The U.S. and China: a complicated relationship

The U.S blinked in recent days, preferring to put off until after the November elections the question of whether or not to declare China a “currency manipulator.” Such a move might have been the correct one. What we don’t need at this juncture is a trade war with China.

The U.S.-China relationship is unlike any other on the planet. We need the Chinese to buy vast amounts of U.S. Treasury bills, notes, and bonds to help us fund our massive budget deficits. China needs the U.S. to be a major buyer of Chinese-produced goods.

“Undervalued”
Intense pressure upon China from the U.S., Japan and Europe to allow its currency to strengthen further in value has been in place for years. The Chinese have allowed their currency, the yuan (also known as the renminbi) to rise in value roughly 20 percent versus the dollar since 2006, including a 2.8 percent rise since mid-June 2010.

Critics of China strongly argue that another 20 percent or 30 percent or even 40 percent appreciation is needed to better “balance” the global economy, reduce Chinese exports to the world, and enhance Chinese demand for additional exports from the U.S. and other nations.

U.S. and other major nation manufacturers have a valid claim that the efforts of the Chinese leadership to keep its currency undervalued allow China to sell more products around the globe, thereby undermining (and under pricing) manufacturers in the U.S. and around the world…no argument here.

The Chinese are a proud people. Their leadership has made it clear that additional currency appreciation will come, but it will be on their timetable…not ours.

The Flip Side

However, there is an important and positive by-product of that undervalued yuan. Goods produced in China are more affordable to Americans, whether shopping at Wal-Mart or Target or Forever 21 or other retailers. The Chinese currency manipulation allows greater U.S. household purchasing power for Chinese-made goods…good news for U.S. households that are already under tremendous pressure from a very damaging recession and a weak U.S. economic recovery.

Imports…Exports

Record imports from China have led politicians from both sides to demand a stronger yuan. The roughly $28 billion U.S.-China trade imbalance in August ($35 billion in U.S. imports, versus $7 billion in U.S. exports) recently provided more ammunition for the appreciation argument.

China is easily our fastest growing export market. China is now the third largest export market of the U.S.-behind only Canada and Mexico. From 2000 to 2009, U.S. exports to China surged 330 percent, while U.S. exports to the rest of the world rose only 29 percent (USA TODAY).

The Chinese bought $21.7 billion of U.S. Treasury securities in August, bringing its total ownership to $868.4 billion. Japan ranks second with $836.6 billion of U.S. Treasury securities (money.CNN.com.)

Down the Road

Chinese premier Wen Jiabao talked candidly about the currency earlier this month, noting, “If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down, and society will be in turmoil.” He noted that would be “a disaster for China and the world.” Rarely has a Chinese leader been so candid about societal and political challenges in this nation of 1.3 billion people.

What he may not see are the longer-term benefits to China of a stronger currency: less global friction, stronger Chinese consumer purchasing power and less dependence upon volatile exports to the global community.
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