China says U.S. policy, not its currency, to blame for economic woes

October 6, 2011

The view from Washington, as seen by proponents of the China currency sanctions bill, seems clear: China’s government keeps its currency artificially low. That keeps manufacturing here cheap, which in turn makes Chinese products less expensive. U.S. companies cannot compete. Americans lose jobs.

But the view from China — as gleaned from official comments, newspaper opinion pieces and interviews with economists — is often diametrically opposed.

China’s currency, those observers point out, has actually been rising in value — so much so that Chinese manufacturers are feeling the pinch. Inflation here is high, putting an extra burden. Many local factories have gone bankrupt. Growing wage demands, after a string of strikes last year, mean China has ceded the title of world’s top cheap producer to Vietnam, Bangladesh and others.

Furthermore, this view holds, Americans should stop blaming China for their country’s financial mess.

“It’s crystal clear that labeling China as a ‘currency manipulator’ is just a cheap excuse for some in Washington to launch a protectionist war,” the state-run news agency, Xinhua, wrote in an editorial this week. “It is also unfair and unwise to make China a scapegoat for the economic problems of America’s own making. The United States has to look inward to revive its economic growth.


With the Senate clearing a procedural hurdle Thursday allowing the sanctions bill to proceed to a final vote, economists in the United States and in China say there is truth on both sides.

“Clearly, the currency is part of the answer. In that way, the Americans are right,” said Patrick Chovanec, who worked on Capitol Hill and now teaches at Tsinghua University in Beijing. “But it’s only part of the puzzle. And it’s not a silver bullet.”

Bolstering the U.S. argument, Chovanec and others said China is sitting atop foreign exchange reserves whose worth topped $3 trillion this year. Such an accumulation, economists said, indicates that the local currency is undervalued and that China is selling more than it buys.

More proof: The 2011 U.S. trade deficit stood at $428 billion through July, and 37 percent of that was with China.

Economists in the United States said they believe the Chinese currency — officially called the renminbi but more commonly called the yuan — is undervalued anywhere between 15 percent and 38.5 percent.

Many of the same economists note, however, that the yuan has appreciated considerably in recent years, especially in the past 12 months. Until 2005, the last time Washington and Beijing came to a near-crisis confrontation over the currency, the yuan was pegged at 8.2 to the dollar. Since then, it has been allowed to gradually appreciate about 5 percent a year, to the current level of about 6.3 yuan to the dollar.

The yuan’s appreciation was halted in late 2008, when the global economic recession took hold and Chinese manufacturers began seeing their U.S. and European markets dry up. China’s government — propelled by the powerful Commerce Ministry, which represents small manufacturers —argued that any more appreciation, coupled with the diminished markets in the recession-hit West, would damage local factories and trigger widespread unemployment.


Appreciation was allowed to resume in June 2010, and the currency has since gone up about 5 percent in value, according to estimates by the U.S. Treasury Department, among others. A new factor this year has been inflation, currently running at an adjusted annual rate of about 6.5 percent, well above the government’s target of 4 percent.

Chinese officials note that the 5 percent appreciation of the yuan, plus inflation of at least 6.5 percent, means that the price of doing business in China is actually almost 12 percent higher than a year ago.

In 2010, China was also hit by an unprecedented outbreak of labor unrest, particularly in Guangdong province in the south, prompting officials to increase minimum wages across the country — a development that helped topple China as the global capital of cheap manufactured goods.

The Chinese government still wants to support its booming export sector — and in that sense is just following the model that has led to its success.

“Every country that’s ever gotten rich in the industrial era has used an export-led growth model,” said Arthur Kroeber, managing director of GaveKal-Dragonomics, an economics research firm in Beijing.“All that China is doing is what every other successful economy has ever done.”

Still, officials speak of the need to shift the country from its reliance on exports to a model based more on domestic consumption.

Allowing the yuan to appreciate would presumably increase the purchasing power of Chinese consumers, who could then buy more Chinese products as well as expensive U.S.-made products. But experts said market access restrictions to American and other foreign goods remain a far bigger impediment than the value of the currency.

The other main evidence cited as proof that China’s currency is undervalued — the trade surplus — is also contested in Beijing. China’s surplus is now less than 3 percent of the country’s gross domestic product, down from 11 percent in 2007, according to statistics from GaveKal-Dragonomics. So China has actually cut its trade surplus relative to the size of its economy.

“I think people in the U.S. exaggerate the power of the currency to achieve real gains,” Kroeber said. “Most of the U.S.’s problems have to do with U.S. policy.”

Although attacking China’s currency might make for good politics, Kroeber said, “it’s not tackling the fundamental issue of what is needed to get U.S. growth going.”

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