China On Notice

Forbes ^ | 17MAY05 | Paul Maidment

[familyop]

NEW YORK - The Bush administration has put China on notice that it expects a revaluation of the yuan within six months.

In its biannual report to Congress on exchange rates and trade, the U.S. Treasury said China will be at risk of being accused of unfairly manipulating its exchange rate if it doesn't act swiftly to abandon its fixed exchange rate against the dollar.

For the past ten years, the yuan has been pegged to trade in a narrow band around $8.28. Beijing has repeatedly said it will widen the band, making the yuan more flexible in time, but the head of China's central bank denied again last week that a revaluation was imminent.

The Treasury report can be seen as the administration's response to a bill put forward by Senator Charles Schumer, D-N.Y., that would impose heavy sanctions if China does not revalue in the next six months.

The report and a statement from U.S. Treasury Secretary John Snow played a major role in turning around U.S. stocks Tuesday afternoon after they had been hammered on inflation fears when strong Producer Price Index and monthly housing starts numbers were posted before trading began. The Dow Jones Industrial Average posted a second straight day of gains--rising 79.59 points to 10,331.88.

The Treasury report makes clear that China would meet the requirements of being named a currency manipulator if there is no substantial change in its currency regime within six months.

"It is widely accepted that China is now ready and should move without delay in a manner and magnitude that is sufficiently reflective of underlying market conditions," the Treasury report says.

"It is critical that we address the issues of imbalances aggressively," said Snow's statement. "China's rigid currency regime has become highly distortionary. It poses risks to the health of the Chinese economy, such as sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows and overinvestment," he added.

The Treasury is now saying that China should take an immediate transitionary step towards a full float of its currency, but that Beijing doesn't need to move immediately to a full floating rate regime. This could be as straightforward as a significant widening of the yuan's trading band.

U.S. Congressmen and U.S. export manufactures would welcome an immediate signal of intent to allay their concerns about the U.S. trade deficit with China which they argue is being increased by what they say is China's artificially cheap currency.

China's bilateral trade surplus with the U.S. expanded in the second half of 2004 to $93.5 billion, compared to $70.2 billion in the same period the previous year.

China's global current account surplus had increased to $40 billion in the second half of last year, or 4.2% of gross domestic product--roughly twice as large as the surplus in the second half of 2003.

Though China has already been working on financial market deregulation for two years, preparing to loosen the yuan's peg to the dollar, and has gradually sought to give its financial institutions more experience operating in foreign exchange markets. China's capital markets would require substantial further liberalization to sustain the impact of a fully free float.

Further interest-rate liberalization is also crucial. If the central bank loses its exchange-rate control over monetary policy, it needs to be able to affect either of the only two alternative policy tools: a target interest rate or a target inflation rate, and targeting the latter is impractical.

Earlier this month, Vice Finance Minister Li Yong told the annual meeting of the Asian Development Bank meeting that China had to first get its market mechanisms in order and repair its corruption-ridden and bad-debt burdened banking system.

Many in Congress have been critical of the administration softly jawboning the Chinese authorities over the issue of the yuan. But the administration has been reluctant to take a more forceful approach, in public at least, for fear that the Chinese authorities won't want to be seen within China as bowing to foreign pressure, and particularly not American and Japanese pressure. (Tokyo has made similar calls for revaluation.)

Note that the Treasury report is diplomatically couched in the language of global economic imbalances rather than the bilateral U.S.-China relationship,

"The fixed exchange rate China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding adjustment of international balances. It is also a source of large and increasing risk to the Chinese economy," the report concludes.

[Marysecretary]

Absolutely! We've become a tourist industry in NY State. We used to have so much manufacturing here and now it's gone. Taxes killed a lot of it. Now we have services, government jobs, and TOURISM. Boy, that pays a lot, doesn't it? My first husband worked for Revere Copper and Brass in the tube mill and he made darn good money for those times. Now all these companies are going out of business because of imports. We eat our dead here!

