Dec 18th 2008

China's barely-noticed economic war with the U.S.

by Sol W. Sanders

Sol W. Sanders, (solsanders@cox.net), is an Asian specialist with more than 25 years in the region, and a former correspondent for Business Week, U.S. News & World Report and United Press International

Beijing is waging economic warfare against Washington. But as is the Chinese wont, it is using traditional guerrilla asymmetrical tactics in what is more than a little fog of war.

With near financial hysteria and demi economic chaos in the U.S. and what looks increasingly like a meltdown of the Chinese economic model - export-led mercantilist state capitalism - the viewer has more than sand thrown in his eyes.

Shell-shocked old Hank Paulson in late November went through the motions of the semi-annual Strategic Economic Dialogue with the Chinese. Maybe it was a relief just to get out of Washington for a short visit to Beijing even without the usual Communist version of sing-song girls. So he hit the repeat button on old mantras about how helpful both parties were to each other.

An official and required report of the Treasury to Congress claims that no major trading partner, including China, fell below the standards that would label them a currency manipulator. But there weren't many analysts around who believed it. Even in the Treasury itself, Washington couldn't quite get their songsheets together. In May a report to Congress said "…the pace of appreciation needs to continue in order to address the continuing substantial undervaluation of the RMB and the risks China is creating for itself, the Asian region, and the world economy in which China is playing a greater role. Treasury has been reinforcing that message to Chinese authorities on a frequent basis both bilaterally and multilaterally and will continue to do so."

Six months later, another Treasury report finds that China allowed its currency to appreciate a total of 6.2 percent against the dollar in the first half of 2008, just short of the 6.4 percent gain in the entire year in 2007. But in the last couple of weeks of November before Paulson's meeting, the yuan slipped back to its lowest level in about five months, the report went on to say. [Were the Chinese trying to tell Paulson something in numbers instead of ideographs?]

Translation from Washington bureaucratese? "The Chinese are mucking around with their currency to the U.S. dollar and the whole world trade community's hurt and we keep asking them to stop it. But they won't."

The Congressionally mandated U.S.-China Economic and Security Review Commission - once the darling of the Taiwan lobby but now a dumping ground for Hill staffers - annual report in late November put it bluntly [if with not much documentation and therefore, apparently, little hope]: Congress should enact legislation to stop China's currency manipulation. How?

It isn't that Beijing is operating in a moneychangers' vacuum. The Chinese government is doing everything it can to help its export sector. That's because it is losing jobs at a rapid pace with the current global shutdown. That includes intervening to keep the yuan stable against the dollar instead of permitting it to continue to rise, even at the glacial pace for years it had informally promised the Bush Administration it would permit. That would make exports more expensive. With exports accounting, the mythmakers in Chinese statistics say, for a third of any growth in the Chinese economy, the reason is obvious.

Of course currency manipulation isn't the whole story of this cat and mouse saga. Some observers have argued that the yuan is now probably so undervalued that only a massive - and therefore destabilizing - revaluation would really cut into China's cheaper export prices for manufactured goods. That may be even harder with reports Beijing's still cloudy $1.7 billion "stimulus" package - everybody has to have a stimulus package these days, the most fashionable policy around. A significant [and secret, of course] part is going to go into new export subsidies to back up the cheaper yuan.

Besides, the Chinese are buying American debt - and Washington is about to roll up vast news sums of that for export. The Chinese, long the largest holders of U.S. Treasury securities [along with its East Asian neighbors and the Persian Gulf sheikhdoms], continue to buy more. [With a $43.6 billion increase in holdings of U.S. treasury securities in September, China's overall holdings amounted to $585 billion with.Japan cutting its holdings to $573 billion from $586 billion in August.] What else could they do with the foreign exchange they are piling up with their mercantilist policies? Besides, for the first time in history, the Treasury has gone into minus interest rates for its securities. That means the world, generally, still thinks that the U.S. promise to pay the bearer on demand is more valid than other possibilities around the globe.

