In recent years, Beijing has been pressed relentlessly by Washington to strengthen its currency against the dollar and adopt a market-oriented exchange rate. Since 2005, the U.S. Senate has passed legislation sponsored by Sen. Charles Schumer and Lindsay Graham that would punish China for currency manipulation. Under pressure, China has immediately caved in and lifted the peg from the dollar and allowed the Yuan to fluctuate with a basket of currencies.
However, in the aftermath of the 2008 economic crisis, China reintroduced its currency peg, which sparked outcry in Washginton that China was responsible for the job losses in America.
Indeed, China became a scapegoat for America’s economic ills. China’s central bank statement of currency reform bought disappointment to many American politicians, who felt that China did not go far enough and wanted a fast appreciation of the Yuan. When the rate of Yuan against the dollar remained unchanged on the first trading day after the announcement, Sen. Schumer promised to have legislation passed that would lead to name China as a currency manipulator.2.
Is China really a currency manipulator through pegging the Yuan to the dollar? In reality, many countries including the Gulf oil states and Saudi Arabia--the world’s biggest oil producer have pegged their currencies to the dollar, but nobody has ever accused them of currency manipulation. As a matter of fact, most global currency rates were fixed until the breakdown of the Bretton-Woods monetary system in 1971. Therefore it is rather misleading and disingenuous on the part of American politicians and President Obama to call China to adopt market-oriented exchange rates and to have the Yuan appreciate against the dollar in order to reduce trade deficit. However, they conveniently forget that much of U.S. trade deficit with China is the result of American multinational firms moving their manufacturing facilities to China in their pursuit of higher profits. Since 2005, the Yuan has been revalued upward against the dollar by close to 20 percent, and it has no impact on the U.S. trade deficit. Moreover, there’s no such thing as market-oriented exchange rate, as both “the Bush and the Obama administrations have pursued a depreciating dollar policy.”3. By pursuing the depreciated dollar policy, the United States is the true currency manipulator, and “there is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback’s value than any other single actor.”4. The Fed also controls the interest rate, which has influence on the value of the dollar.
Since China’s Reform and opening up, the Chinese policy makers have tried their utmost to integrate into the global capitalistic economy. They even surrendered their monetary power by pegging the Yuan to the dollar in return for a stable exchange rate.
China’s stable currency and her policy of welcoming foreign direct investment with open arms has led China to become the factory of the world and accumulate plenty of dollar assets. Unfortunately, “China’s build-up in dollar reserves is contributing to world’s anger at China, as it represents a huge misallocation of global resources.”4. Moreover, the accumulated dollars will soon be appropriated through the process of inflation, hyperinflation or financial manipulations, as the U.S. Federal Reserve is pursuing a policy of inflating its way out of debt through near-zero interest rate.
In order to carry out the kind of financial appropriation and manipulation against a target country such as China, Wall Street speculators need a flexible exchange rate regime and an open market in China’s banking sector. Hence, finance capital in Wall Street has exerted tremendous pressures on successive administrations and politicians, the likes of New York Sen. Schumer who has close ties to Wall Street. Washington raises the Yuan issue and at the same time demands China open up its banking sector and carry out financial liberalization.
Unfortunately, the experiences of financial liberalization were all too painful and familiar to the people in Asia. In the 1990s, the Southeastern Asian governments opened their financial and capital market under the similar pressure from Washington. Consequently, the excessive liquidity created by speculative capital inflow led to the real estate and stock market collapse. Southeastern Asia ended with the financial crisis in 1997. The Asia Financial Crisis dealt a heavy blow to the economy of those countries and South Korea. Overnight, 100 billion dollars of foreign currency reserves disappeared from the central banks of those countries. Related financial losses exceeded those caused by the Second World War. It brought untold sufferings to the working people, as unemployment rose by 50 percent in Thailand, and there were two million Thais out of work, together with mass job losses, food shortage and a dramatic increase in bankruptcy in Indonesia. One of the main reasons that China was able to escape this fiasco was her tightly regulated capital market which made it impossible for financial speculators like George Soros or Julian Robertson of the Tiger Management Corporation to buy and sell the Chinese currency. China certainly would have ended in financial disaster had she liberalized her financial market at that time.5.8.
Consequently, the accusation that China is a “currency manipulator” and that the undervalued Chinese Yuan is the culprit for American trade imbalance have lost credibility in Asia. The Asia Financial Crisis has convinced many Chinese that deregulation and financial liberalization would end in economic disaster, as speculative capital inflow together with the irresponsible lending of the international banks would inevitably bring the country to economic collapse.
More importantly, as a result of economic crisis and the failure of his $787 billion stimulus package to create jobs in America, President Obama’s approval rating has experienced a precipitous decline. Fiscally, the bailout of the bankrupted American banks, which amounted to the colossal sum of over $13 trillion, has already placed the U.S. government finance in a precarious position. Most significantly, since President Obama entered office, he has further committed to wars and overseas military expansions resulting in record-breaking deficit. In fact, America, with a budget deficit close to two trillions at 13 percent of GDP, is experiencing funding difficulties. The United States is monetizing its debt by lending money from the Federal Reserves to the banks, which in turn are using the funds to buy Treasury bonds.3.
