China Bashing Once Again-Becker

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.

Comments

[Anfernee]

It turned out to be that as long as it is for benefit for US, it is the other party's fault. Of course, American could keep pushing Chinese for currency or other forms of protectionist, we just do the same. Too selfish, American!

[Thomas Brownback]

"its extensive accumulation of US Treasury bonds... were for the most part foolish"

"China... holds US Treasury assets because they are considered among the safest of all assets... at a time when China is trying to cut its exposure to risk."

I wonder whether stockpiling US bonds is safely foolish, or foolishly safe.

[jerry]

I agree with Anfernee,we just do the same,or even far less than what you have done to us,I really think it is more foolish to let us pay your faults.

[blake]

I think you economists tend to view the benefit from the cheaper goods as perhaps more durable than it may be. It seems to me it makes a huge difference what the U.S. does with the value it gains with the trade imbalance. If for example we had funneled the incredible wealth into excellent education, infrastructure, and other durable goods then it would have been good for us. In actuality though I think we spent more of it on overpriced designer clothes, restaurants, coke and hookers. Oh ya, gambling too. It seems similar to rich parents, giving a kid a lot of money can either help him or allow him to get away with being worthless without feeling the consequences. Didn't Spain getting vast quantities of gold in the middle ages allowed them to let their domestic production die, resulting in a massive gimping of their production once it ran out?

[joe1]

What real options does the US have? We need China to continue to buy US securities to keep interest rates low. They can continue to manipulate the yuan all they want, and there's nothing we can do about it.
Joe from California

[mo jian]

The simple principle of economy
that trade makes everyone better off inspires me.Doesn't the trade between china and us makes them better ?

[John Booke]

Retail sales in China increased over 20% year-over-year in 2008. Last October retail sales in China hit $148 bn - a huge number. Last month the year-over- year difference dropped to 13.8% but actual spending hit $290 bn which is close to 80% of US retail spending for the same month. Maybe Chinese "beggar-thy-neighbor" policies are finally paying off for Chinese workers.

[CRen]

blake - I think Spain's expulsion of the Jews and Moriscos killed their domestic production and the gold imports simply concealed the fact of it for a while.

[blake]

Well, but what I'm saying is that the gold imports allowed the government to do retarded things on a scale that would not have been possible otherwise, and for longer than they would have if they had been feeling the effects in something closer to real time.

[StatsGuy]

China's purchase of T-bills will be proven foolish only when the US absorbs so much debt that the risk of default becomes impossible to ignore.

As US tax revenue plummets, world asset values collapse, US middle class assets (home ownership and 401ks) are vaporized, the debt becomes an increasingly large part of total world wealth.

It is time to have a real conversation about printing money directly (rather than trying to "get banks lending again"). This crisis ceased to be a lending crisis 2 months ago and became a demand crisis. Creditworthy borrowers with good collateral can easily obtain (very cheap) credit.

Our pathological dependency on banks to keep our money supply growing - while making one-sided bets - has proven crippling.

It is time to print money, and spend it - extending 4.5% interest rate loans to all homeowners (covering the difference by having the Fed float a 0% loan) is a good and fast way to spend it. A 2 month tax holiday would do as well.

However, the money _needs_ to be created by a 40 year 0% loan floated by the fed, or some similar mechanism. NOT by floating more T-bills in auctions that suck vast amounts of currency out of the private economy.

The arguments against inflation are growing weaker by the day as the debt load mounts at an accelerating rate and income (both personal income and national income) decline.

Obligations that should never have been made were made by our parents and will be paid by our children - and rather than investing, those assets were consumed. Our children are being enslaved to debt.

So while we talk about banks making bad loans, e must recognize that some countries made bad loans. China made a bad loan - and it made this loan with the express purpose of allowing the US to consume more by keeping the Yuan undervalued. Now everyone is paying the price, and there are only two ways out:

1) Inflation now

2) US national bankruptcy in 5 to 10 years

If the US tries to cut its budget now, or to absorb another 3-4 trillion dollars in debt to rescue the banking "system" and to stimulate the whole world economy, we will inevitably go bankrupt. I rather suspect this will have a more damaging impact on interest rates than printing a trillion or two now to reflate asset values and reignite the economy.

Moreover, when the US prints money, it creates a strong incentive for other countries to follow suit or see their exports get hammered. Thus, printing money in a deflationary environment has a POSITIVE CONTAGION EFFECT - This is directly the opposite of fiscal stimulus which is a Prisoner's Dilemma game in which every country tries to suck off their neighbor's stimulus.

[Jack]

Joe, from California, (which has a $2 trillion GDP by itself with just 35 million people, as compared to China having just $3.2 trillion spread over 1.3 billion people)

Truth is that the "China won't take our IOU's" concern is more than a bit overblown as we're locked in this deal together like something of a co-dependent marriage. Our "habit" is that of spending every dime we make and then some. As, despite China's recent success they are still an impoverished nation of $2,000 per capita income and thus desperate to do all the business they can and they enabled the game to continue by recycling their surplus dollars back into our economy via investments and buying our Treasuries.

Were they to stop? And hold our surplus dollars? First off we'd end up paying somewhat higher interest on our T-bonds etc. to lure other investors. Our surplus dollars remaining in China would have the tendency to devalue the dollar vis a vis the yuan. But since we're still "the big guy" with a $14 trillion GDP with many other high volume trading partners the major effect would be that of causing their own yuan to float upwards in value with these effects:

A. a slowing of their exports to the largest importer in the world as we or other nations became more competitive.

B. their HUGE population would begin using their stronger currency to buy things from abroad or to travel. (Remember when the Japanese, also "savers" attained a certain level of wealth and were sort of "everywhere?" There are ten times as many Chinese.)

