Raise the Yuan, Live In Interesting Times

Maybe it's not such a problem economically. Chinese buyers, flush with cash but relative know-nothings in the U.S. market, will almost certainly pay too much for assets that suddenly look inexpensive. Sellers in mature or declining industries could take their gains and invest in newer industries that add to U.S. productivity and wealth. On the whole, the United States would probably come out ahead.

But the public and Congress might cringe at the thought of U.S. companies being snapped up by Chinese firms -- or worse, by government-controlled investment groups. In 2005, Chinese oil company CNOOC tried to buy the U.S. energy company Unocal, and many members of Congress howled with outrage, even though most of Unocal's oil fields were in other countries and the company supplied only a tiny percentage of the oil used by Americans. Just two weeks ago, a fund controlled by the Chinese government spent $3 billion on a 10 percent stake in the Blackstone Group, a big private equity firm. Again, the outcry was full-throated.

These are just two deals. But a big yuan appreciation would unleash many more. That's precisely what happened the last time the United States compelled a major trading partner to revalue its currency. In the 1980s, Japan was accused of competing unfairly in world markets with an undervalued currency. Under the 1985 Plaza Accord, the central banks of the big economies, including Japan, conspired to drive up the value of the yen. It doubled in less than three years, and Japanese firms went on a shopping spree, acquiring such American icons as Rockefeller Center, MGM Studios and even a slice of Goldman Sachs (which sold a 10 percent stake to Sumitomo bank in 1986).

If Chinese firms started to do the same thing, Congress could respond by slapping controls on foreign investment in the United States. (It threatened to do just that in the late '80s, but fortunately the Japanese economy tanked before any controls could take effect.) If these restrictions were too narrowly targeted at Chinese investment, it would be blatant hypocrisy. After all, Washington has spent the past quarter-century lecturing Beijing on the virtues of open markets and free flows of capital. But if the controls were applied more broadly, they would damage our own economy, which relies heavily on foreign investment.

Let's face it. Neither forcing the Chinese to revalue the yuan nor blocking Chinese investment in the United States would do anything to improve the competitiveness of U.S. firms or raise our standard of living. Blame-the-foreigner tactics like that only distract us from the real tasks of seeing to it that U.S. companies keep their innovative edge and that the benefits of economic prosperity are broadly shared.

Over the past two decades, America has done a good job at the first and a poor one at the second. Let's focus on fixing that, not trying to fix the price of another country's currency.

arthur.kroeber@dragonomics.net

Arthur Kroeber is managing director of Dragonomics, an economic research firm with offices in Hong Kong and Beijing.