China Did It

Written by Kathleen Packard

Wednesday, October 31, 2012

China helped fuel help fuel the overheated international economy in the last decade.  Now, China’s slowdown is helping put the brakes on an international recovery.

As an analysis of China in the Financial Times observed: “China’s decleration has affected a diverse range of industries and trading partners to varying degrees – and, in recent months, its economic prospects have become almost as big a concern for global investors as the fate of crisis-hit Europe and the trudging US economy.”  The Wall Street Journal reported: “The seventh consecutive [quarterly] deceleration reflected a combination of weak demand from abroad, flagging investment at home, and insufficient spending by China’s households to pick up the slack.”

China is not an innocent victim of a worldwide economic slowdown. Bloomberg Businessweek recently editorialized: “Let’s be a bit more precise about who is a currency manipulator. The charge is best limited to countries that stop their currencies from appreciating even though they have big current-account surpluses -- that is, countries that block the movement of currencies toward levels that would help balance global trade. That isn’t what the U.S. is doing with QE3. It is precisely what many other countries are doing, however, hurting the U.S. and Brazil alike.”

If currency manipulation is defined this way, the leading offender is China. One measure is a country’s growth in foreign- exchange reserves: Manipulators hold their currencies down by using domestic money to buy foreign assets. Recently, and especially over the past year, China has eased this policy, but its foreign-exchange reserves still stand at a colossal $3.2 trillion.

Writing in World Affairs, Peter Navarro noted: “China manipulates its currency by pegging the value of the yuan primarily to the US dollar.  To maintain that peg in the face of massive trade surpluses with the US, China must recycle hundreds of billions of dollars of that surplus back into the US every year.  China does so primarily by buying US bonds – but increasingly by also scooping up US real estate, companies, and other assets.

One obvious result is a US debt to China, now approaching three trillion dollars. This debt has exposed the US to significant political pressure.  China’s fixed peg also makes it impossible for the US to ever balance its trade through the normal kind of currency adjustments that are the hallmark of mutually beneficial free and fair trade.  Patrick Mulloy of the US-China Commission, observes: “It’s like having a tariff on goods coming from the United States of forty or fifty percent by the amount that they’re underpricing their currency.  It also gives their exports to the United States a subsidy of forty or fifty percent to capture our market and knock out domestic industries that might be competing with them.

So China did it – with US complicity – but what will China do now.  Newsweek’s Hannah Beech wrote recently: “The nation with the world’s second largest economy is on the cusp of a rare political transition, yet the path that its future rulers wish to take is largely a mystery.  Though much the world’s attention is focused on the Nov. 6 U.S. presidential election, what will start to transpire in China two days later is perhaps more important.  The fate of the global economy hangs in part on how China’s leaders navigate potentially perilous financial and political shoals.”