The guesswork - Chinese financial policy is such a tangle of propaganda, ineptitude, corruption and stealth that one can never be quite sure about even the estimates of the dismal scientists - is that the Beijing financial warriors have been more active recently. It looks like the Chinese have been using their massive foreign exchange reserves [now nearing $2 trillion in other people's, mainly U.S., debt] to hammer the rate of the ren min bao [yuan] to the dollar. Cheaper Chinese currency to the American dollar, of course, theoretically fuels Chinese exports now as it has all through the boom period

The honorable experts have already been shaken and chastened by the latest [always suspicious] statistics on those exports. At a still magnificent $114.99 billion, they declined in November 2.2 percent from a year earlier, the sharpest fall since 1999, and, morosely, are predicted to continue to fall and bounce on the bottom for at least another year or so. Of course, the Chinese currency manipulation tends to keep out imports, anything but the industrial components and raw materials, especially energy. They are needed for the export machine, ironically, largely in the hands of the Western and Japanese multinational corporations who bundle and brand them to market. The worldwide collapse of commodity prices, particularly in metals and oil, also helped trim the import bill. So the trade balance recorded a new record: 40.1 billion yuan, $5.8 billion, well over the previous record of 35.2 billion yuan set in October.

China has been the third-largest export market for the U.S., and has been a major buyer of commodities - much of that from the U.S. and such other [until now] booming economies as Australia. Even India is going to be hit as a major exporter of iron ore with China's purchases falling by 7.9 percent in November. [Crude wasdown 1.8 percent.] But that is likely to dramatically decline with the level of production in China.

All of this is leading to a galloping deflation in China - prices are falling everywhere. That's good news for the ticket punching bureaucratic hacks at the Politburo in Beijing since the cost of living - particularly a sharp rise in food prices - was threatening back in the late spring to get out of hand. Theoretically it would also help the exporters to keep their prices down, if for no other reason, than growing unemployment has further strengthened the hand of the slave markets for industrial labor in the Pearl River Delta and Shanghai industrial complexes.

But the question is whether all this falderall will really help maintain the stability of a fragile Chinese politcal economy. Keeping export prices at an artifically low level - now with the help of worldwide deflation - may not do the trick. The question is, to use Maynard Milord Keynes metaphor, whether continuing to hold prices down for Chinese exports to the U.S. [the EU and Japan] will really push the hanging string of rapidly diminishing U.S., Euro and Japanese demand. With consumption patterns retracting in the U.S., Europe and Japan, at an alarming rate, nobody may want that new widescreen LCD/Plasma TV even at a bargain price. In fact, there may not be a market for that new Intel microprocessor measured in millionths of a millimeter even if we can use it to replace most of the tower of a PC or produce tiny little accelerator to fit inside your ear. Not for a while.

Most businesspeople in China "didn't imagine that these events in the U.S. would affect them," Li Qiang, chief statistician of the National Bureau of Statistics, told the Financial Times. "For most of the last 18 years, the economy has been continually growing, so they've gotten used to it." Curious, since everyone knew all the time they had been living on exports and had created only a relatively small internal market largely for a pampered elite partial to Guchi and Armani. In China, of course, that includes tens of millions of people. But in the coastal city of Yuyao, the Ningbo Wanglong Group, a food company, claims that years of rapid expansion have made it one of the world's largest producers of preservatives for food and feed. But the combination of continuing adulteration and poisoning scandals in Chinese foods, domestic and export have frightened away customers at a time of general decline in demand. That reflected in toys and other goods has resulted in growing unemployment including graduates of Chinese universities who had for some time been having trouble finding employment.

