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2 Romney stays
in character on China By Peter Lee
A further difficulty for
Romney is that the merits of the case against the
PRC as a currency manipulator are becoming rather
thin, and serve as a rather poor justification (on
grounds of cost-benefit as well as principle) for
a session of scorched-earth countervailing duty
trade warfare.
China has been quietly
appreciating the yuan for several years.
Government action, combined with domestic
inflation, has led to a 40% appreciation in the
yuan since 2005 according to Treasury's
calculation, thereby significantly eroded the
export advantages the PRC enjoyed from its
undervalued currency. [5]
The Peterson
Institute, which hung its hat on the narrative
that China's adherence to an undervalued currency
was weaving the
capital account basket
that would haul it straight to economic hell, went
so far as to take issue with Treasury's rather
mild conclusion that China, though not a
manipulator, still had a "significantly
undervalued" currency:
"Treasury is making a mistake in not
giving China more credit for the appreciation
that it has undertaken and the large reduction
in its global external imbalance," Lardy said in
an e-mail. "They should not stick with the
'significantly undervalued' language."
[6]
Some observers looked at China's
shrinking foreign trade surplus and a sustained
drop in yuan deposits in Hong Kong and decided
that the yuan already reached genuine equilibrium
in the fourth quarter of 2011. [7]
There
appears to be an expert consensus that further
pounding on the yuan valuation is
counterproductive, and a distraction from more
effective measures like pushing the PRC on the
opening of its financial markets, respect for
intellectual property, and so forth. [8]
Distaste for pursuing the
currency-manipulation chimera is compounded by
financiers' desire to get down to the business of
trading the yuan, and by a growing squeamishness
about pushing a trade war with China while the
global economy is gasping for breath.
In
Europe, the obsession of US political circles with
the yuan is quietly poo-pooed as London positions
itself for the possibility that it will soon be
trading large amounts of yuan in virtually
free-market conditions, hopefully without the
ruinous distraction of compulsory appreciation
imposed under American pressure. [9]
As
China concludes currency swap agreements with
multiple partners in an effort to internationalize
the yuan and reduce its reliance on the dollar
(and remove its banking relationships from the
baleful influence of US Treasury sanctions),
trading bands have been widened and the yuan is
beginning to behave like a real currency.
In fact, as the Chinese economy slows and
the US becomes the safest haven for investors
spooked by the travails of the euro, the yuan has
shown a perfectly rational trend to depreciate.
Thereby, a significant historical
threshold has been crossed: holding the yuan is no
longer considered a sure, one-way bet on
appreciation, and international hot money - parked
in China in the guise of real estate and other
investments while waiting for an easy forex payday
- has started to flow out of China instead. [10]
While depreciation of the yuan provides
the volatility that currency speculators adore -
and is the prerequisite for an exciting and
profitable global market in the currency and its
derivatives - it is also an unwelcome symptom of a
weakening global economy.
Xinhua reported
the grim numbers for July 2012:
"The July data were poor indeed,"
said Zheng Yuesheng, head of the GAC [General
Administration of Customs] statistical
department. "It will be an arduous task to
fulfill our foreign trade target, as external
demand is weak."
Wang Tao, chief China
economist of UBS Securities, saw increasing
downside risks in exports in the third quarter
due to sagging US and European markets.
China's exports to the EU, its largest
trading partner, slumped 16.2% year on year in
July, GAC figures showed.
Exports to the
United States, the country's second-largest
trading partner, edged up 0.6% year on year,
compared with 10.6% growth in June.
[11]
Now we enter into ironic
territory.
Continuing to allow the yuan to
appreciate to benefit foreign exporters distressed
by weak economies and China's trade surpluses, and
to strengthen the hand of outgoing Prime Minister
Wen Jiabao and the reformers, who are trying to
restructure the Chinese economy away from export
processing, real estate speculation, state
enterprises, and single-minded investment in
infrastructure, would require active intervention
and purchase of yuan by the People's Bank of China
- the kind of currency manipulation free-market
apostles abhor.
Instead, the idealistic
desire to see the yuan strengthen is in danger of
being overwhelmed by a self-interested desire by
many corporations, both inside and outside China,
for the PRC to weaken the yuan (through
quantitative easing, a type of currency
manipulation not unfamiliar to the US Treasury
Department) to get exports moving, gun the
stimulus engine, and keep the global economy going
- inflation and trade surpluses - and distaste for
"currency manipulation" - be damned.
In
summary, today China might be too big - and the
international economy too weak - for the ordinary
political rules of China-bashing to apply. And as
much as we adore our new not-quite-free-market
friends (and useful antagonists of China) in
India, Vietnam, and Myanmar, they aren't quite
ready to pick up the slack.
The Wall
Street Journal's editorial page, no friend of
state socialism, and in fact the Great Thunderer
of the Republican Party, ran an editorial - not an
op-ed - on August 16 titled "China Trade
Benefits". It took aim at congressmen pushing
anti-currency manipulation legislation, asserted
that their districts have benefited enormously
from exports to China, and refused to endorse the
existence of Chinese currency manipulation, merely
characterizing it as "alleged". [12]
The
Journal's editorial echoes a recent chorus of
disapproving op-eds in the business press from
Bloomberg to Forbes to Reuters. [13]
One
can draw the conclusion that designation of China
as a currency manipulator, a key plank of Romney's
platform is 1) factually dubious, 2) practically
and legally unfeasible, 3) ineffective, 4)
dangerous to the world economy, 5) takes money out
of the pockets of masters of the universe looking
to profit from the trade in yuan, and 6) is odious
to his core supporters, who rely on sustained
global economic growth for their continued
financial success.
In an oblique nod to
the concerns of his backers, Romney has floated
plans for a titanic Pacific economic engine to
take away the downside of a trade war with China,
at least in theory: a confrontational free-trade
zone that will boost trade internally while
sticking it to countries - like the PRC - that
fail to display sufficient allegiance to
open-market and free-trade principals.
This initiative appears to be nothing more
than a clone of President Obama's Trans-Pacific
Partnership. Romney's alternative has, to his
mind, one unanswerable advantage: it is called
"The Reagan Economic Zone" (REZ), bringing the
irresistible posthumous charisma of the Republican
Party's Great Communicator to bear on our overawed
Asian trading partners.
Reuters veered
dangerously close to editorializing in its
description of this ad hoc piece of political
vaporware, describing the REZ as "a new
super-sized free-trade agreement without precise
geographic boundaries to act as a counterweight to
[China]." [14]
Romney's China economic
policy seems to be little more than empty
election-season sloganeering. If he is elected
president, Romney will probably be most sedulous
in his stewardship of the world economy and his
own millions, and an antagonistic currency and
trade policy will not be at the top of China's
list of US-related worries.
That may
create some awkward moments with the Republican
Party's fire-eating base, but Romney is no
stranger to awkward moments.
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