Tuesday, March 30, 2010

Geithner Could Label China As A Currency Manipulator Come April

The Greek debacle has been dying down a bit after attempts by bigger EU nations to placate the markets. While the Greece situation is still dicey, it is still in ICU but showing signs of life and recovery. Now we have a new looming "bear factor" coming to play with a fixed deadline, mid-April.


There have been furious behind the scenes negotiations that have basically gone nowhere. Now the discussions, opinions and grouses are being publicly aired - obviously after the secretive discussions went nowhere, the US BSDs will have to air their attempts to the democratic Senate, telling them that they have tried. Just weeks before he makes a decision whether to label China a "currency manipulator," which could trigger tougher action against Beijing, Geithner said last week that Beijing should allow its yuan currency, which is virtually pegged to the US dollar, to appreciate in a reflection of market expectations.

"We can't force them to make that change. But it is very important that they let it start to appreciate again," he said.

Some experts believe the Chinese currency is undervalued against the dollar by up to 40 percent. The United States and China's other trading partners claim that it gives the Asian giant an unfair trade advantage by making Chinese exports cheaper. US lawmakers have called on Geithner to label China a "currency manipulator" in a mid-April US Treasury report, as they demanded Beijing to revalue the yuan.

The exchange rate is the most important factor in determining U.S. export competitiveness. Every increase of 1 percent in the dollar, averaged against other major currencies, reduces US exports by about $20 billion annually and destroys about 150,000 jobs. The recurrent overvaluations of the past 30 years, when the dollar became overpriced by 30 to 40 percent, contributed significantly to the decline in manufacturing jobs and was the major cause of the huge current account deficits of most of that period.

The policy goal should be a competitive exchange rate that produces a sustainable trade balance, rather than a "strong dollar." Fortunately, the decline of the dollar since 2002 has virtually restored equilibrium in its value against most other industrial countries' currencies.

Fred Bergsten said that the remaining large misalignment is the undervaluation of at least 25 percent of China's renminbi and the currencies of several important economies surrounding it (Hong Kong, Malaysia, Singapore, Taiwan). How to make a correct statement but with all the wrong examples. Yes, the HKD is undervalued but its not their active manipulation that causes that, OMG its been pegged to the USD for 20 years - if anything it just shows that HK has been a lot more competitive and productive using the same currency.

Singapore is not overvalued, if anything they have let their currency to appreciate as they wanted to be progressive and hive off the labour intensive industries. So Fred's very wrong there. As for Malaysia, well he is right on the dot. As much as the yuan is undervalued, Bank Negara has been keeping the ringgit in step with the yuan for the past 5-7 years. BN is more concerned on pricing Malaysia's industrial competitiveness rather than letting the ringgit appreciate on its own. Taiwan's currency is also slightly undervalued but nowhere as much as the ringgit. Of in my view, if the yuan is 40% undervalued to the USD, the ringgit is about half that.

If China continues to block any rise of the renminbi, the administration should label it a currency manipulator and escalate pressure, including by taking China to the World Trade Organization.


Obama has entered into negotiations for a Trans-Pacific Partnership with seven Asia Pacific nations, a group that could shortly expand to include a critical mass of countries in that region and eventually evolve into the Free Trade Area of the Asia Pacific that President George W. Bush proposed in 2006. The administration should aim to conclude these talks when the United States hosts the annual summit of the Asia-Pacific Economic Cooperation forum in 2011.

The Obama's administration should abandon its plan to increase taxes on the overseas activities of U.S. firms because their foreign investments clearly increase U.S. exports. Several modest tax reforms could enhance our international competitiveness, including to attract direct investment here by foreign companies that would then access many of their global markets from the United States and create jobs here.

The administration and Congress must avoid hurting U.S. competitiveness when they inevitably move to raise tax revenue substantially over the next few years to help curb the budget deficit. Increases in corporate income tax rates would jeopardize exports by raising U.S. production costs. By contrast, a value-added tax or national retail sales tax, or better yet a gasoline or carbon tax, could be fully rebated at the border on exports (and imposed at the border on imports) and thus avoid such harm. Positive export and job expansion would be fostered by replacing some or all of our current income tax system with these alternative devices.


In the past a rising renminbi hasn’t reduced China’s surplus, the United States can’t produce many of the goods it now imports from China
, so most of the jobs won't get shipped back even if the yuan is revalued 20%. In many cases, Chinese exports compete with those of other developing nations. If the renminbi rises, those nations would become more competitive – and would also find their currencies appreciating against the dollar, offering new channels for onshoring.
China is an economy in the process of rapid transformation – exactly the circumstances in which a real exchange rate that makes sense one year may be way off base just a few years later.

The U.S. administration feels that the policy of keeping quiet on China and instead engaging its leaders privately has failed. The U.S. grudgingly accepted for a while that China was bound to re-peg in the middle of the economic and financial storm of 2008-09 as it was rapidly losing exports and experiencing a sharp growth slowdown.

A formal U.S. statement that China is a currency manipulator would not trigger automatic U.S. trade sanctions against China; rather, it would lead to a negotiation process that bilaterally—or possibly multilaterally with the IMF—would rectify the situation. Trade sanctions would be the eventual outcome of failed negotiations. In fact, it could take the better part of a year for disputes to be lodged with the WTO and trade sanctions imposed. But certainly even a formal U.S. statement that China is a currency manipulator would significantly raise trade tensions and nervousness in financial markets about a trade war.

The real-estate boom is turning into a bubble, with home prices rising more than 32% in the largest cities in the last year alone. Ghost towns are popping up all over China as the increase in the supply of commercial real estate, with vacancy rates in office space of 20% in Beijing and 16% in Shanghai, and of residential real estate, especially at the high end of the market, is becoming serious. Even in infrastructure, China has advanced too far for a country at its level of development, as evidenced by empty highways to nowhere, bullet trains that no one uses and fancy, empty new airports.No country in the world is productive enough to take almost 50% of GDP every year, reinvest it into more physical capital stock to produce more goods and services and not end up with a glut of capacity that will eventually cause low returns, rising nonperforming loans and rising implicit liabilities for the public sector.

Letting the currency appreciate is key for achieving the stated goal of increasing consumption's share of GDP.The financial market consequences of such a move could be significant: If the decision is unexpected, global stock markets could fall by several percentage points once the ugly M word is uttered by the U.S. Treasury. And so far, financial markets don’t seem to be pricing in such an outcome. History suggests that even threats of trade protectionism can sharply move financial markets. Take 1987: The U.S. had a very large current account deficit, in spite of the dollar falling since 1985, and the major U.S. trade partners (Japan and Germany, which were running a large surplus with the U.S.) were resisting the U.S. push for further rapid appreciation of their currencies against the U.S. dollar. On a Sunday morning, as tensions were rising, then-U.S. Treasury Secretary James Baker appeared in a TV interview and implicitly threatened a trade war if Germany and Japan were to resist further appreciation of their currencies. The next day, the Dow Jones index fell by 20% in the infamous October 1987 stock market crash.

p/s photos: Ju Daha


Kingsmen said...

biggest bullshit in history....what about those currency traders who borrows a zillion times to whack the daylights out of asian currencies back in the 90ies? Truth of the matter is no matter how smart asses may try to reason and present fundamental statistics, the 'tai koh' always have the final say. The world is such a make believe place.

hishamh said...

Kingsmen, in 1997 most of the Asian currencies were seriously overvalued compared to economic fundamentals, over 20% in the case of the Ringgit.

Even speculators need a reason to trade - and in 1997-98, attacking the Asian currencies was the equivalent of a sucker bet, a can't-lose proposition.

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