Time To Get Tough With China; Barron’s
According to a report by Barron’s, a trade war is fueling between U.S. and China. The reason behind the tensions between the two countries has been President Barack Obama’s push for China to implement “market-oriented exchange-rate policy” and Premier Wen Jiabao’s claims that the Chinese currency is not undervalued.
The U.S. Treasury Department has been facing mounting pressure from the House of Representatives to dub China as a “currency manipulator.” According to Barron’s, China’s peg against the U.S dollar is not only affecting the U.S. economy but also the global economic recovery. China’s claims that the yuan is not undervalued are outrageous as studies have shown that the fundamentals point to a much stronger yuan. The country has not just received calls from the U.S. to strengthen its currency but from its other trading partners as well.
An undervalued yuan gives Chinese exporters an unfair advantage against its competitors in global markets. This combined with the export subsidies provided by the country has resulted in U.S. running a huge trade deficit. Being a member of the WTO, China’s actions are not justified. In a free market, exchange-rates should be determined by the demand and supply of currencies. Using exchange-rate policy to unfairly support trade will lead to a global imbalance, which can result in dire consequences for the global economy. Fundamentals suggest that as the U.S. trade deficit has grown, the value of the dollar should decline against the yuan, resulting in an increase in exports from the U.S. to China. However, by keeping its currency artificially low, China has never allowed its trade with U.S. to rebalance.
Ever since President Obama has been elected to the White House, he has kept a tough stance on China’s unfair exchange-rate policy. However, next month the Obama administration could take the toughest stance as yet against the world’s third largest economy by branding it as a “currency manipulator.” Such a move could come with heavy price for China. However, Barron’s has doubts on whether the Obama administration has the courage to take such a step. This is due to the fact China’s huge current account surplus has financed America for a long time.
In order tom maintain the peg against the dollar, China has to create a demand for the U.S. currency. It does so by buying U.S. Treasury bonds. This results in a strong demand for the dollar, resulting in it remaining strong against the yuan. However, Barron’s believes that such an arrangement is unsustainable in the long-term and that the U.S. must act against China now.
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