Page 5 of
5 A dialogue of
the mute By Henry C K Liu
for Chinese families to put their
savings in banks, instead of risking them in
China's feverish stock markets.
But
raising domestic lending rates could make it
harder for China to allow further appreciation of
the yuan. That is because the central bank is
itself a borrower. It borrows yuan, by issuing
bonds, to pay for its need to buy dollar inflows
from currency markets, where it has accumulated
$1.2 trillion in foreign-
exchange reserves, mainly
dollars.
The central bank earns a higher
interest rate on US Treasury securities than it
pays on yuan-denominated bonds at home. The
authorities use this profit from the interest-rate
spread to cover losses on the foreign-exchange
reserves, which are worth less and less in yuan as
the yuan appreciates. This causes a boom in the
bond market, with rising bond prices unsupported
by fundamentals.
The semi-official China
Business News reported on Friday that the
government had entrusted $3 billion to the
Blackstone Group, a private-equity firm, to invest
abroad. Blackstone declined to comment, being in a
"quiet" period before a planned initial offering
on the New York Stock Exchange. It is widely
expected that China will make larger use of
"alternative investment" vehicles, which may add
to systemic risk inn the global structured finance
markets.
US labor sees the
light On Friday, the head of the Teamsters
union, James Hoffa, in a dramatic gesture, arrived
in Beijing to visit US-owned factories and to meet
with Chinese union leaders and top Communist Party
officials, as a first stop of a 10-day trip to
China with members of several other large US labor
unions, including the Service Employees
International Union, the United Farm Workers and
Change to Win, a coalition of unions that
represents about 6 million US workers.
"We
felt it was time to get our head out of the sand
and engage this enormous country," Hoffa said at a
news conference.
Greg Tarpinian, executive
director of Change to Win, said: "We've been
behind the curve. [The late US president Richard]
Nixon came [to China] in '71. We're coming in
2007."
US union leaders say encouraging
union leaders in China may raise standards in
China and around the world, thereby making US jobs
more competitive.
"I think a dialogue with
them is very constructive," Hoffa said. "You can't
ignore a union that claims to have 100 million
workers." The visit came as China's only
official union is pressing multinational
corporations such as Wal-Mart and McDonald's to
allow unions in their Chinese factories and
stores.
China's union is helping to draft
a new labor law that some US corporations are
opposing. That proposed law, which has already
been through a variety of drafts, may be passed as
early as this summer, and US union leaders say
they are angry that US companies are trying to
oppose or weaken such a law.
Currency
speculators Currency speculators are
actively trading the yuan with the non-deliverable
forward (NDF) market. An NDF is simply a contract
to buy the yuan at anywhere from one week to
several years into the future. A trader buys a
"one-year forward" to bet that the currency will
be worth more than the price of the forward at
that time.
Chinese companies do not
usually get to play this game, since the NDF
markets are offshore, so the market is generally
made up of speculators and foreign companies doing
business in or with China who feel the need to
hedge their currency exposures.
NDF prices
have been moving from estimating that the yuan
will be 7.62 against the US dollar in a year's
time at the end of October, to 7.52 the last week
of November. This suggests that speculators are
betting again that the Chinese currency will
appreciate more rapidly than before, in response
to anticipated political pressure coming from
overseas. The Democratic Party's election win in
the US has traders thinking that Washington is
going to pick on China.
The average US
working family now faces a 17% chance of losing
50% or more of its income, vs only 7% 30 years
ago, because of US tax and economic policies.
China has become the scapegoat of choice for the
painful restructuring that a rich economy
profiting handsomely from global trade needs to go
through.
Hedge funds are raiding the NDF
market, looking for high returns after a year of
low returns from low market volatility. Every
change in market rules issued by the PBoC
represents a window of profit opportunity for the
hedge funds. Chinese state-owned enterprises with
inside information also trade NDF illegally,
despite the ban of such activities by the State
Administration of Foreign Exchange.
Realistically, Washington has not much
leverage over Chinese currency policy. The
lame-duck and unpopular Bush administration has
its hands full with Iraq, Iran and North Korea,
investigations over scandals over cabinet members
and high White House officials, immigration
policy, and pending loss of British subservient
support, and it does not really want to add China
to its full plate of problems, despite a
relentlessly anti-China Congress.
The PBoC
still has a tough fight on its hands to keep all
the liquidity from flooding into the Chinese
economy and causing inflation. The yuan has moved
7% against the dollar so far. Yet no amount of
yuan appreciation that China can afford will
satisfy China critics in the US, because the yuan
issue is only an excuse for deeper anti-China
attitudes.
The Democratic majority of the
110th Congress is led by what many from both
parties view as confrontational leaders, Nancy
Pelosi in the House of Representatives and Harry
Reid in the Senate. Both have strong records of
opposition to perceived unfair trading practices,
human-rights violations, and other policies and
behavior by Asian governments in general and China
specifically. Pelosi and Reid are in the
Democratic vanguard that is pressing for
fundamental changes in US policies and practices
amid a partisan atmosphere supercharged by
preparations for the presidential election next
year.
