Yuan Some More?

Take a deep breath. Do you smell that? That, my friends, is the smell of US Treasury Secretary Timothy Geithner getting grilled by the Senate Banking Committee. Yesterday, Geithner had the unenviable task of answering to senators who have been pushing the Obama administration to accuse China of currency manipulation.

Although Geithner did admit that he believes China is artificially weakening the yuan, he stopped short of labeling the economic giant a “manipulator.” Bah! Potato, potahto, I say! But really, who can blame him for not calling out China? After all, they have had a history of retaliation. If the US chooses to name-call and point fingers at China, they might just strike back by cutting demand for US exports. And that, I’m sure, is something the US would like to avoid.confucius.png

If this scenario sounds familiar, it’s because we’ve heard this before. Earlier this year, the yuan’s artificially-low value was a big issue in the US. Since then, China has allowed its currency to appreciate, although at a pace “too slow and too limited” according to Geithner.

Despite China’s newfound “leniency” towards the yuan, another growing problem now is that all the suits in US Congress are getting more and more riled up. They aren’t satisfied with how China has handled the value of the yuan and say that Geithner isn’t taking as strong a stance as he should towards China.

As a sign that they mean business, US officials filed a couple of complaints against China with the World Trade Organization, saying that the low value of the yuan puts American companies at a disadvantage.

More and more, the issue of the yuan is becoming a trending topic on Twitter feeds in Congress. Lawmakers are busting their butts trying to form a bill that would allow the US to impose taxes and penalties on currency manipulators (ahem, China). With election season just around the corner and with politicians wanting to win the hearts of voters, it’s no surprise that these politicians are focusing on China. Many are pointing to China’s unfair trade advantage (by virtue of its currency) as one of the reasons why the US economy is struggling.

In fairness to Chinese officials, over the past two weeks, the yuan has clocked in nearly a 1.5% gain against the dollar to close Shanghai’s trading session at 6.7248. While it doesn’t seem impressive on paper, the gain is actually pretty… well, awesome. This has put the yuan at its highest level since it started trading 15 years ago. If the yuan, a currency whose value is pegged against the dollar, can rally, then I don’t see any reason for other major currencies to NOT post gains as well.

Is this a sign that the yuan has nowhere to go but up? Hah, hardly. Besides, Chinese policymakers have made it crystal clear that they will not let the yuan appreciate solely on speculation as it could undermine China’s booming economy. If China were to let the yuan appreciate too quickly, it might lead to a sudden surge of capital inflow that could put the economy in a tailspin. Furthermore, they don’t believe that it’s the value of the yuan that is causing high unemployment or huge trade deficits in the US.

In any case, these two big boys better learn how to get along with each other. As I’ve said time and again, the only way for everyone to get out of this mess is if we all work together.


  • PipiLongstock

    China being China? Shocking (sarcasm).
    I’ve been trying to warn people for a while, but have only been rudely dismissed by the massive bandwagon.

    Here’s a piece from Barron’s by Alan Abelson:
    “CHINA IS VERY MUCH IN THE NEWS these days. Admittedly, that doesn’t rank as an astounding observation. In fact, it’s pretty much like sharing with someone the knowledge that two plus two equals four. Still, it’s amazing how omnipresent China is in so many spheres in so much of the world.

    As noted in passing above, the country has an enormous influence on commodity markets. It’s the world’s No. 2 economy, and its gargantuan foreign reserves, conspicuously including the greenback, provide it with immense clout, and it’s not shy about throwing its financial weight around. Nor is it hesitant to get into spats with the likes of Japan and the U.S. over the yuan and, more specifically, whether it’s deliberately keeping its currency undervalued to gain a competitive edge in global markets.

    In a kind of backhanded recognition of the country’s status as a growing economic colossus is the fear, voiced occasionally by market mavens, that should the perpetual China boom go bust, the result would be widespread havoc. As it is, of course, Corporate America and investors here are wild about China.

    All of this is a prelude to recommending a piece on China by Ian Johnson in the Sept. 30 issue of the New York Review of Books. Johnson, now based in Beijing, is a former Wall Street Journal writer and bureau chief (we never met him), who has collected a number of awards, including a Pulitzer. His take on China is not only informed but extraordinarily revelatory and compelling.

    Early on, he points to “the spectacular misperceptions about China, a key one being that the government has been privatizing the economy.” Actually, he says, what it has been doing is turning state-owned enterprises into shareholder-owned companies but—and this is rather a big but—with the government holding a controlling stake. And, he adds, “even today, almost all Chinese companies of any size and importance remain in government hands.”

    Throughout the ’90s and into this decade, he recounts, prospectuses for IPOs of Chinese companies written by Western lawyers fudged the fact that the Communist Party’s Organization Department, rather than the company, would remain in control of all personnel decisions. The ability to hire and fire is scarcely trivial. And major Chinese companies, Ian relates, have Party secretaries who manage them in conjunction with the CEO.

    China has changed and for the better in many ways, Ian feels, such as largely withdrawing from what he dubs the “personal lives of Chinese citizens,” permitting them to “pursue their own ambitions and goals as long as they avoid the high crime of directly challenging the party.”

    For all the economic growth achieved by what Ian calls China’s “conventional mercantilist policies” in the past 30 years, he’s skeptical those policies will continue to work in the future. What’s badly lacking, in his opinion, is a “more open economic and social system that can foster innovation and creativity.” One badly needed reform on this score, he argues, would be to pry loose the Party’s iron grip on businesses. But don’t hold your breath waiting for that to happen.

