Anti-China sentiment is being fanned across the political spectrum. A report in today's New York Times (below) charges China with "skillfully using inconsistencies in international trade rules to spur its own economy at the expense of others, including the United States." The report is based on leaks from Obama administration officials frustrated by the failure of the IMF and G20 to secure China's voluntary compliance to alter the yuan's exchange rate. It claims the Chinese have both used IMF rules to block the release of an internal study showing that it's currency is "substantially undervalued", and that it's increased recourse to the WTO to resolve trade disputes is a somehow illegitimate abuse of that mechanism.
Another piece (following) in the Telegraph, the conservative British publication, frames Chinese Premier Wen Jiabao's angry response yesterday to US pressure as further evidence that it is the Chinese who are guilty of provoking a trade war. Under the headline "Is China's Politburo spoiling for a showdown with America?", the Telegraph's economic columnist, Ambrose Evans-Pritchard, who has been predicting a global economic Armageddon since the onset of the financial crisis, likens the growing US-China tensions to the Anglo-German rivalry which preceded World War I. He truculently blames the tensions on Chinese "hubris", with China cast as today's "Wilhelmine Berlin, (which) so badly misjudged the strategic balance of power and over-played its hand". The Chinese economy is more vulnerable than it appears and any attempt to exploit it's role as America's banker, he warns, would be met by crippling US trade sanctions and exchange controls. It is the US economy, he asserts, which holds China to ransom, not the other way round.
-MG ============================================= China Uses Rules on Global Trade to Its Advantage By KEITH BRADSHER New York Times March 14, 2010
http://www.nytimes.com/2010/03/15/business/global/15yuan.html?pagewanted=print
HONG KONG — With China’s exports soaring, even as other major economies struggle to recover from the recession, evidence is mounting that Beijing is skillfully using inconsistencies in international trade rules to spur its own economy at the expense of others, including the United States.
Seeking to maintain its export dominance, China is engaged in a two-pronged effort: fighting protectionism among its trade partners and holding down the value of its currency.
China vigorously defends its economic policies. On Sunday, Premier Wen Jiabao criticized international pressure on China to let the currency appreciate, calling it “finger pointing.” He said that the renminbi, China’s currency, would be kept “basically stable.”
To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.
China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.
In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.
China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.
Many prominent academic economists see a basic contradiction in the global system of oversight on trade and currency.
“Many of us would like to see the W.T.O.-style commitments — with people’s feet being held to the fire — at other international agencies, like the I.M.F.,” said Jagdish Bhagwati, a Columbia University economist.
Western countries hoped last year to bring international pressure to bear on China, after years of complaining that Beijing keeps the renminbi artificially low.
An undervalued currency keeps a country’s exports inexpensive in foreign markets while making imports expensive. That makes a trade surplus more likely, reducing unemployment for that country while increasing unemployment in its trading partners.
Last September, President Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China’s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China’s attitudes about its economic policies.
If China is found to be manipulating its currency, it could be a political and economic challenge for the Obama administration. President Obama called on Thursday for China to introduce “a more market-oriented exchange rate.” China’s defiant response keeps the administration in a difficult position.
China is the biggest buyer of Treasury bonds at a time when the United States has record budget deficits and needs China to keep buying those bonds to finance American debt. But the Treasury also faces an April 15 deadline for whether or not to list China as a country that manipulates the value of its currency.
If China is listed, that could embolden members of Congress who are already discussing whether to seek restrictions on Chinese exports to the United States. China would certainly criticize such retaliation as protectionism, leading to a broader deterioration in already strained bilateral relations.
China is starting to describe its currency interventions as stimulus. But unlike extra government spending in the United States and other countries, currency intervention does not expand global demand, but shifts it from other countries to China.
Two closely related scourges played a central role in the collapse of world trade in the 1930s: protectionism and beggar-thy-neighbor currency devaluations. World leaders set up two institutions after World War II, now known as the W.T.O. and the I.M.F., to reduce the risk of another Great Depression.
Unlike its predecessor, which had weak arbitration panels whose rulings could be easily blocked by the losing country, the trade organization has had powerful tribunals since 1995. These tribunals can clear the way for the imposition of sanctions running into the billions of dollars.
Filing a case against another country is the heaviest artillery available to countries in trade disputes. But it also is expensive. Preparing a case and pushing it through a tribunal can easily require millions of dollars in legal expenses, and low-income countries seldom file them.
China joined the W.T.O. in 2001 and in its first seven years filed only three cases. But it has stepped up its pace recently, and has filed four of the 15 cases in the last year: two against the United States, on poultry and tires, and two against the European Union, on steel fasteners and poultry.
The monetary fund has not acquired similar powers to the trade organization.
I.M.F. policies call for it to disclose documents and information on a timely basis, with the deletion only of market-moving information. But under the rules a member country may decide to withhold a report, an organization official said.
China allowed the release of its reports until the monetary fund’s executive board decided in June 2007 that reports should pay more attention to currency policies. China has quietly blocked release of reports on its policies ever since, without providing its specific reasons to the I.M.F.
A person who has seen copies of the most recent report last summer said that the monetary fund staff concluded the renminbi was “substantially undervalued.”
The monetary fund regards a currency as substantially undervalued if it is more than 20 percent below its fair market value.
More than four-fifths of the I.M.F.’s members allow publication of the agency’s annual staff reports on their economies. Countries blocking release are mostly tightly controlled places like Myanmar, Sudan, Turkmenistan and Saudi Arabia, although Brazil has also not released its reports.
China’s central bank did not respond to calls and messages seeking comment.