To escape the deficit quagmire and increase its approval rating, the Obama administration wasted no time in trying to take advantage of China. One of the ways to implement this strategy is to shift the burden of budget financing to China, the country with the fastest growing economy and trade dependence on the United States. By threatening China with trade sanctions, Washington shrewdly calculates that it can press China to revalue its currency, to open up its financial market and, to allow free capital flow, adopt a flexible currency exchange rate regime. The United States would be able to channel all the speculative capital into China and further balloon China’s reserves. The increase in China reserves will force China to increase the Treasury bond purchase. The increased purchase of U.S. Treasury bonds will largely solve the financing problem for Obama, and China will end up holding a vast amount of depreciating or even worthless Treasury bonds. America’s economic crisis will shift to China and the American economy will recover.
This very much resembles Japan’s economic relations with the United States at the time of Plaza Accord in the mid-1980s when, under the American pressure, Japan revalued its currency from 360 to the dollar to as high as 80.4. Consequently, Japan experienced deflation in her economy, and their central banks cut interest rates and adopted a cheap money policy, which flooded the Japanese market with liquidity. As a result, speculative capital flowed into Japan and Japan ended with the collapse of both the real estate and stock market. The Wall Street financial speculators profited enormously by shorting the Japanese stock with derivatives, and the Nikkei eventually lost nearly $5 trillion of its value from the peak of the stock market. Wall Street financial speculators successfully conducted financial warfare against Japan, and the savings of the Japanese people were appropriated through financial manipulations.7.
It is obvious that this kind of outcome would not be acceptable to the Chinese people and the nasty experiences of Asia Financial Crisis and the economic stagnation in Japan over the past decade should be a valuable lesson for China. One would think that the Chinese policy makers, for the sake of the welfare of the Chinese people, would have the courage to resist American pressure and adopt independent fiscal and monetary policy. However, events, since China joined the WTO, the most unequal treaty signed by China since the Qing Dynasty, do not offer a ray of hope in this regard. Since joining the WTO in 2001, after a series of bluffing from U.S. Congress with the threat of tariff increase or be named as currency manipulator, China readily gave in toAmerica’s unreasonable demands to have the Yuan peg lifted from the dollar in 2006. By declaring that her central bank would proceed with currency reform on the eve of the Toronto G-20 meeting in 2010, China sent out an unmistaken signal that the Yuan would rise in value in relation to the dollar in the days ahead. This would provide a haven for Wall Street financial speculators, and hot money would rush into China. China would not only be faced with the problem of excessive capital inflow, but it will come at the prices of high inflation, stock market collapse and economic crisis.
This is an untenable position for China, and the main culprits are trade dependence and the onerous conditions imposed on her when she joined WTO. As a matter of fact, for the sake of trade and exchange-rate stability, “China has subcontracted much of its monetary discretion to the Fed.”4. China is losing her sovereignty, as a sovereign country formulates her own monetary or fiscal policy. “No country, small or big, should be told and pressured into a particular exchange-rate policy. A country is free to peg its currency, manage it, or to float it.”3.
Therefore, it is unthinkable that a big power such as China would cave in to American pressure by agreeing to currency reform. What is even more ridiculous is that this outrageous demand is a red herring for other ulterior purposes, solely to shift the financial burden to China and provide a fertile ground for Wall Street financial speculators and the opportunity of taking over China’s banking industries.
Obviously, the first requirement of an independent country is the safeguarding of her sovereignty, and it is a compelling obligation for any government to uphold this sacred task. By caving in to U.S. demands, China has violated the cardinal rule of a sovereign state. This is especially important at the time of economic difficulties when the United States increasingly practices protectionism and clamors for trade restrictions against China. In the name of free trade, WTO rules are used to infringe on China’s sovereignty. By caving in to American pressure on the revaluation of Yuan, China will make the situation worse, as any sign of weakness on the part of China will engender more demands and enact more protectionist legislations against her. China should not act from the position of weakness. On the contrary, as America’s number one creditor, China should be able to negotiate from the position of strength and regain her rights as a sovereign nation.
Notes:
1. Newsdaily.com: “China’s central bank on Yuan exchange rate”, June 19, 2010
2. Bradsher, Keith: “Currency Revaluation to Be Gradual”, June 20, 2010 New York Times
3. Askari, H. and Krichene, N: “G-2- split and out of order”, June 22, 2010 Asia Times
4. Wall Street Journal Editorial: “Tagging the Yuan as scapegoat is unfair”, March 18, 2010
5. Shawki, A. and D’Amato P.: “ World Bank: plunder with a human face”, Spring Issue, 2000 International Socialist Review
6. Goldman, David: “Geithner blows up the world”, June 22, 2009 Asia Times
7. Engdahl, William E.: “A Century of War”, PP225-227 Pluto Press 1992
8. HKTDC: “Carry Trade and New Form of Financial Turbulence”, April 1, 2007 Economic Forum, HKTDC
