(Mr. Ben Mah, author of America and China, America and the World, and America in the Age of Neoliberalism, is a frequent contributor to this website.)

Since the publication of his “brilliant shattering book” entitled “Super Imperialism: The Origin and Fundamentals of U.S. World Dominance” in 1972, Dr. Michael Hudson has achieved prominence in the field of international finance. However, his ground-breaking book which was heralded by Terence McCarthy of Columbia University as “one of the most important books of this century,” was not well received in many quarters in the United States. One of the reasons for this was that Hudson used government statistics and global capital flow to illustrate how America uses foreign debt to dominate and exploit the world.

       Over the past thirty years, this Distinguished Professor of Economics at the University of Missouri has been a consultant for the governments of Canada, Mexico, Latvia and Russia, as well as an advisor to the White House, State Department and Defense Department while working at the Hudson Institute.

       In the aftermath of the 2008 U.S. economic crisis, political discourse in Washington has been centered on the revaluation of Chinese currency—the yuan. U.S. key economic policy makers such as Ben Bernanke, Timothy Geithner and American academic elites have blamed the accumulation of foreign reserves by China for America’s economic problems. The Obama administration has exerted considerable pressure on China to push the yuan upward and adopt a flexible exchange rate. As a former balance-of-payments economist and an American who wishes “to see global disarmament in a multi-polar world rather than a unipolar world,”1. Dr. Hudson has no hesitation in joining the fray to counter the “solution” that Washington persistently prescribes for China. 

       Accordingly, on March 15, 2010, Dr. Hudson wrote his letter to China’s Premier Wen Jaibao and outlined China’s options if she did not wish to continue the present policy of holding down her exchange rate by recycling her dollar assets and accumulating U.S. Treasury bonds.

      One of the options for China is to revalue the yuan upward, but this will not affect U.S. balance of payments deficit with China, as falsely claimed by Washington. According to Hudson, the U.S. payments deficit is structural and would not be responsive to the change of the value of the yuan relative to the dollar.

      One of the major contributors to the U.S. balance-of -payment deficit is military spending and the establishment of overseas military bases. This is especially significant since President Obama assumed office, as he further escalated war in Afghanistan and ignited another conflict in Pakistan. American trade deficit with China worsened when China became a popular destination for outsourcing of U.S. multinationals. On the capital account side, U.S. corporations continuously increased their investments in China by buying up Chinese domestic industries at fire-sales prices, thereby further aggravating the balance-of-payment problem. The U.S. hedge fund managers, on the other hand, “are abandoning the U.S. economy, looking mainly to China for higher yields and for a foreign-exchange windfall gain.”1. Consequently, Wall Street financial speculators are rushing to China and “trying to force up the renminbi’s exchange rate. Foreign inflows into China’s banks—especially those owned by the U.S., British or other foreign companies—are flooding China with foreign currency.”1. China’s central bank will “ultimately take a loss (as measured in yuan) when its currency rises against its holdings in dollars, sterling and euros. Speculators and other foreigners holding Chinese assets will get a free currency ride upward.”  As Hudson stated: “The U.S. strategy is to buy up Chinese assets yielding 20% or more annually, while China recycles these dollars to Washington and Wall Street at interest rate of only 1% (for Treasury securities) and absorbs losses in many private-sector investments.”1.  

       As a matter of fact, the speculative capital inflow has already ballooned China’s foreign currency reserves and increased her money supplies. The increase in China’s reserves will ultimately force China to buy more Treasury bonds thereby solving the financing problem for Obama. Moreover, the increase in money supplies will result in higher inflation in the Chinese economy, which will eventually end in a financial and real estate bubble, as in the case of Japan in the aftermath of the Plaza Accord in 1985.

      As a result of the Plaza Accord, the value of the Japanese yen had been revaluated from 360 yen to the dollar to as high as 80, but this did not make any noticeable effect on U.S. trade deficit with Japan.2. On the contrary, Japan simply accumulated more foreign currency reserves and American consumers paid more for their imports. Likewise, the Chinese currency has appreciated more than 21% against the U.S. dollar since 2005 when China caved in under American pressure, but “China’s trade balance increased rather than shrank.”1. According to Hudson: “given the fact that trade patterns are deeply entrenched, a quantum leap in revaluing the renminbi would be needed to reduce China’s trade surplus. Small revaluations would not ‘solve’ the problem that U.S. diplomats are demanding. Unless revaluation is enormous -- in the neighborhood of 40 %, raising the exchange rate thus will tend to increase rather than reduce China’s trade surplus.”1.

      Similarly, Japan was pressed in 1985 “to restore ‘equilibrium’ by easing credit to spur a balance-of-payments outflow.”1. The net result was “a financial bubble, derailing industrial competitiveness and leaving the banking system in a debt-ridden shambles.”1. 

       The Japanese economy has been stagnant and the real estate market strangulated with debt since 1990. China, advised Dr. Hudson: “should avoid this kind of policy at all costs. To avoid the debt overhead now stifling the Western economies, it should minimize debt leveraging and limit the banking system’s ability to create credit to buy assets already in place. Foreign-owned banks in particular need to be restricted from aiding parent-country currency speculation and related financial extraction of revenue from China’s economy.”1.