Regime change in the
US For more than a decade, these Democratic
politicians have been on the receiving end of the
hard-edged policies and practices of the White
House and the Republican congressional leadership.
The Democratic congressional leaders are expected
to pursue their agenda using the same kinds of
tough, partisan, and openly confrontational
tactics that have prevailed on Capitol Hill and in
congressional-executive relations introduced by
Republicans Newt Gingrich and Tom DeLay two
decades earlier that gave the Republicans their
1994 landslide in Congress.
After last
year's elections, it is "payback time" for the
Democrats. The Democratic majority is expected to
employ the kinds of tactics used against them
since the 1990s and also to take aim at the
opposing party's leader in the White House,
seeking to discredit his rule in anticipation of
electing a Democratic candidate for president in
2008.
The new Democratic majority can be
expected to pursue policies to reverse the
free-trade emphasis of the Bush administration.
Free trader Thomas Friedman of the New York Times
predicted a "civil war" in US politics over the
massive US trade deficit and related economic
issues, such as job loss and benefit inequities,
with China. Voter anxiety over economic trends
adverse to US populist interests was a key factor
of Democratic victory in the November elections.
Skepticism about the benefits of free trade is
spreading widely on Capitol Hill, beyond the
active "industry-based protectionists" in the rust
belt.
The anti-China gang in
Congress House Speaker Pelosi built her
political career on anti-China activism throughout
the 1990s to link China's access to US markets to
Chinese human-rights practices. The Democratic
chairman of the Subcommittee on Trade in the House
Ways and Means Committee, Congressman Sander
Levin, and some other members of that and other
economic-policy committees also favor a tougher
stance on trade issues, especially with China, and
on trade issues with Japan that affect key US
industries, notably autos.
Congressman
John Dingell, chairman of the House Energy and
Commerce Committee, is a strong defender of the US
auto industry, which is fending off growing
challenges from Japanese auto makers in the US
market. Thomas Lantos, Democratic chairman of the
House Committee on Foreign Affairs, has a long
record of vocal opposition to alleged human-rights
violations, notably those by China. This stance
meshes a tight fit with the views of Pelosi.
The strong imperatives for change coming
from the Democratic-controlled 110th Congress can
force changes in US economic policies and
practices in Asia, particularly China. A serious
recession in the United States almost certainly
would strengthen congressional efforts to protect
US jobs from alleged unfair competition from
China, Japan, India, and other Asian economic
powers.
Roots of US-China
hostility US hostility toward China is
rooted in its anti-communist phobia. Until this
phobia is cured, there will be no peace between
the two nations.
On the other side, China
needs to stop treating its socialist roots
apologetically like some skeleton in the closet.
Chinese socialism has made its share of policy
errors through its protracted revolutionary
history against domestic feudalism and Western
imperialism, but such errors are inevitable
milestones for constructive correction, not
excuses to abandon socialist principles of
cooperative equity.
Market capitalism has
also had made drastic errors that have
impoverished billions of people around the world
and stunted their growth for centuries for the
benefit of a select few. Yet proponents of
capitalism manage to accentuate the positives to
adjust its flaws and shortcomings to perpetuate an
economic system based on individual greed and
exploitation of others.
All eyes on
China's Iron Lady Madame Wu has been
described in the Western press as China's "Iron
Lady". It remains to be seen whether the vice
premier will live up to her reputation by
displaying a good trader's nerves of steel to
resist US bullying.
She enters the SED
with a very strong hand. The rules of the game
have been set by the US, so the US cannot complain
about unfair rules. China has played the game
under US rules well, thus it would be
unsportsmanlike for the US to complain. US threats
of punitive measures are mere empty threats from
disingenuous politicians suffering from delusions
of grandeur, because irrational punitive measures
against China would hurt the US economy more than
they do China's.
Strategically, China is
in dire need of shifting its excessive reliance on
exports toward domestic development, but it has
been less than successful in its policy shift
because of special-interest resistance from the
influential export sector in Chinese domestic
politics. If the Chinese export sector is cut down
to size by US irrational belligerence, the
strategic benefit to China would actually be
substantial in the long run.
The Iron Lady
should tell the US that the age is long gone of
the its lording over the rest of the world by
treating trade with it as a special favor granted
to poor nations. The exporting economies of the
world are the ones granting the favor of trade to
the US, the biggest debtor nation in the world.
The main theme of the US-China Strategic
Economic Dialogue should be that debtors are in no
position to be belligerent. The US, the world's
most advanced financial power, should understand
this first law of finance.
Henry C K
Liu is chairman of a New York-based private
investment group. His website is at
www.henryckliu.com.
(Copyright 2007
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