[Marysecretary]

AMEN, groanup! You're so right. We are dumbing down our kids and I can't help but think it's on purpose. I learned a lot more when I was in school than they're learning now and I didn't even have to learn how to put a condom on a cucumber! Cheez.

[Southack]

"You can't make a living compatible with American standards by making cameras as a factory worker."

That's not my point. I'm fine with automating every manufactoring job. In fact, that's what is happening. Even service jobs are getting automated. China has coke machines dispensing soft drinks rather than peasants, for instance.

My point is that I want those manufacturing machines located physically in the U.S.

Right now, business investment money is going into China due to their currency manipulation. That's moving manufacturing from physical U.S. locations to physical Asian areas. In exchange, the U.S. gets an extra $75 Billion per year in currency trading profits (i.e. the price that China is paying for their stealth business sudsidies via currency manipulation ABOVE their trade surplus) over and above what we lost from the manufacturing shift.

But building a lucrative currency exchange industry in exchange for essentially selling China manufacturing monopoly rights strikes me as a long-term losing proposition if carried to its most radical extreme...

...Even if it makes us more money in the short-term.

Pause

Not that I think we will reach that extreme end. For one thing, the Bush Administration *is* taking the appropriate corrective action by gently nudging China towards an earlier rather than a later currency re-evaluation.

For another, automated manufacturing is an American strength that will only escalate...and cheap Chinese labor is no match for automated American factories and services (e.g. Coke vending machines).

Which is to say, China is paying an enormous sum of money to gain human-assembled-product rights and capabilities at the very time that the U.S. is ushering in a gradual paradigm shift to automated, non-human-assembled manufacturing.

In fact, China is going after human-assembly products at the very moment when executives are least likely to defend those human jobs...because executives are either caught up in the outsourcing fad or else looking forward to automated assembly plants.

Thus, China's actions are going to make the pain of the eventual human-to-automated labor shift more abrupt and more severe.

Which is what I've been saying all along. China's currency manipulation is distorting the global economy, and this distortion is causing and will cause some fair amount of pain for all involved, China especially, but also the U.S.

[Brilliant]

I don't understand your logic.

Kodak is selling cameras like hotcakes. They've made a profit in the past few quarters after years of massive losses. They blamed the prior losses on competition from the Japanese. They even had the US government bring a trade case against the Japanese, and lost because the Japanese weren't dumping--they just had lower costs.

Now Kodak is making money, and they say that the reason they are making money is that they (unlike the Japanese) are using cheap Chinese labor to make their cameras. If you ban them from doing that with trade restrictions, then how does that create American jobs? I won't. It will create Japanese jobs, and higher prices for the American consumer. We'll be right back to where we were before Kodak started making its product in China.

[Southack]

I'm not saying ban anything, much less Kodak's cameras from China.

But Kodak's profits on those cameras are occuring NOT because Chinese labor is so cheap, but by Chinese currency manipulation that makes those cameras cheaper for the U.S. to buy than what it actually cost to make them in China...by some 40%.

That currency manipulation is therefor distorting our economic view of the global Marketplace. It is also extremely expensive for the Chinese to maintain...though it is addictive because it employs millions more than would be otherwise employed in China and also because it draws in massive foreign investments into China that would otherwise not be there.

Marketplace distortions, however, are bad. Yes, you can profit from them, but that's not the point. There will be considerable pain when China's currency manipulation is finally ended (one day). The sooner that it is ended, the less pain for the global economy (including the U.S.).

[Brilliant]

OK, I get your point, but why is that not the problem of the Chinese? If the Chinese government manipulates the currency so that Chinese labor costs less to Kodak than it is really worth, then why shouldn't we take the Chinese for all they've got, buy some cheap cameras, and leave them holding the bag?

I will grant you that when the cheap Chinese labor comes to an end, that will be painful. But if someone gave you the choice of losing your leg now or losing your leg in 5 years, which would you take?

[Southack]

It is most certainly a problem for the Chinese. Propping up the U.S. Dollar has been extraordinarily expensive for them...to the point that China, and China's banks, and China's foreign investors, and China's domestic manufacturers are nearing a crisis.