      More ominously, the revaluation of the yuan as demanded by Washington is “in effect asking China to take a loss, similar to those of Japan amounting to hundreds of billions of dollars, on her holding of U.S. Treasury paper.”3. What is most disturbing is that America, as an indebted nation experiencing difficulty in paying her debt, would resort to this kind of strong-arm tactics to renege on her obligation. This is unprecedented in the history of international finance and a great insult to China’s national dignity.

      In view of the Japanese experience, the revaluation of yuan should not be acceptable to China. Dr. Hudson suggested another alternative is the use of Chinese foreign currency reserves to buy up foreign resources and assets, thereby balancing her international payments. Unfortunately, China’s experiences in overseas investments in the United States and other Western countries did not offer any promise in this regard, as witnessed by the takeover battle of Unocal in 2005. Unocal, a major U.S. independent oil producer with sizeable overseas investments was the subject of takeover by a Chinese company. Although the Chinese company’s offer was far more superior financially to the shareholders of Unocal, it encountered strong opposition from the U.S. Congress and American public. As a result, the Chinese company suffered a humiliating defeat in its first corporate acquisition in the United States. Subsequently, events clearly showed that the Chinese company could not even buy a minor stake in Western multinational firms. The case in point is the acquisition of a minor stake in Australia mining giant Rio Tinto, whose board under public pressure blatantly refused to sell its shares to the Chinese even when the agreement was reached with the company. Australia is a country dependant heavily on exporting its resources to China, but Australian politicians “don’t want land and resources sold to China.”4. Evidently, the option of investments in the West has a limited potential to reduce China’s excessive foreign currency reserves.

     To be sure, a Chinese company was allowed to invest in a minor stake in financial companies such as Blackstone and Morgan Stanley in the hour of need amidst U.S. financial crisis, but suffered a heavy loss. More importantly, such transactions even profitably invested, let alone suffering a high loss, serves no useful purpose for the Chinese economy as they remain part of the U.S. financial system, and stand only to benefit U.S. financial capital.

       Aside from investing in Western countries, China did embark on a program of investing in the resource extraction sector and infrastructure projects in Africa and other developing countries. But China’s commercial activities have been monitored carefully by the West. Moreover, in endeavoring to thwart China’s commercial activities, countries such as Zimbabwe, Sudan and Iran who took an independent stand and have friendly relations with China are all suffering sanctions from the West.5.

     Consequently, the best viable option, according to Dr. Hudson, is to use the excess foreign currency reserves to buy out American and other multinationals’ subsidiaries in China at a book value. Such acquisitions will draw confrontation with Washington, and China should not be afraid of this. Even in the event that the U.S. government reacts “by taking anti-China measures, China would be in the position of responding to a U.S. initiative rather than acting independently. And it would have the support of other countries in a similar position vis-à-vis U.S. attempts at politicizing foreign investment.”1.  This should turn out to be a more realistic alternative, as America is now an indebted nation and China has the sovereign rights to regulate business within its own border. “International law has long backed host countries regarding trade and investment policy, credit policy and so forth.”1.          

       As a result of overseas military spending and the collapse of investment in the manufacturing sector, America has become a land of consumers with a massive balance-of-payment deficit. For many economists, “the structure of American economy is one of the most alarming of all time. For a developed economy it is scandalous.”6. Nonetheless, Washington key economic policymakers and many American academics are still blaming U.S. economic problems on China for what they call a “saving glut”. Astonishingly, in a matter of the utmost national importance with great implications for the fate of billions of Chinese and the future of China, Chinese mainstream economists remain silent on this unfair accusation and offer no viable solution to this problem. This is in sharp contrast to Dr. Michael Hudson who has spoken out in his letter to Chinese Premier Wen Jaibao. By pointing out the truth and the global economic realities, Dr. Hudson might not be the most popular person in America and may even be persona non grata in the political circle in Washington. However, as a person with great integrity and recognized for his outspoken advocacy for social and international justice, Dr. Hudson should be congratulated for his courage and the contribution he made to this debate. It remains whether China’s policymakers have the wisdom and courage to follow the professor’s timely advice and implement this policy for China and the betterment of the Chinese people. The first step in changing policy direction would require that all buyouts of Chinese national industries and foreign direct investments, especially the banking sector should cease immediately.

Notes:
1. Hudson, Michael: “Dollar Hegemony and the Rise of China”, July 12, 2010  Michael-Hudson.com
2. Wall Street Journal Editorial: “Tagging the yuan as a scapegoat is unfair”,  March 18, 2010
3. Fekete, Antal E.: “Floating Exchange Rates: Scheme to Embezzle the Dollar Balance of Surplus Countries”,  July 6, 2010  Asia Times
4. Saefong, Myra P. Kennedy, Simon: “Rio Tinto rejects Chialco deal to sell stock:,  June 5, 2009  Market Watch
5. German-Foreign Policy: “Contested Gulf”, September 9, 2008
6. Richebacher, Kurt: “U.S. Consumer Spending”,  The Daily Reckoning