During his confirmation hearing before the United States Senate toward the end of January, Secretary of the Treasury Timothy Geithner accused China of "manipulating" its currency. This is not a statement that helps to further China-US cooperation on trying to stimulate the depressed world economy and on other issues- Secretary of State Hillary Clinton is now in China trying to mend some fences. Yet Geithner's statement is a correct evaluation of the Chinese policy of keeping the value of its currency, the yuan, low relative to the dollar and other currencies. It is far less clear, however, whether this and related Chinese policies harm the US and other countries.
By keeping its currency cheap, China encourages greater exports since that policy makes Chinese goods cheaper on world markets. This policy also discourages imports by Chinese consumers and producers since it raises the cost of foreign goods in terms of the yuan. Partly due to its manipulation of the value of the yuan, China has run large surpluses on its current account in recent years because the value of its exports has been significantly above the value of its imports. China has accumulated over $2 trillion of reserves. The world recession has sharply reduced China's exports, but surprisingly the recession has reduced China's imports by much more, so that its foreign trade surpluses have grown greatly during recent months.
Some American producers have had trouble competing with cheap Chinese imports, and have either gone out of business, or shifted production overseas, mainly to China itself. Since China mainly exports goods produced with low priced labor that is not available in richer countries, their exports have not had a major impact on production in the richer countries. Far more significant to developed countries are the reductions in the cost of imported clothing and many other goods from China. Consumers, especially low income consumers, now take for granted their ability to buy cheaply many everyday goods that would cost perhaps five times as much were they made in the US, Western Europe, or Japan.
The Chinese government holds most of its more than $2 trillion in official reserves in US Treasury securities. China gets a bad deal from selling goods made by Chinese labor and capital in exchange for large amount of paper assets that yield low returns. China has accumulated far more reserves in the form of these assets than can be justified as a buffer against fluctuations in its imports and exports, or than is wise given its low standard of living. The US seems to have made the better bargain by exchanging low interest paper assets for a rich variety of consumer and producer goods.
Does China's ownership of large quantities of US government bonds give China the opportunity to "blackmail" the United States into more favorable policies toward China through threats to flood the international capital market with these assets? China has not made such threats, perhaps mainly because they would not be credible. Since China owns only a rather small fraction of US Treasury obligations, and an even smaller fraction of total liquid assets traded on world capital markets, a threat to sell their US governments would give China only a little leverage on world interest rates, including those paid by the United States government. Moreover, China, along with other governments, holds US Treasury assets because they are considered among the safest of all assets, especially during these turbulent times. By selling their US Treasury bonds, China would have to take on riskier assets at a time when China is trying to cut its exposure to risk.
To be sure, the high savings rates of China and other Asian countries during the past decade are partly responsible for the low world interest rates that contributed to the housing bubbles in the United States and other countries. To that degree, China bears some indirect responsibility for the financial crisis that is afflicting much of the world. However, China too is being badly hurt by the world recession. Moreover, excessive bank lending and borrowing, and government encouragement of sub prime loans, were much more important culprits in generating excesses in the housing market.
The extensive protectionist policies practiced by the Chinese government do hurt the United States and other countries, including China itself. Chinese protectionism is especially common in the financial sector; while foreign banks are being allowed greater access to China markets, they are still subject to considerable discrimination. The general trend in China (and other nations) toward less protectionism has been set back by the global recession, as China has recently introduced various "buy China" programs in its steel and other industries.
China bashing during past decade is reminiscent of the Japan bashing that occurred during the 1980s. It turned out that Japan's substantial export surplus with the US, its extensive accumulation of US Treasury bonds, and its purchases of assets in teh US did not hurt the United States, but were for the most part foolish actions on the part of the Japanese government and businesses. I believe that similar conclusions will be reached about the parallel Chinese practices.
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