For the U.S., the pain and the economic (perhaps even political) dangers are much less severe than for China. This is *not* a crisis for the U.S., but is merely a small problem.

A small problem that is best addressed sooner, rather than later.

For instance, GM has invested Billions into China. When China re-values their Yuan, those GM products from China will instantly be 40% more expensive. That's going to kill whatever cost advantage that GM thought it was getting back when the Yuan was heavily advantaged by the over-valued U.S. Dollar.

Now granted, General Motors is a mere $16 Billion marketcap U.S. firm, so its loss is really no big deal in the grand scheme of things...but GM illustrates that there is and will be *some* pain for the U.S. due to China's market manipulations.

Moreover, the longer that China goes without re-valuing their Yuan, the more American firms will invest over there because of the distorted economic picture. So the longer this goes on, the more we'll feel the pain here in the U.S. by first losing the business investments to China (instead of being made here) and then second by seeing those investments get HAMMERED by the inevitable Yuan re-valuation.

Instead of the pain that will come from any market manipulation, you seem to be focusing solely on the profits that can be made by the savvy currency traders (some masquerading as corporate businessmen). And it is true that those profits are currently available for the taking.

It's also highly addictive. Easy money and all of that tends to look good, even if it is coming from a temporary market distortion that *will* go away with considerable pain for those most involved.

[Last Dakotan]

One of the better posts I've seen on this topic.
I am increasingly annoyed by those who argue for the status quo in trade by casting those who see the problems as "doom and gloomers". It adds nothing to the sensible arguments put forth by posters like yourself.

[familyop]

You know that universities and employers would not honestly cooperate with surveys to gather ratios of foreign nationals to US citizens (and permanent residents, even) in the hard sciences. Therefore, you demanded proof of what is common knowledge. The spite by too many education administrators and teachers (including higher education instructors) against US boys and men is also common knowledge.


http://www.computerworld.com/governmenttopics/government/story/0,10801,100057,00.html

Sidebar: Foreign Students Fill Computer Science Graduate Programs

News Story by Patrick Thibodeau

FEBRUARY 28, 2005 (COMPUTERWORLD) - H-1B Salary Interactive ToolAn argument cited by H-1B supporters for raising the visa cap stems from the high number of foreign students -- especially from China and India -- who come to the U.S. to study.

Foreign student enrollments account for about 70% of the masters and Ph.D. computer science students at Texas Tech University, according to John Borrelli, dean of the graduate school at the 28,000-student university in Lubbock. Last year, the number of foreign students who applied for graduate admissions was more than three times the number of U.S. residents who did so, Borrelli said.

In 2001, the most recent year for which figures are available, foreign students made up nearly 60% of graduate enrollments nationwide, according to the National Science Foundation.

Borrelli said U.S. students aren't as interested in engineering and science studies as foreign students are. "We are not preparing our students out of high school to compete in the area of science and engineering very well," he said.

Most of the students enrolled in the New Jersey Institute of Technology's graduate program are foreign nationals. The Newark-based school has so far received 208 applications for admission in computer science master's degree programs next year, with about 165 of those applications from foreign students, said Stephen Seideman, dean of the school's college of computing science. The foreign students "will do everything they can to stay here," he said.

Typically, foreign graduates of U.S. universities get a one-year training visa after graduation and then seek an H-1B visa.

Rock Regan, former CIO for the state of Connecticut, said state agencies typically don't hire H-1B visa holders because of political concerns. But Regan thinks U.S. schools are "not putting out the number of qualified workers that the industry needs."

Despite the addition of 20,000 more visas for the current fiscal year, the H-1B cap is still less than half of its 195,000-visa peak. Regan suspects that the reduced number of visas will encourage offshore outsourcing of IT jobs. Offshoring "will become more of a reality if people can't get the talent here in the U.S.," he said.