The main indicator of a country’s intervention in currency markets is its level of foreign reserves. China halted the gradual appreciation of the renminbi against the dollar in July 2008; from June 30, 2008, through Dec. 31 of last year, China’s foreign exchange reserves rose by $590 billion. A small part of the increase reflected interest on bonds, the appreciation of stocks and currency fluctuations.
* * *
Is China's Politburo spoiling for a showdown with America?
The long-simmering clash between the world's two great powers is coming to a head, with dangerous implications for the international system.
By Ambrose Evans-Pritchard Telegraph (UK) March 14 2000
China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.
Within a month the US Treasury must rule whether China is a "currency manipulator", triggering sanctions under US law. This has been finessed before, but we are in a new world now with America's U6 unemployment at 16.8pc.
"It's going to be really hard for them yet again to fudge on the obvious fact that China is manipulating. Without a credible threat, we're not going to get anywhere," said Paul Krugman, this year's Nobel economist.
China's premier Wen Jiabao is defiant.
"I don’t think the yuan is undervalued. We oppose countries pointing fingers at each other and even forcing a country to appreciate its currency," he said yesterday. Once again he demanded that the US takes "concrete steps to reassure investors" over the safety of US assets.
"Some say China has got more arrogant and tough. Some put forward the theory of China's so-called 'triumphalism'. My conscience is untainted despite slanders from outside," he said.
Days earlier the State Council accused America of serial villainy. "In the US, civil and political rights of citizens are severely restricted and violated by the government. Workers' rights are seriously violated," it said. "The US, with its strong military power, has pursued hegemony in the world, trampling upon the sovereignty of other countries and trespassing their human rights," it said. "At a time when the world is suffering a serious human rights disaster caused by the US subprime crisis-induced global financial crisis, the US government revels in accusing other countries." And so forth.
Is the Politiburo smoking weed?
I let others discuss the rights and wrongs of this, itself a response to the US report card on China. Clearly, Beijing is in denial about is own part in the global imbalances behind the credit crisis, specifically by running structural trade surpluses, and driving down long rates through dollar and euro bond purchases. No doubt the West has made a hash of things, but the Chinese view of events is twisted to the point of delusional.
What interests me is Beijing's willingness to up the ante. It has vowed sanctions against any US firm that takes part in a $6.4bn weapons contract for Taiwan, a threat to ban Boeing from China and a new level of escalation in the Taiwan dispute.
In Copenhagen, Wen Jiabao sent an underling to negotiate with Mr Obama in what was intended to be - and taken to be - a humiliation. The US President put his foot down, saying: "I don't want to mess around with this anymore." That sums up White House feelings towards China today.
We have talked ourselves into believing that China is already a hyper-power. It may become one: it is not one yet. China is ringed by states - Japan, Korea, Vietnam, India - that are American allies when push comes to shove. It faces a prickly Russia on its 4,000km border, where Chinese migrants are itching for Lebensraum across the Amur. Emerging Asia, Brazil, Egypt and Europe are all irked by China's yuan-rigged export dumping.
Michael Pettis from Beijing University argues that China's reserves of $2.4 trillion - arguably $3 trillion - are a sign of weakness, not strength. Only twice before in modern history has a country amassed such a stash equal to 5pc-6pc of global GDP: the US in the 1920s, and Japan in the 1980s. Each time preceeded depression. The reserves cannot be used internally to support China's economy. They are dead weight, beyond any level needed for macro-credibility. Indeed, they are the ultimate indictment of China's dysfunctional strategy, which is to buy $30bn to $40bn of foreign bonds every month to hold down the yuan, refusing to let the economy adjust to trade realities. The result is over-investment in plant, flooding the world with goods at wafer-thin export margins. China's over-capacity in steel is now greater than Europe's output.
This is catching up with China, in any case. Professor Victor Shuh from Northwestern University warns that the 8,000 financing vehicles used by China's local governments to stretch credit limits have built up debts and commitments of $3.5 trillion, mostly linked to infrastructure. He says the banks may require a bail-out nearing half a trillion dollars.
As America's creditor - owner of some $1.4 trillion of US Treasuries, agency bonds, and US instruments - China can exert leverage. But this is not what it seems. If the Politburo deploys its illusiory power, Washington can pull the plug on China's export economy instantly by shutting markets. Who holds whom to ransom?
Any attempt to retaliate by triggering a US bond crisis would rebound against China, and could be stopped - in extremis - by capital controls. Roosevelt changed the rules in 1933. Such things happen. The China-US relationship is no doubt symbiotic, but a clash would not be "mutual assured destruction", as often claimed. Washington would win.
Contrary to myth, the slide to protectionism after the 1930 Smoot-Hawley Tariff Act did not cause the Depression. Trade contracted more slowly in the 1930s than this time. The Smoot-Hawley lesson is that tariffs have asymmetrical effects. They devastate surplus countries: then America. Deficit Britain did well by retreating into Imperial Preference.
Barack Obama has never exalted free trade. This orthodoxy is, in any case, under threat in the West. His top economic adviser Larry Summers let drop in Davos that free-trade arguments no longer hold when dealing with "mercantilist" powers. Adam Smith recognized this too, despite efforts by free-trade ultras to appropriate him for their cause.
China's trasformation has been remarkable since Deng Xiaoping unleashed capitalism, but as ex-diplomat George Walden writes in China: a Wolf in the World? you cannot feel at ease with a regime that still covers up Mao's murderous nihilism. He reminds us too that China has never forgiven the humilations inflicted by the West when the two civilizations collided in the 19th Century, and intends to exact revenge. Handle with care.