithner-says-china-must-move-to-prop-up-substantially-undervalued-yuan.html
Narioka, K. (2011,
January 13). Euro Falls Against Dollar And Yen; Spain Auction Eyed.
Retrieved January 14, 2011, from Wall Street Journal:
http://online.wsj.com/article/BT-CO-20110113-700301.html
Reuters. (2011,
January 9). Central banker urges China to cut U.S. debt holdings: report.
Retrieved January 15, 2011, from Reuters: http://www.reuters.com/article/idUSTRE7090W120110110
Rosenbaum, E. (2010,
December 15). Fed Surpasses China in Treasury Binge. Retrieved January
14, 2011, from The Street:
http://www.thestreet.com/story/10948075/fed-now-the-largest-holder-of-us-debt.html
St Louis Fed. (2009). Graph:
Employees on Nonfarm Payrolls: Manufacturing (MANEMP). Retrieved January
15, 2011, from St Louis Fed:
http://research.stlouisfed.org/fred2/graph/?s[1][id]=MANEMP
Digital Copy of Original Print:
