The recent jousting between the US and China had the look of a full on row. And the spectacle at last weekend’s G20 seemed to offer further confirmation, with Geithner proposing a cap on current account surpluses that was aimed at China above all.
But now the Financial Times tells us that relations are already on the mend:
China and the US have the basis for an agreement at the summit of the Group of 20 leading nations next month on setting targets to cut trade imbalances, according to an adviser to the Chinese central bank.
Li Daokui, a member of the central bank's monetary policy committee and professor at Tsinghua University, said on Tuesday there had been "good progress" at the weekend meeting of G20 finance ministers in South Korea which had moved debate from the "surface issue" of nominal exchange rates to "talking about the substance of rebalancing world trade".
"China should not be afraid of numerical targets for reducing its trade surplus," said Mr Li in an interview. "China is well positioned politically and economically to make this adjustment."
The Financial Times does point out that Li is not a government official, but the article contend that his remarks point to a real movement.
Or do they? The US was never going to push China hard. Not that it couldn’t; various analysts have suggested the US holds the better cards were things to get ugly. But it’s well known Team Obama blinks in any staredown. China was bound to prevail if it talked tough enough. And it isn’t clear Treasury had its heart in this fight. Geithner has consistently upped his rhetoric in response to Congressional pressure and dialed it back down as soon as possible. It seemed obvious that he intended to push the timetable of the war of words with China past the Congressional midterms, since the legislative saber-rattling would presumably abate.
However, in past serious financial crises, it is creditor nations like China that face a more difficult adjustment than debtor countries that the US. The debtors just need at worst to default on or restructure their debts or depreciate their currencies. The creditors, by contrast, actually have to restructure their economies in a major way. The US and China have both pushed back the day of reckoning with big liquidity injections, and in China’s case, a pretty hefty fiscal deficit. But China’s growth is becoming harder to sustain, with each $1 in growth requiring $7 to $8 in debt.
But if Li is right, and the US and China are about to see if they can agree on a timetable for China to reduce its surplus, what does that really mean? It appears China is trading getting out of immediate pressure on its to let the renminbi rise for committing to future action. Ah, but will these commitments be specific, and even if so, will China live up to them? Look how its widely touted June announcement, that its was moving to a more market oriented currency policy, turned out to be a PR ploy that the press lapped up. Is this to be more of the same?
In fact, if anything China wants to depreciate its renminbi. It has already increased interest rates to try to cool off its economy. Wen Jinbao has stressed that exporters can’t take a currency increase of even as much as 5%; many would go bankrupt. A 5% differential with US inflation, say the US at 1.5% and China at 6.5%, achieves the same result even with a fixed peg. It’s particularly hard to get a good reading on Inflation in China. There is reason to think that China has no intention of letting the renminbi rise and would lower it if could (one offset is that with the dollar having fallen versus the euro and other currencies, China has a little more wriggle room when you look across all its trade partners).
So it shouldn’t be surprising that after letting the renminbi increase 2% over the last month plus, presumably to avoid being branded as a currency manipulator, China pegged it lower by almost a half a percent overnight. From Clusterstock:
We don’t know if this is a glitch or a middle finger or what. It’s certainly odd.
ForexLive:
The talks at the G20 were supposedly productive and all about ending currency wars and then China sets the Yuan above 6.69 after a close yesterday just above 6.66.
Elsewhere on the currency front, the dollar continues to make progress against the yen after hitting all-time lows on Monday.
Next time they have one of these trade meetings, the Chinese should hand out dunce caps for all the American trade diplomats and journalists to wear. In small print on the inside it could say “I was there for the 8888th Chinese head-fake, and I believed EVERY WORD”.
These people are staunch Nationalists. It’s a country composed of 99% Xenophobes. They don’t care about global responsibility. What decade is this gonna dawn on you people?? Their lifetime credo is “China da best. China alway da best.”
Even more to the point, The Chinese Communist Party, led by barely a handful of men, are the best. They are a true oligarchy. The capitalist roaders are not democracy proponents but rather admirers of the productive capacities unleashed by capitalism. More Vanderbilts, more Rockefellers, more Carnegies, No Lincolns-No FDRs-No New Deal. Just the grinding wheels of industrialization at any cost. Under the watchful eye of the party and its leadership.
China is in a very good position to deal with the surplus.
They are banning export of rare earths to the rest of the world. That is a good move to reduce their trade surpluses. But what happened since then? Amerika is not happy about it, and wants to consume more, not less. You can’t point the finger to China and say they are the bad boys here when they are doing something which can have the effect of reducing their trade surplus with Amerika. And it is the high-tech stuff (embargoed by the USA government after 1989, incidentally made from the very rare earths that China is restricting exports) — something that China would want to consume from Amerika but is not available because of Amerika policy, not Chinese policy.
How does embargoing the REE’s reduce the trade surplus? They’re trying to force everyone to make their REE-using stuff in China. That would seem to actually *increase* the trade surplus.
And yes, in theory we could sell China F-22’s to reduce the trade surplus. It’s certainly not going to happen for obvious national security reasons, and it will only work until China reverse-engineers them and uses the technology in their own home-built planes.
Thanks for dealing with the China apologist today. Sometimes I get tired of doing it.
No, you get RE from other countries, so decreasing your trade deficit with China. As all Amerika interested in is the current account deficit with China, here you have some medicine. You haven’t dealt with this aspect.
And what is this “national security interest” that you are referring to? It is obviously in China’s national security interest not to export RE for Amerika to produce weapons that will “mistakenly” used on Chinese, such as what happened in Belgrade 11 years ago.