    The tight ties in China between politics and economics have “created giant state-owned companies that have had spectacular success on foreign stock markets.” Those big companies, he goes on, are giants, but merely because of their size. Essentially, they’re little more than partially privatized quasi monopolies, not very nimble or inventive or even influential in global markets, except “when trying to buy natural resources.”

    Ian bemoans the fact that after Tiananmen, the Chinese government “channeled huge sums into better dorms for students, housing for teachers, labs for scientists and junkets for administrators” to little avail. This may have satisfied material demands and lured foreign universities hoping to set up programs in China. But it hasn’t produced a bumper crop of “creative and innovative” students that Chinese companies can draw on.

    “Even among China’s elite universities,” Ian claims, the academic level, in most cases, is on a par with one of our “mediocre community colleges.”

    While economic reform hasn’t quite come to a halt, says Ian, the state sector is regaining lost ground in part because of Beijing’s policy of “recentralizing control.” The powers that be lack any impetus to reform. That would suggest that an awful lot of folks, businessmen and investors alike, in our blessed land who can’t wait to get a piece of the Chinese miracle might wake up one day more than a little disappointed.”

    Finally. Someone who does not think I’m crazy.
    I hope more people will see more clearly and DO something about it so prevent future disasters. It will take more than the US to persuade China to “work together” and “get along” with everyone.

  • PipiLongstock

    China being China? Shocking (sarcasm).
    I’ve been trying to warn people for a while, but have only been rudely dismissed by the massive bandwagon.

    Here’s a piece from Barron’s by Alan Abelson:
    “CHINA IS VERY MUCH IN THE NEWS these days. Admittedly, that doesn’t rank as an astounding observation. In fact, it’s pretty much like sharing with someone the knowledge that two plus two equals four. Still, it’s amazing how omnipresent China is in so many spheres in so much of the world.

    As noted in passing above, the country has an enormous influence on commodity markets. It’s the world’s No. 2 economy, and its gargantuan foreign reserves, conspicuously including the greenback, provide it with immense clout, and it’s not shy about throwing its financial weight around. Nor is it hesitant to get into spats with the likes of Japan and the U.S. over the yuan and, more specifically, whether it’s deliberately keeping its currency undervalued to gain a competitive edge in global markets.

    In a kind of backhanded recognition of the country’s status as a growing economic colossus is the fear, voiced occasionally by market mavens, that should the perpetual China boom go bust, the result would be widespread havoc. As it is, of course, Corporate America and investors here are wild about China.

    All of this is a prelude to recommending a piece on China by Ian Johnson in the Sept. 30 issue of the New York Review of Books. Johnson, now based in Beijing, is a former Wall Street Journal writer and bureau chief (we never met him), who has collected a number of awards, including a Pulitzer. His take on China is not only informed but extraordinarily revelatory and compelling.

    Early on, he points to “the spectacular misperceptions about China, a key one being that the government has been privatizing the economy.” Actually, he says, what it has been doing is turning state-owned enterprises into shareholder-owned companies but—and this is rather a big but—with the government holding a controlling stake. And, he adds, “even today, almost all Chinese companies of any size and importance remain in government hands.”

    Throughout the ’90s and into this decade, he recounts, prospectuses for IPOs of Chinese companies written by Western lawyers fudged the fact that the Communist Party’s Organization Department, rather than the company, would remain in control of all personnel decisions. The ability to hire and fire is scarcely trivial. And major Chinese companies, Ian relates, have Party secretaries who manage them in conjunction with the CEO.

    China has changed and for the better in many ways, Ian feels, such as largely withdrawing from what he dubs the “personal lives of Chinese citizens,” permitting them to “pursue their own ambitions and goals as long as they avoid the high crime of directly challenging the party.”

    For all the economic growth achieved by what Ian calls China’s “conventional mercantilist policies” in the past 30 years, he’s skeptical those policies will continue to work in the future. What’s badly lacking, in his opinion, is a “more open economic and social system that can foster innovation and creativity.” One badly needed reform on this score, he argues, would be to pry loose the Party’s iron grip on businesses. But don’t hold your breath waiting for that to happen.

    The tight ties in China between politics and economics have “created giant state-owned companies that have had spectacular success on foreign stock markets.” Those big companies, he goes on, are giants, but merely because of their size. Essentially, they’re little more than partially privatized quasi monopolies, not very nimble or inventive or even influential in global markets, except “when trying to buy natural resources.”

    Ian bemoans the fact that after Tiananmen, the Chinese government “channeled huge sums into better dorms for students, housing for teachers, labs for scientists and junkets for administrators” to little avail. This may have satisfied material demands and lured foreign universities hoping to set up programs in China. But it hasn’t produced a bumper crop of “creative and innovative” students that Chinese companies can draw on.

    “Even among China’s elite universities,” Ian claims, the academic level, in most cases, is on a par with one of our “mediocre community colleges.”

    While economic reform hasn’t quite come to a halt, says Ian, the state sector is regaining lost ground in part because of Beijing’s policy of “recentralizing control.” The powers that be lack any impetus to reform. That would suggest that an awful lot of folks, businessmen and investors alike, in our blessed land who can’t wait to get a piece of the Chinese miracle might wake up one day more than a little disappointed.”

    Finally. Someone who does not think I’m crazy.
    I hope more people will see more clearly and DO something about it so prevent future disasters. It will take more than the US to persuade China to “work together” and “get along” with everyone.