The Great, Phoney Currency War

Led by the United States, many western nations’ strong concerns about the undervaluation of the Chinese RMB have been public knowledge for half a decade. Following China’s recent economic rise, these concerns have slowly gained critical urgency and widespread support however, especially so after the 2009 recession which saw Western unemployment numbers spike as Chinese trade surpluses skyrocketed. The undervalued RMB, which is closely controlled by the Chinese government, is a large reason for the worldwide trade imbalance and despite Western complaints has only risen from 8.3 to 6.5 RMB against the dollar in five years, this despite the dollar losing two fifths of its value over the same period and the Chinese economy overtaking both Europe and Japan.

Looking at these figures, coupled with the almost universal acknowledgement of financial trackers, there seems little doubt that the CCP is deflating the Yuan’s potential via currency exchange manipulation. This method, according to Paul Krugman of the New York Times is “a combination of an export subsidy and an import tariff”; both designated illegal by the WTO and involves pegging the RMB to the dollar and strictly controlling the exchange rate as the it fluctuates.

Despite these arguments however, the CPC seems deaf to the indignation of the West and violently opposed to any outside interference or criticism of their monetary system. This Chinese disregard came to a head last month as lawmakers in the US crossed party lines to attempt to rectify the issue in the senate through a trade tariffs bill.

The Currency Exchange Rate Oversight Reform Act of 2011, was passed by the US senate in mid October by a relatively non partisan group of Republicans and Democrats whose co-sponsors; senators Brown and Shumer stated after the bills passing that; “today we are fighting back”, the United States has ended “the unilateral disarmament approach we have taken for the past decade.”

This fighting talk has been mirrored in the warnings from the Chinese media too, who have threatened nothing less than a tit-for-tat trade war if the bill is passed by the US house and President’s Office. Citing economic and trade “analysts”, Wang Jianhua and Li Yunlu argued in a People’s Daily article that “long-held fears of a brewing trade war between the United States and China will become a horrible reality, hurtling the world economy into disorder and recession” if the new law goes ahead. The article went on to quote the vice director of a CPC department of economics, Zhao Jinping who all but confirmed the sentiment regarding the senate bill by saying that its implementation would make “a trade war between China and the United States… inevitable”.

Second and third and fourth articles written on the 12th , 13th and 14th, two from People’s Daily and one from the Global times aped the sentiment of Jianhua and Yunlu’s article in predicting the inevitability of a trade war, whose menace would usher in a great depression to make the 1930’s look tame. On the more extreme end of the spectrum according to Jianhua and Yunlu this would see “millions” more unemployed Americans as well as the repatriation of millions more Chinese migrant workers back to their hometowns. Furthermore this bill could damage the mining sector in South America, Australia and Africa as well as the high-end manufacturing sectors of Japan, the European Union, and North America. The two go on to state in their apocalyptic vision, that the resulting protectionism of nations could plunge markets “into prolonged turmoil, and the already severe European and U.S. debt crises may escalate rapidly”.

Cui Tiankai, Chinese Vice Foreign Minister

The aforementioned October 12th article from People’s Daily carried quotes from the Chinese Foreign Ministry’s vice minister, Cui Tiankai, which placed serious weight behind these threats. Cui, in claiming that the bill violated WTO regulations concluded that “the only result would be a trade war between China and the US” and that ominously, “it would be a lose-lose situation for both sides.”

The result of all of this conflict, according to the Chinese press, is that the incident serves the crass political needs of the two US parties heading into elections looking for outside sources to blame for the economy. This Chinese narrative; that American scapegoating of the RMB is the beginning and end of an issue already mired in the failings of the democratic system, belies an inability to consider Western concerns and is no good for international relations. The rancorous and condescending way in which the CPC has responded to the bill and the historical grievances behind it will do their reputation no favors either. In effect the CCP has done very little in the last five years to allay Western concerns, further, not once in any of the articles released in the aftermath of the bill did any Chinese publication make mention of the ‘undervaluation’ other than to simply say that Western claims were “supposed” or “unfounded”.

On this issue China seems to be publicly prepared to let the ‘world burn’ rather than to cede or negotiate in any capacity to Western concerns, despite the strong evidence behind them. As such, Chinese worries about the “high tech” and “mining sectors” of foreign regions seems facetious; it is evident that this conflict is another example of Sino/US conflict, especially when considering China’s expressed threats to engage in brinksmanship and eye for an eye diplomacy. It all seems for nothing though, whether because of timidity or the development of alternative strategies to deal with the trade surplus, both the house majority leader John Boener and the White House have signaled that they will scupper the tariffs bill.

Considering the bill’s impotence, and acknowledging that the CCP is most likely aware of it, is it best to assume that on this issue that China is just trying to look tough by scaling a monetary ‘molehill’?

 

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