“No, you get RE from other countries, so decreasing your trade deficit with China.”
Not at the moment, no. China produces over 95% of the world’s REE’s, so they’re basically the only game in town. In a few years, however, the Mountain Pass mine in California will fully re-open, which will make your statement more true.
Most REEs are not used directly, but in finished goods. Right now, China is not embargoing finished goods with REEs in them (e.g. NdFeB magnets, fluorescent lights, NiMH batteries, etc.), just the raw oxides and pure metals. Finished goods = raw materials + value add. Currently, the value add is done by countries other than China (e.g. Japan for NdFeB magnets). If China requires everyone to do the value add in China too, that would increase China’s trade surplus at the expense of the other countries that previously did the value add.
“And what is this "national security interest" that you are referring to?”
Read the paragraph again. What I’m saying is that even if every aspect of the ITAR regulations (which restrict in the US what technology goods can be exported to certain countries) were repealed in the US, our trade deficit with China would only modestly shrink for awhile. Once China extracted the useful technology from the ITAR-restricted goods, the trade deficit would go right back up because they would just make these goods themselves.
“It is obviously in China's national security interest not to export RE for Amerika to produce weapons that will "mistakenly" used on Chinese, such as what happened in Belgrade 11 years ago.”
Honestly, if the US couldn’t build its precision-guided munitions anymore (REE’s play important roles in them), more of these mistakes would happen, as we would have worse intelligence to work with (due to lack of sophisticated sensing) and having to use more primitive bombing techniques like carpet bombing.
China probably wants to emulate the Singapore strategy : hold the RMB price around the price of a secret basket and allow progressive increase from that basis. The RMB fixing “glitch” is consistent with that as EUR has gone down. It is worth noting that on a trade weighted basis,the RMB has not gained recently (to the great dismay of europeans…)
Every country in the world got a little glimsp (with this unexpected manipulation of resources) of how China intends to act on the world stage as she gets more power, and frankly if China were ever allowed to become a dominate world superpower.I don’t think most informed people seeking safety and happiness would want to live in a world with the Chinese as the #1 world superpower.
Obama is showing great restraint with his position of power, which I believe he feels is important to re-building world trust. I have no doubt Obama will do the right thing when it comes time to protect democracy and the rest of the free world from tyranny.
I nearly spilled my coffee reading this. You are being sarcastic right?
The Chinese stared down the Obamaites, and they apparently just stared down the Fed also, if the WSJ article is correct. I would not be the least surprised that the Chinese were behind much of the 10% commodities “ramp” over the past month or so. The rare earths ban was no doubt the icing on the cake.
The Fed got the message, loud and clear. They dont want $5/gallon. The Fed may have also figured that, as with Geithner, they got as much political juice as possible just by talking about QE2, so why actually implement it now.
I think this post is correct and I will try to explain how each side got here within the broader historic context. (Sorry for the length)
China was first united under the Shang dynasty in the 12th century BC but it was under the subsequent Chou dynasty that Chinese political theory was born. The Emperor had a universal Mandate from Heaven but interestingly enough flexibility was built into the system. Things not going well could be read as a sign that Heaven had withdrawn its mandate and the ruler could be overthrown. The key point is that the Chinese leader was universal and admitted no equals outside of China.
The initial central Chinese governments were weak and the society quickly fell into feudalism where the Emperor still existed but true power was held by disparate noble warlords who eventually went far enough to call themselves kings (wang) but never so far as to claim the Mandate from Heaven. This Chinese feudalism featured many of the same characteristics as subsequent European feudalism did 1500 years later which I think points out the universal nature of the way human societies are organized and react to pressure, both internal and external.
With the chaos of the Feuding States Confucius was born. William McNeill, in his classic "The Rise of the West" describes it so:
But if the breakdown of the old political order brought benefits of a sort to the fringes of the Chinese world, if was far otherwise for the small states which clustered in the old centers of Chinese civilization along the middle and lower reaches of the Yellow River. From the sixth century BC onward, these states were reduced more and more to the status of pawns, subject of recurrent invasions, and diplomatic bludgeoning at the hands of the ruder, but also stronger, frontier principalities. The emperor's domain, centered at Loyang, was no better off than its neighbours, despite imperial pretensions to supreme authority. Amid this political chaos, it was natural for the educated classes to hark back to the good old days, when imperial power was a reality. This nostalgia was one of the roots from which Confucius' thought grew.
In such troubled times, old-fashioned morality, and good government nowhere prevailed. Oaths and treaties concluded with the most solemn rites in the presence of the ancestors were repeatedly broken; all sorts of violence and intrigue flourished at the princely courts, and the most unscrupulous ruffians fared best. Where in such a world was Heaven? And how should a man behave when all traditional landmarks seemed to be tumbling down?
If we accept that economic strife is just war by other means, and if we substitute the warlords for the financial industry, the current situation in the US is not so far from what the Chinese were facing in those days.
Confucius' answer was to go back to the old ways; but only some of them:
Confucius' doctrine clearly departed in important respects from older aristocratic mores. He decried violence and paid little attention to military training, which had been at the forefront of traditional education. Decorum, a concept dear to him, forbade resort to force in all ordinary circumstances and he seems to have believed in the feasibility of governing "by ritual and yielding," i.e. by giving way gracefully to others all according to the rule precedence and propriety laid down by the code of good manners
If we substitute violence and military training for economic competition and productivity, who is more Confucian now? As Yves said, "it's well known Team Obama blinks in any staredown." I would agree that while China may now again feign a desire to yield, in the end it is the US that backs down in the economic realm.
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