Currency War: Since China pegged its undervalued currency to the dollar,
every devaluation of the dollar in the wake of the American financial crisis has
also meant a devaluation of the yuan vis-à-vis the other world currencies. The
central banks of South Korea, Brazil, Taiwan, Japan, Switzerland and many other
countries are buying dollars in order to protect their own currency against a
revaluation and to defend their exports. Europe also became nervous after the
euro exchange rate had risen to more than US$1.40, far beyond the purchasing
power parity of $1.17.
The United States is now taking drastic steps against China and is making
provisions for a trade war. Congress has authorised the President to impose
import duties on Chinese products if China is not willing to increase the value
of its currency substantially over the dollar.
Why is the US now suddenly acting so aggressively, given that the undervaluation
of the yuan, which is currently 45%, has already persisted for many years? Why
did they not take action much earlier?
The reason lies in capital movements. China is no longer willing to invest
its income from merchandise trade with the US in American government bonds. The
lower valuation of the yuan was accepted by the Americans as long as China
returned the dollars it earned to the US to finance the government deficit. Now
that the Chinese prefer to invest their money in raw materials in Africa and
elsewhere, they have aroused the full ire of US policy-makers.
The Chinese turnaround is indeed dramatic. In 2008 and 2009 China purchased
US government bonds to the tune of $17bn a month. Since November 2009 China has
reversed its course. On average for the first seven months of 2010, China has
not only refrained from buying any more papers but has even begun to sell those
it holds. Each month China sold a net amount of about $7bn in government bonds.
That nerves are now on end in America is perfectly understandable.
London City has jumped into the breach, raising its purchases, which in 2008
and 2009 had only amounted to about $1bn monthly, to an average of $28bn in the
first seven months of this year. Since the UK itself is a large capital
importer, we can assume that the City is not holding the papers itself but
merely restructuring them and then selling them to the world under a new name
and with the London stamp on them.
Despite having withdrawn from financing the US government, China is still the
world’s largest net capital exporter, followed by Germany, having held this
position since 2006. Before the crisis, it exported about $400bn of capital
annually, on average for 2007 and 2008. The US, which at the time needed annual
capital imports of $800bn in order to offset the near total cessation of private
savings, received the lion’s share of this capital. The unwillingness of the
Chinese to consume enabled Americans to build new houses for many years on
borrowed money and to maintain a level of consumption that its own economy was
not able to finance.
To be sure, the Chinese always restrained themselves from private real-estate
financing in the US. They only bought government papers and securitised
real-estate instruments that were issued by the semi-public bodies Fannie Mae
and Freddie Mac. The direct real-estate finance via private channels came mainly
from other countries, Germany for example. Nevertheless, China helped the US
achieve a higher standard of living by making money available to government
authorities that would otherwise have had to come from American citizens
It is a little bit shabby now to reproach China for its exchange rate
policy, since it was this policy that was the basic prerequisite that enabled
the US to live beyond its means for so long.
The low valuation of the yuan was certainly not at the expense of the US, as
is constantly claimed, but was the basic prerequisite that Americans were able
to live the American dream of everyone being able to afford their own house. The
imports of inexpensive Chinese products freed up in the US the capital and the
workers that were employed for a dramatic expansion of the real-estate stock and
the American standard of living.
It is understandable that the Chinese are now reluctant to invest more money
in the US. They tried to enter the American energy market with the purchase of
Unocal, but this was blocked by politicians. Other direct investments were also
stopped by Congress under the pretence of national security. One need only
recall the bidding for Emcore or Firstgold. The US indeed wanted the Chinese
money, but it was not prepared to offer anything more than structured securities
of questionable creditworthiness as well as government papers that are now
clearly exposed to the risk of inflation and devaluation.
It would be a service to world peace if the US stopped making cheap moral
accusations against China. The truth is often much more subtle than that which
is maintained in political interests.