John Booke's comments on China's retail growth has be thinking they may be reach a sort of tipping point. ie..... thought Chinese families have been famous for being their own bankers, real commercial credit is likely just developing there so as to make possible the purchase of big screen TV's,major appliances, furnishings, cars and other items that can only be affordable on payment plans, including trips as tourists or to see relatives in other lands. Ha! they too will be able to spend more in a year than they earned!

In short........ I don't think Hillary was dong much heavy lifting by discussing buying our bonds with the Chinese.

[EAllen]

"Since China owns only a rather small fraction of US Treasury obligations, ... 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."

You're crazy. If China hinted that they were not going to buy our bonds, you would see the bonds sell off massively. China is the marginal buyer. Becker, have you ever heard that the marginal buyer sets the price, and can do so with very little volume? If our bonds sold off, then the world would wonder how we could have a sustainable deficit with higher interest rates. Their concerns would push our rates even higher, with the negative feedback loop dynamics.

But the U.S. Treasury market is one of the largest free markets in the world. OH, I forgot, free markets are always self regulating and tend to the the most efficient outcome - NOT!

[Anonymous]

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[Optode]

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[blueli]

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[David Duncan]

I keep thinking about the fall of Zenith (a painful personal memory). Would it be fair to say that say that they understood "better, cheaper, faster" but, failing to grasp the concept of "cost", sold at below cost? Some of the Chinese goods I have purchased have been so cheap that I couldn't believe they weren't sold below cost. I think about the scene from Dr. Zhivago where the general comments that it is too bad they can't use machines to build the dam.

[Jack]

David....... yes, I too am amazed at how cheap some Chinese tools and things are. I'm reminded that there is a time-honored method for taking over markets. Sell half your production at home, or in some venue where competition is not so stiff at a fair or even more than fair profit......... then sell into others as breakeven or even lower prices until what competition there is goes away.

I wondered some years ago why they were building more movie theaters in Anchorage when they weren't filling up the existing ones. The answer seemed to be that of freezing out small competitors. The "bigs" could build prematurely and run at breakeven for years and perhaps make a bit on the R/E while a local operation would have to be at least marginally profitable soon after opening the doors.

It IS interesting that I've not heard of any dumping charges in a long time!

[thargego]

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[Jim]

Well it looks like our fearless leader (who has never had a job) and his economic "experts" have decided on inflation as a more politically acceptable way of getting us back into economic equillibrium. The Chinese and others can't be stupid enough to keep buying our debt without a significant interest rate increase. How else will will we deal with this except by monetizing the debt and suffering the inflationary consequences. At least a deflationary policy might be a quicker form of death and resurrection but then that would not be good for the Democrats. In either case, the US standard of living will be coming down, unemployment going up and the dollar not the peg for exchange. At that point the Yuan might be worth as much as the dollar and the balance problem will have been solved. Maybe then we might actually make something and pay wages that are sustainable. Oh, I forgot, the top 2% of earners will pay 60% of the taxes or more and capital will dry up. Perfect. One thing about a "democracy"; You get exactly what you deserve.

[Anonymous]

I you owe $1 million to a bank, the bank owns you. If you owe $2 trillion to a bank, you own the bank.

[neilehat]

Zenith? Ahh yes ... a former producer of fine electronics in the States. You know the Franklin Park Il. plant is now an International Telemarketing Center personed by Indians and Chinese. What a trade off...! Remember, livable wage job loss is good for you and the Nation as well.

[neilehat]

Jack, Ahh yes... the rebate! Old John D. used the same technique against the competition in terms of rail and pipeline transport which cut his costs to the point where the competition could no longer compete price wise and eventually had to sell out for cents on the dollar or sold out prior to the pricing war for shares of stock. Those who sold out early became wealthy. Those who didn't, Bankrupts. In fact, the Trust, towards the end was receiving Rebates on the Competitions raw material and product transport costs as well. I won't mention, the fact the Trust had one of the finest Industrial Intelligence Operations the World has ever seen. In fact, they knew their Competitions operations costs across the board to the penney and due to their scale could adjust their price below whatever the fair market price was. And lo and Behold, the Standard Oil Trust was born.

The problem is, American Corporations can no longer operate as such, in either Domestic or International markets due to the Anti-Trust Laws now in effect. Whereas, other Nations supported by the I.M.F. and the World Bank can (perhaps the new equivalent of S.O.'s Industrial Intelligence apparatus?). Which puts American Corporations at a severe competitive disadvantage.

Remember China is only the "tip of the Iceberg".

[milkypig]

What can China do? Those policy makers are even stupid than American politicians. However, there are at least quite a few bankers and economists who are smart to protect their own assets and know deeply of politics at the same time, though greedy. What China have are just a lot of scholars who do not understand politics and are poor.
About the treasury bonds, what else can Chinese government buy? It definitely will be disaster to China. But what can they do? Sell them? Give back to individual? Or investment. But here comes the protectionism of other countries. Australian mines, American oil company, European banks and firms, everything is not easy. Finanlly, they found some investment in Sudan, which was disposed by others at first. Then, those greedy government want it back after seeing yields to China. What a world!!

[Teddy]

GOOD

[Austin Web Guy]

In my humble opinion, we should reduce the amount of Chinese imports into our country and through tax incentives promote US based businesses to actual operate in the United States. We also need to shift our focus from quantity back to quality.