Ironically [or perhaps characteristically] there are no reliable estimates of Chinese unemployment, certainly no statistics. But anecdotal evidence is that the always rampant undereployment and unemployed in the economically stagnant countryside is now getting an addition, returning workers from declining industrial production. The 640 million question is, of course, how far will this go. Economists are already scaling back estimates of Chinese gross development product, from the slightly over 9 percent of the last quarters, to as low as 5 percent. It's long been believed that anything less than double digit growth or thereabout does not absorb even a modicum of the growing labor force in China's 1.3 billion. Large unemployment could mean trouble for Beijing's rulers; incidents of social unrest including pitched battles with police have been growing. There may not be a lot American policy can do about helping a regime which has refused so adamantly to move politically toward more flexible policies.

President-elect Obama spoke out during the campaign against what he called unfair Chinese trade practices and currency manipulation. But Lawrence Summers, tapped to be Obama's White House economic director, last year told the Congress they should go easy on China's currency policies. Fed banker Timothy F. Geithner who will slip into Paulson's worn shoes as Treasury secretary in January, has lived in China, studied Chinese, and sat in the New York Fed where this problem of foreign currencies was uppermost. He may even have thoughts about how to approach it. Ken Lieberthal, a former National Security Council adviser on Asia under President Bill Clinton and who advised Hillary Rodham Clinton and then Obama during the presidential campaign, has made soothing noises about calming what he calls "mutual distrust about both sides' intentions [which] has grown." He claimed that on a recent trip to Beijing, he found many officials and ordinary Chinese who believed in one of those 9/11 conspiracy type theories: the United States purposely triggered a global financial crisis to thwart China's growth. Maybe Lieberthal, to introduce a little realism, had better remind the Chinese that their Paramount Leader Deng Xiaoping, who started the modernization, said that it didn't matter what color a cat was in this cat and mouse economic game, as long as it caught mice.

Copyright: WorldTribune.com

If you wish to comment on this article, you can do so on-line.

Should you wish to publish your own article on the Facts & Arts website, please contact us at info@factsandarts.com. Please note that Facts & Arts shares its advertising revenue with those who have contributed material and have signed an agreement with us.

