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| Chinese premier Wen Jiabao |
OVER THE PAST few months China has come under intense scrutiny because of its undervalued currency. Unfortunately for China's leaders, as US politicians prepare for the 2004 presidential elections they realize that attacking China continues to sound a chord with their domestic audience. They are blaming it for US job losses, ballooning trade deficits and other economic ills. The accusations will not die down soon. And it doesn't seem to matter that many of the arguments are severely flawed.
At a meeting in July with the CEO of a global investment bank, Chinese premier Wen Jiabao (pictured above) was advised to steel himself for intensified criticism in coming months. "We emphasized that the US was gearing up for presidential elections in 13 months' time," says the bank's head of its China operation, who was privy to the conversation between his boss and Wen. The chat was a warning that despite China's leaders making it clear that there would be no revaluation of the renminbi in the short term, the mudslinging and finger-pointing from the US would become more frequent and more virulent in coming months.
But Wen is "ready for it", according to the bank's country head. "The premier knows that there will be a lot more controversy surrounding the currency and revaluation. And he understands that many of the comments coming out of the US are being made for political reasons. He's also clear that there are pockets of very vocal people saying things who don't really have a clue."
The recent build-up of international pressure for revaluation can be attributed to US Treasury secretary John Snow. Although he only picked up the message from a surprisingly agitated and noisy Japan, it was Snow who suggested publicly in July while visiting factories in Milwaukee that the Chinese should reconsider their exchange-rate regime and make it more flexible. He pointed to the surge in China's foreign exchange reserves - $60 billion so far this year - as evidence that the currency is being kept artificially low.
"Snow needs to be more careful," says another senior banker based in Shanghai. "His comments suggesting a more flexible currency regime in China may well have been reasonable, but others who are less well informed read so much more into them."
US Federal Reserve chairman Alan Greenspan fanned the flames further when he argued that China would not be able to keep the renminbi pegged at 8.28 to the dollar indefinitely. Many believe that such observations were, as the senior banker says, tantamount to telling the Chinese that they should allow their currency to appreciate immediately.
To those demanding an immediate revaluation of the renminbi the arguments are simple: by being pegged to the dollar China's currency has become far too competitive given the dollar's recent decline against other currencies. The protagonists argue that you only have to scan the numbers for proof. While the industrialized world's GDP growth is limping along at 1.5%, China's is hitting 7%. In addition, its industrial output has surged 16.9% year on year and exports are up by 32.6%. China, the critics say, is unfairly vacuuming up a large share of the global export market at the expense of other nations, in particular the one with the loudest voice, the US.
In addition, commentators in the US highlight the fact that the US trade deficit with China is now as high as $103 billion and increasing by 25% a year. They also claim that China's policy of maintaining a weak exchange rate has so far cost 2 million American jobs in manufacturing, with more expected. Tim Condon, ING's chief Asia economist, says: "The recovery in the US won't really be complete without a strong turnround in the manufacturing sector. And to do that the dollar needs to weaken further." But as Condon points out, the dollar isn't going to weaken further against the euro or Latin currencies. "The big place that does not allow its currencies to strengthen against the dollar is Asia. But you won't see a move in dollar-Asia until the renminbi and dollar are revalued."
Industrial lobbying
In an attempt to protect US producers from being steamrollered by imports from Asia, and especially China, industrial lobbyists, such as the pressure group Coalition for a Sound Dollar, which represents over 80 industrial and trade associations, are demanding that Washington twists China's arm to get it to revalue.
Helping them out and seemingly happy to join the bandwagon are Democrats looking to score political points. In the run-up to elections opportunist politicians will say anything in an attempt to placate sectors of the electorate - in this case domestic manufacturers tired of seeing products labelled "Made in China" swamping the country - and win easy votes. As Dong Tao, CSFB chief economist for non-Japan Asia, says: "In an election year when things are not going well, foreign exports are very easy to blame." Fred Hu, Goldman Sachs's chief China strategist, agrees: "All these quarrels are being driven by domestic politics. But if the US economy was to pick up it would alleviate a lot of the pressure on China."
Jonathan Compton, chairman and UK and global fund manager at Bedlam Asset Management, worries about the potential unintended consequences for global equity markets of the US becoming preoccupied with the transfer of productive capacity to China and the hollowing out of American jobs. "Given the huge ideological differences and the fact that America and China tend to compete in the same export markets, it is a sure bet that one of the key issues for all presidential candidates will not be Iraq, al-Qaeda or Jacques Chirac, but how to deal with the Chinese 'menace'. It will be about protectionism."
There is, of course, an element of hypocrisy here. Some US corporations that belong to these trade groups have for years happily shifted production to countries with cheap labour, such as Mexico, Brazil and India, to boost earnings. Americans have benefited through cheap goods and healthy stock market returns.