The latest summit between the United States and Chinese officials graphically
illustrates that China has learned to play two games from the West: hardball
and beggar thy neighbor.
China's hardball approach is evident in the announcement by its major sovereign
wealth fund that it will no longer invest in the US financial sector.
The stated reason for this provocative announcement, which was issued on the
very eve of the economic summit, is that any such investments would be too
risky.
"I don't dare to invest in financial institutions now," Lou Jiwei, chairman of
China Investment Corp, said at a conference in Hong
Kong. "The policies of the developed nations on these institutions are not
clear. Until they are clear, I don't dare to invest in them. What if they go
bust? I will lose everything."
In fact, China's new policy represents both retaliation and a bargaining chip.
The retaliatory part of the hardball message has been aimed directly at US
Treasury Secretary Henry Paulson, who, much to the displeasure of the Chinese,
continues to repeat his demand for Chinese currency reform. The bargaining-chip
part is designed to reinforce just how weak the US position is in negotiations
while leaving open the door to future investments by China's sovereign wealth
fund if the US behaves itself.
As for the beggar thy neighbor, it has become clear over the past week that
Chinese government officials intend to export their way out of the global
economic crisis. This is all too readily apparent in the recent downward
movements of the Chinese yuan relative to the dollar. Stripped of any rhetoric,
this movement represents a "competitive devaluation" designed to boost Chinese
exports to the US at the expense of both domestic US manufacturers and
competing countries such as South Korea and Japan.
In fact, Chinese currency manipulation represents "beggar thy neighbor" on a
grand scale. By grossly undervaluing the Chinese yuan relative to the US dollar
over the past five years, China has grown its economy on the backs of American
workers and helped to decimate the American manufacturing base. Today, it is
almost impossible for American manufacturers to compete against their Chinese
counterparts when the yuan is undervalued by 30% or more. Add to this an
extensive array of illegal Chinese export subsidies, and it becomes easy to
understand how China has been able to offshore so many American jobs to its own
factories.
Under political pressure, China allowed the yuan to modestly appreciate
relative to the dollar over the past year. However, despite this appreciation,
the yuan still fell relative to the euro and other major currencies - in the
process, significantly exacerbating China's trade imbalance with Europe.
It's not just the United States and Europe that China's currency manipulation
hurts. Japan, South Korea and others of China's erstwhile competitors in Asia
for export markets likewise lose competitive advantage. That's why China's
latest devaluation of its currency could not come at a worse time for its Asian
neighbors.
South Korea is experiencing an horrific currency crisis of its own, one that is
in large part driven by the steep decline in its exports and a collateral
slowing of its economy. The last thing South Korea needs right now is a
competitive devaluation by China that further negatively impacts South Korean
exports and puts more downward pressure on the won.
Japan is in exactly the same boat. This is a country that just a year ago
finally got its head above the economic waters but now is sinking back into the
recessionary, deflationary morass. China's devaluation likewise strikes hard at
the ability of Japan to bounce back.
The ultimate big picture here is that China could play a very constructive role
in the rebuilding of the global economy. With its huge foreign reserves, it
could assist Asian neighbors like South Korea in their time of need. China
could also use this time as a transition point for moving from an export-driven
economy to one fueled by domestic consumption.
It is all too clear, however, that China has chosen to move in the opposite
direction. This will not only further destabilize the global economy. It will
also significantly strain relations with the United States. This is
particularly true given the campaign promise of president-elect Barack Obama to
crack down on Chinese mercantilism.
Peter Navarro is a professor at the Paul Merage School of Business,
University of California-Irvine, a CNBC contributor, and author of The
Coming China Wars. www.peternavarro.com
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