Browse articles by author

More Current Affairs

Nov 20th 2019
Extract: "Moody’s, one of the big three credit rating agencies, is not upbeat about the prospects for the world’s debt in 2020 – to put it mildly. If we were to try to capture the agency’s view of where we are heading on a palette of colours, we would be pointing at black – pitch black."
Nov 17th 2019
Extract: "Digital money is already a key battleground in finance, with technology firms, payment processing companies, and banks all vying to become the gateway into the burgeoning platform-based economy. The prizes that await the winners could be huge. In China, Alipay and WeChat Pay already control more than 90% of all mobile payments. And in the last three years, the four largest listed payment firms – Visa, Mastercard, Amex, and PayPal – have increased in value by more than the FAANGs (Facebook, Apple, Amazon, Netflix, and Google)."
Nov 14th 2019
Extract: "Trump, who understands almost nothing about governing, made a major mistake in attacking career public officials from the outset of his presidency. He underestimated – or just couldn’t fathom – the honor of people who could earn more in the private sector but believe in public service. And he made matters worse for himself as well as for the government by creating a shadow group – headed by the strangely out-of-control Rudy Giuliani, once a much-admired mayor of New York City, and now a freelance troublemaker serving as Trump’s personal attorney – to impose the president’s Ukraine policy over that of “the bureaucrats.” "
Nov 4th 2019
Extract: "Trump displays repeated and persistent behaviours consistent with narcissistic personality disorder and antisocial personality disorder. These behaviours include craving for adulation, lack of empathy, aggression and vindictiveness towards opponents, addiction to lying, and blatant disregard for rules and conventions, among others." The concern is that leaders with these two disorders may be incapable of putting the interests of the country ahead of their own personal interests. Their compulsive lying may make rational action impossible and their impulsiveness may make them incapable of the forethought and planning necessary to lead the country. They lack empathy and are often motivated by rage and revenge, and could make quick decisions that could have profoundly dangerous consequences for democracy.
Oct 31st 2019
EXTRACT: "......let’s see what happens when we have less money for all the things we want to do as a country and as individuals. Promises and predictions regarding Brexit will soon be tested against reality. When they are, I wouldn’t want to be one of Johnson’s Brexiteers."
Oct 21st 2019
EXTRACT: "Were Israel to be attacked with the same precision and sophistication as the strike on Saudi Arabia, the Middle East would be plunged into war on a scale beyond anything it has experienced so far. Sadly (but happily for Russian President Vladimir Putin), that is the reality of a world in which the US has abandoned any pretense of global leadership."
Oct 20th 2019
EXTRACT: "Europe also stands to lose from Trump’s abandonment of the Kurds. If, in the ongoing chaos, the thousands of ISIS prisoners held by the Kurdish-led Syrian Democratic Forces escape – as some already have – America’s estranged European allies will suffer. Yet Trump is unconcerned. “Well, they are going to be escaping to Europe, that’s where they want to go,” he remarked casually at a press conference. “They want to go back to their homes." "
Oct 15th 2019
EXTRACT: "Assuming the House ultimately votes to impeach Trump, the fact remains that there are far fewer votes in the Senate than will be needed to convict him and remove him from office. But the willingness of Congress – including the Senate – to continue tolerating his dangerous conduct in office, including threats to US national security, is now truly in question."
Oct 7th 2019
EXTRACT: "The problem didn't start with the election of Donald Trump. Nor did it begin with the Democrats launching an impeachment inquiry against Trump. This is a developing crisis that has been growing like a cancer within our polity for at least the past 25 years. Its main symptoms are a lack of civility in our political discourse, a "take no prisoners" mindset, and a denial of the very legitimacy of "the other side." Trump didn't create this crisis; he was the result of it.   When Newt Gingrich took the helm of Congress in 1995, unlike previous Republican leaders, he embarked on a campaign not only to obstruct the efforts of then President Clinton, but to destroy him. Congress launched a series of investigations accusing Clinton of everything from corruption to obstruction of justice – with hints of even more nefarious plots to assassinate those who might pose a problem to his presidency.  "
Oct 4th 2019
EXTRACT: "As the story spreads, it grows darker. Meanwhile, Trump is trying to learn the identity of the whistleblower (who is protected by law), which could expose that person to great danger. And he is accusing some people – including Adam Schiff, the chair of the House Intelligence Committee – of treason. My sense is that Trump fears the tough, focused Schiff. Trump has ominously noted that traitors used to be shot or hanged. And he hasn’t helped himself with members of either party by declaring, in one of his hundreds of febrile tweets, that forcing him from office could lead to a “civil war.” Trump has taken the United States somewhere it’s never been before. His presidency may not survive it."
Sep 24th 2019
EXTRACT: "But regardless of whether the Ukraine scandal remains front-page news, it will haunt the US intelligence community, which has been Trump’s bête noire since the day he took office. Trump has relentlessly attacked US intelligence agencies, cozied up to Russian President Vladimir Putin, and divulged secrets to foreign officials, potentially burning high-value sources. This behavior had already raised serious concerns about whether Trump can be trusted to receive sensitive intelligence at all. Now, intelligence leaders must ask themselves how far they are willing to go in toeing the White House line."