Opponents see any increase in the number of visas as having an impact on the prospects of U.S. students. Norman Matloff, professor of computer science at the University of California, Davis, and a longtime critic of the H-1B visa program, said it's largely a matter of supply and demand. The more H-1B workers there are, the less opportunity there is for his students, Matloff said.

[familyop]

The falling US dollar and the increasing value of the yuan are among solutions to that, BTW. Another solution is homeschooling for those who have the time to do it.

[Brilliant]

I don't disagree with your points, except that I don't think there is going to be an "instant" change of 40%. The Chinese will gradually ease up, I think.

Right now, they don't even seem to realize that they've got a problem, though. They will ease up because they will figure out that if they stop the peg cold turkey, then their dollar denominated investments will become worth a lot less. They've been acquiring dollar denominated assets throughout all this. That's how they've been manipulating the market.

The really assinine thing is that they could keep pace with the dollar without the manipulations, if they simply adjusted their money supply. Of course, their banking system is somewhat primitive, and that may be easier said than done. The reality, though, is that their policy of pegging the dollar could be viewed simply as a way of making sure that they are growing their money supply at the right rate. If they adjust their monetary policy so that the yuan tracks the dollar, then they know they are on track. The problem with that logic, though, is that since they are absorbing dollar denominated assets, it's more the dollar that they are trying to control than their own currency--a very bad idea. The supply of dollars worldwide is gargantuan compared to the supply of yuan.

Given the volitility, I think any large company investing in China would have been wise to hedge in some way. Whether GM has done that or not, I can't say.

[superiorslots]

Quote: I have read many of your posts and you seem to consisently ring one of two bells:
-The US economy is doomed
-Corporations versus the poor workers
Interesting...very revealing.


I live in an area that was very prosperous due to manufacturing. It is now all gone and I have seen what the resulting service jobs have done to my area in regards to standards of living. My brother comes home about once every 2 years and every time he comes home he says the areas looks worse each time.

A new Cabelas opened up at 9.00 per hour and people were going nuts over these part time/seasonal jobs. The local newsgal on the 6:00 news actually said there was a new Sheetz gas station opening up with 3 full time and 15 P/T workers starting at $7.50 pr hour. Whoopee!!!

Yeah I imay have alittle doom and gloom but I see the twin deficits, outsourcing, record debt, pensions plans underfunded etc etc and it's not getting any better.

There should be more people like me that would get the mess straigthened out in Washington.

Not very area of the country is thriving.

[snowsislander]

An easy way to deal with China's monetary/trade policy that doesn't require groveling before trade tribunals and is constitutional - impose tariffs.

Also, the 28% (or whatever) gain from a general tariff would stay in this country; a 28% increase in dollars to China would just make China wealthier. I don't think a 28% increase in prices for Chinese goods will have much effect on the volume of imports from China, since even at an additional 28% cost of goods, they would still be far cheaper than domestic goods, and still cheaper than most imports.

Of course, had I my druthers, I would like to us stop all normal trade with China rather than impose tariffs or insist on China taking more dollars.

[Brilliant]

Of course, another way to look at it is this: The Chinese are doing exactly what the Japanese did in the 70s and 80s. The world did not come to an end.

[simon says what]

One of the better posts I've seen on this topic.

I am increasingly annoyed by those who argue for the status quo in trade by casting those who see the problems as "doom and gloomers". It adds nothing to the sensible arguments put forth by posters like yourself.

Thank You

I am increasingly annoyed as well seeing those who want to discuss economic realities being referred to as "doom and gloomers".

I believe people who resort to this reference are either being deceptive or are Ostrich Optimists who do not want to hear economic truths if they are negative.

[oceanview]

did you read the link I sent you? Its more current then this. do you realize how many of these students are foreign nationals?

[oceanview]

Japan was not the "bottom" in the race to the bottom. they were undercut by china. who can undercut China? perhaps countries like Vietnam for some tasks, but on the whole, there is no nation with the kind of infinite labor supply that china has. and their labor supply is perfectly crafted to take US jobs - slave labor at the bottom forced to do factory work at the point of a gun or starvation, and a well educated workforce segment to take engineering and techincal jobs.

