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News : International Last Updated: Oct 11, 2010 - 6:25:31 AM


Obama may have to play the Nixon card with China in 2011
By Michael Hennigan, Founder and Editor of Finfacts
Dec 13, 2009 - 9:11:45 AM

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President Barack Obama proposed additional stimulus measures last week to boost the bumpy recovery in the United States, while China reported several indicators showing the positive impact of its own huge stimulus program. By 2011, one year before a presidential election, Obama may well have to play what could be termed the Nixon card, if the US recovery remains anemic, while China, with a then unpegged currency against the US dollar, likely  will only have allowed the renminbi/yuan (renminbi is Mandarin for peoples' currency; yuan in simple terms, means unit) to appreciate slightly, for fear of impacting export earnings.

China has fixed its currency at about 6.83 to the dollar for the past 17 months and this week, yuan forward rates indicated the currency will appreciate about 2.6% in the next 12 months, despite Premier Wen Jiabao last month angrily rejecting calls from its biggest trading partner, the European Union, for a revaluation.

A US Treasury Department report, published in October, noted that of the 17 currencies examined, two (the Saudi Arabian riyal and the Venezuelan bolivar) are officially fixed against the US dollar. Among the remaining 15 currencies, all except the Norwegian kroner depreciated against the dollar in the first quarter of 2009, as capital flows to emerging markets declined and investors continued to shift their portfolios into dollar assets. During the second quarter of 2009, 14 of these currencies appreciated against the dollar, as improvements in financial market conditions and the global outlook led to a return to more diverse portfolios. Only the Chinese renminbi remained unchanged against the dollar in the second quarter.

China's economic recovery surged ahead in November with industrial production rising by 19.1% compared with the year before; imports jumped 26.7% and exports fell 1.2% from the November 2008 level but the dip compared with double-digit year-over-year plunges in previous months.


The increase in industrial output followed a 16.1% rise in October. China's urban fixed-asset investment rose 32.1% year on year in the first 11 months.

In a report last summer, the Peterson Institute for International Economics, a Washington-based think tank, claimed the renminbi was undervalued 40% against the US dollar.

In the year to October, the US exported $54bn worth of goods to China while importing $242bn, resulting in a deficit of $188bn.

The full-year deficit in 2008, was $268bn.

The deficit in the boom year of 1999 was $69bn and it was $162bn in 2004.

In the 13 months from Sept 2008 to Sept 2009, China's holdings of US Treasury securities increased $180bn to $798bn - - up from $51.8bn in 1999.

China's foreign currency reserves (ex-gold) were $146bn in 1999; by 2006, they had topped $1trn and in April 2009, topped $2trn.

According to China's State Administration of Foreign Exchange, the reserves amounted to $2.3trn in September 2009  - -  the world's highest.

During the second term of the George W. Bush administration, the Treasury Secretary, Hank Paulson, who as head of investment bank Goldman Sachs, had developed strong business links in China, managed to head off Congressional action against China.

In 2007, a bipartisan bill providing for penalties to be imposed on China, passed the Senate Finance Committee on a 20-1 vote, but it never came up for consideration on the floor of the Senate.

Democrat, Senator Chuck Schumer of New York, and Republican Lindsey Graham of South Carolina, supported punitive duties of 27.5%.

Two weeks ago, China's State news agency Xinhua, reported that China suffered 101 trade remedy investigations launched by 19 countries and regions by November 3rd this year, according to the Ministry of Commerce (MOC).

These investigations, targeting Chinese products, involved more than $11.7bn, said Wang Chao, the MOC assistant minister, at a seminar recently held in Beijing.

"The world financial crisis has led to a sharp rise of trade protectionist atmosphere worldwide. China now is in the centre area of world trade friction,"he said.

According to Wang, trade protectionism against Chinese products is expanding from goods trade to other fields, such as the currency exchange rate, service trade, intellectual property rights, and investment.

Last week, China imposed 25% anti-dumping tariffs on US and Russian steel imports.

China is the world's biggest steel producer and its steel industry accounts for nearly half of global output. In fact, its output is so large that it matches the combined output of the next four biggest steel makers, namely: Japan, the United States, Russia and India.

In late November, the European Union Chamber of Commerce in China, launched a report which examined the impact and influence of industrial overcapacity in China, which it said is “wreaking far-reaching damage on the global economy.”

The Nixon card

Martin Wolf of the Financial Times wrote last week that China's real exchange rate is no higher than in early 1998 and has depreciated by 12% over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

In 1971, with the fixed rate currency regime in operation since the end of the Second World War, under pressure as strong economy countries resisted currency revaluations, US President Richard Nixon ended dollar-gold convertibility and imposed a 10% tariff on imports - - which was cancelled months later when trading partners allowed their currencies to float.

China is likely to allow the value of the currency to rise in 2010 but it is likely to be a very gradual process.

Last week, Jeffrey Immelt, the head of America's biggest industrial group, General Electric, said: "I have taken on the challenge to increase manufacturing jobs in the United States. These are the jobs that have created the midwestern middle class for generations. Manufacturing jobs paid for college educations, including mine. They have been cut in half over the past two decades."

In the aftermath of losses in the mid-term elections next November, and looking ahead to the presidential election in 2012, President Obama will also be under pressure to protect America's industrial base in such key swing states as Ohio.

China's big stimulus helped to trigger the recovery and the US has avoided ramping up pressure on the currency issue so far.

However, in 2011, the President may have no option but to play the Nixon card.

Finfacts article, Nov 2009: China hints it may end renminbi peg to the US dollar- - with links to earlier related content

Finfacts artice, Oct 2009: Asian central banks intervene to slow fall of US dollar; IMF asks if large reserves helped countries during the financial crisis?

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