Sep 21st 2019
EXTRACT: "As Lobaczewski pointed out, pathological leaders tend to attract other people with psychological disorders. At the same time, empathetic and fair-minded people gradually fall away. They are either ostracised or step aside voluntarily, appalled by the growing pathology around them.......As a result, over time pathocracies become more entrenched and extreme. You can see this process in the Nazi takeover of the German government in the 1930s, when Germany moved from democracy to pathocracy in less than two years.......In the US, there has clearly been a movement towards pathocracy under Trump. As Lobaczewski’s theory predicts, the old guard of more moderate White House officials – the “adults in the room” – has fallen away. The president is now surrounded by individuals who share his authoritarian tendencies and lack of empathy and morality. Fortunately, to some extent, the democratic institutions of the US have managed to provide some push back."
Sep 16th 2019
EXTRACT: "If the Supreme Court does agree with the Divisional Court that the question is political rather than legal, it will take the UK constitution into quite peculiar territory. Prime ministers will be the new kings and queens. They will be free to suspend parliament at will, and for as long as they wish, without any judicial interference. Parliament will meet not out of constitutional necessity but in the service of the government’s interests – namely, to pass its legislation and to maintain appearances, rather than to hold it to account."
Sep 12th 2019
Extract: "The Republican Party has lashed its fate to an increasingly unhinged leader. Though three other presidential hopefuls for 2020 now stand in Trump’s way, none can defeat him. But they can damage his reelection effort, which is why the Republican Party has been scrapping some primaries and caucuses. How well Trump does in November next year may well depend on how his fragile ego withstands the coming months."
Sep 2nd 2019
EXTRACTS: "Most people think of revolutions as sudden earthquakes or volcanic eruptions that come without warning and sweep away an entire political system. But historians, political scientists, and even the odd politician know that the reality is very different: revolutions happen when systems hollow themselves out, or simply rot from within. Revolutionaries can then brush aside established norms of behavior, or even of truth, as trivialities that should not impede the popular will............ Only time will tell whether we are currently witnessing the hollowing out of British democracy. But Prime Minister Boris Johnson may well have crossed some invisible Rubicon by.......... Whatever happens now, British parliamentary democracy may never be the same again. It will certainly never again be the model that so many people around the world once admired."
Aug 29th 2019
EXTRACT: "Events such as prorogations and dissolutions happen when countries face difficult times. Therefore, because of the disastrous effects of Brexit: sterling in freefall; a recession looming on the horizon and Britain’s international standing at its lowest ebb since Suez, it is no surprise that the country is in this position now. The worrying thing is that using the monarchical power of prorogation does not solve problems – it has a history of turning them into frightening and often violent crises. There is a worrying relationship between the use of such powers and a complete breakdown in government."
Aug 28th 2019
EXTRACT: "Reminiscent of Don Quixote, Trump is tilting at windmills. His administration is flailing at antiquated perceptions of the Old China that only compound the problems it claims to be addressing. Financial markets are starting to get a sense that something is awry. So, too, is the Federal Reserve. Meanwhile, the global economy is fraying at the edges. The US has never been an oasis in such treacherous periods. I doubt if this time is any different. 
Aug 24th 2019
EXTRACT: "In fact, with firms in the US, Europe, China, and other parts of Asia having reined in capital expenditures, the global tech, manufacturing, and industrial sector is already in a recession. The only reason why that hasn’t yet translated into a global slump is that private consumption has remained strong. Should the price of imported goods rise further as a result of any of these negative supply shocks, real (inflation-adjusted) disposable household income growth would take a hit, as would consumer confidence, likely tipping the global economy into a recession."
Aug 21st 2019
EXTRACT: "Climate change is real, and it is a problem. According to the IPCC, the overall impact of global warming by the 2070s will be equivalent to a 0.2-2% loss in average income. That’s not the end of the world, but the same as a single economic recession, in a world that is much better off than today.  The risk is that outsized fear will take us down the wrong path in tackling global warming. Concerned activists want the world to abandon fossil fuels as quickly as possible. But it will mean slowing the growth that has lifted billions out of poverty and transformed the planet. That has a very real cost. "
Aug 20th 2019
EXTRACTS: "It is no exaggeration to say that Johnson has lied his way to the top, first in journalism and then in politics. His ascent owes everything to the growing xenophobia and English nationalism that many Conservatives now espouse................Johnson has chosen a government of like-minded anti-European nationalists. His principal adviser, Dominic Cummings, was described by David Cameron, Britain’s prime minister from 2010 to 2016, as a “career psychopath.” Cummings is, alongside Johnson, the most powerful figure in the new government; he is an unelected wrecker who earlier this year was ruled to be in contempt of parliament. Fittingly, if depressingly, he now is masterminding our departure from the EU with or without parliamentary approval."