[WilliamofCarmichael]

No way did I intend to question your attitude toward the Chi-coms.

I was thinking of "they collapse and the rebuilding begins" in your statement, "We need to ratchet the pressure on their Chicom govt slow, steady, and non-stop, until they collapse and the rebuilding begins."

IMO there cannot be a rebuilding in the sense that I understood the meaning; i.e., the building of a free market economy after these commies are gone, a true free market.

I became a news hound in June, 1950 when the Judy Canova show (as I recall) was interrupted with the bulletin that North Korea had invaded the south. I remember the reporting (MSM or not) over the decades about the commies' crimes. I truly believe that the criminals cannot be changed by what passes for "pressure" from our current crop of national leaders.

Good idea but we just don't have leaders who have the stomach for it. The "greatest generation" that knew how to win hot and cold wars is gone.

I liked the article. It was factual. I liked the observation that the kids don't play cops and robbers they play "kill the boss." The Chi-coms are indeed scared by the unrest of the tens of millions of unemployed, civilian and ex-military. Economic and banking reforms will put tens of millions more out of work. The Chi-coms need the North Koreans to keep us distracted.

You are right, the article expresses "typical socialist idealism and dreams." Let the Marxists destroy themselves trying to implement one version of socialism or another. We don't have a sustainable will to make it happen.

[NewLand]

First of all, the second link I posted was the ASEE statistics for engiineering degrees awarded in the 2003-2004 year. These are the latest statistics, since the 2004-2005 year is not completed yet, unless I missed something.

So, let's look at the actual numbers of all engineering degrees awarded in the most recent school year:

Bachelor's Degrees By Residency
*Domestic 92.2%
*Foreign Nationals 7.8%

A total of 72,893 Bachelor Degrees in engineering were awarded.

Master's Degrees by Residency
*Domestic 54.5%
*Foreign Nationals 45.5%

A total of 41,181 Master's Degrees in engineering were awarded.

Doctoral Degrees by Residency

*Domestic 42.2%
*Foreign Nationals 57.8%

A total of 6,673 Doctorate Degrees in Engineering were awarded.

Here is the link again for the Most recent 2003-2004 Year In Numbers for those who care to review.

So, I find it interesting, if not misleading, that you only stated the Doctorate Degrees stats, whicch represents less than 10% of the number of Bachelor's and only 16% of the number of Master's, both of which are either overwhelmingly or mostly Domestic students.

Nice spin.

Now, back to the ASEE, whom I believe should be the final authority on actual data. I quote (can't cut and paste off the PDF) from their report on the results from the 2003-2004 (most recent) school year:

Engineering degrees increased at all levels during the 2003-04 academic year, thanks in part to computer science. Bachelor's degrees and Master's degrees grew for the fifth consecutive year. Engineering colleges awarded 72,893 bachelor's degrees, including 9,156 in computer science. Excluding computer science, bachelor's degrees increased by just under 2 percent.

Is the rest of your data this stale?

Uh, care to make a retraction on that?

Perhaps you don't work in "high tech"

I do.

...and are therefore unaware of the fact that the vast majority of venture capital, which used to fund high tech innovation here in the US, has been going to China and India during the past five years?

You may be right, but please provide a source with details. Even if true, this is not the death knell of our technology sector by any means, especially without knowing the projects being invested in and the current or projected ROI. Spending VC $$$ is not the last word, producing results is.

I'd suggest you go back to the drawing board on your doom and gloom scenarios.

[NewLand]

In 2001, the most recent year for which figures are available

Please refer to my recent post #139 for updated figures through 2003-2004 (most recently completed academic year) which provides actual numbers of degrees awarded (more definitive figure than enrollments) in all levels of engineering: Bachelor's, Master's, Doctorate, all disciplines.

The rest of your article references 2 schools which account for less then 1% of engineering degrees awarded...hardly a statistical bell weather.