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.

[NewLand]

Yeah I i may have alittle doom and gloom

I had a feeling you were viewing this through a 'local' filter that included some personal issue. I understand and sympathize. I truly do. But I also am trying to rally you and others who are 'down' about our future and our competition with China.

Do not despair. We can and will prevail. Our culture, our capitalist roots, our will to win, our fierce competitive nature, our love of liberty will provide us with the winning formula versus China.

That, along with a superior military and God's help! :-D

[NewLand]

Shame on you. None of us said the sky is falling. Only our manufacturing is suffering against unfair practices from China.

My entrance into this discussion began with the comment from another poster on post #6 that went as follows:

where does it end? the answer is, it doesn't end, until the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives.

I'm glad to know that you understand this problem to be just that, a problem, not an obituary. Our manufacturing base has been attacked before and will be attacked again.

I believe we are robust enough in our innovation, diverse enough in our industries and sectors, and just plain smart enough to defeat the unfair trade practices of a Commie government that will not be able to withstand their own artificial economy.

Let's fight China in the market of innovation and value. And, we still have the significant military advantage!

[Southack]

"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."

It was clever then and it is clever now, for *many* of those involved...and it was painful then and it is painful now to many players.

Likewise, such currency manipulation policies can eventually crumble, ushering in the Mexican Peso crisis or the Argentinian inflation crisis or the Asian currency crisis of 1997 or the Russian default on sovereign debt in 1998, etc.

It's Market Interference, on a grand scale, by governments. Such interference benefits many and costs many others. This should not be applauded.

It should be fixed, and I'm very appreciative of the Bush Administration for the way that they are handling it, and have been handling it for the past 4 years, long before China's clever little trick blows up into something larger.

[NewLand]

The data you referred us all to refutes your own arguments.

Whoa now, let's slow down a minute. I entered this discussion on this thread because another poster made this comment in post #6:

where does it end? the answer is, it doesn't end, until the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives.

My objective and my comments were to show that statement to be irrational and false. I have done that. I presented this data to show the depth of our economy, incuding manufacturing. As you stated, and as the data shows, manufacturing output grew slightly in the 5 year period between 1998 and 2003. Non-services and non-government output still accounts for 37% of our total. It was 41% in 1998. It is shrinking, but as a % of total in a growing economy. And, you seem to have forgotten one little detail that occured in that time frame:

September 11, 2001

Despite an act of war on our own soil, in the financial center of the world, in the middle of a recessing 'bubble' from the dot.com / dot.bomb of the late 1990's, we still have been able to maintain a strong, albeit not robustly growing, manufacturing base.

Yes, 74.4% of growth comes from outside manufacturing, but that is to be expected. The world is shifting towards a smaller heavy manufacturing economy and a larger role for technology, information, finances, and services. I believe this is a good thing and unstoppable. It is not a zero sum game. Eventually, many of the low level manufacturing done in China will either be; losing/loss of demand, or too expensive once their currency gets a real market value.

We will defeat China's unfair currency AND labor practices, one way or the other, either through the 'laws' of economic and market forces, or through our own 'force'.

But we will prevail. Until then, we should be more focused on things like; improving our elementary and high school curricuulums, lowering corporate taxes, providing better incentives for research and development, strengthening our capitalist ideology and dismantling socialist creep. Let's get and keep our own house in order, and China will eventually become our ally as their Chicom government collapses under their own artificial weight.

Think more like this...

[NewLand]

"they collapse and the rebuilding begins"

What I meant by that is all the 'buddy system' that socialism/totalitarianism breeds (i.e. corruption). That has to be weeded out and it takes years to do so. The government can fall in one day since they are visible. The rest takes time.

My experience in China is that there is a general sense and trend toward capitalism and freedom. Maybe not exactly as we implement and know it, but within their own culture, they have a better chance to make it work than the Russians IMO.

[Southack]

"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."

There is only so much that you can "hedge" before you become a hedge fund rather than a manufacturer.

If mere hedging was the answer, then GM could so do...for its current American products.

But Wall Street would rightly go nuts over the level of currency hedging required to price all American GM vehicles in Euros, Yen, or Yuans.

That much currency hedging would become your main line of business and your main focus of risk, rather than your "core" manfacturing.

...And there is also a transaction cost that is added into the equation. That much hedging would find that the fees for the contracts would become significant, and adding such costs is the antithesis of becoming more efficient.

Furthermore, you'd be doing *all* of the above simply in reaction to China's current currency manipulation.

Better to end that currency manipulation and get back to a free market than to have businesses *adding* costs for hedging in order to cope with government intervention in the Market.

[HolgerDansk]

First of all, the second link I posted was the ASEE statistics for engiineering degrees awarded in the 2003-2004 year.

True. But that's what makes it irrelevant. The key issue is declining enrollments, which will show up in 3-4 years as a decline in the number of degrees awarded. You're looking at the end of the pipeline, where everything still looks fine, while I'm warning you that the input into the pipeline dropped off by 19% in the 2002-2003 academic year, and then further declined another 10% last year.

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.

You're comparing apples with oranges. An undergraduate engineer does not do the same job as one with a graduate degree. The latter do actual innovation and research, are responsible not only for the majority of patents but also business startups. And again, the unwillingness of American undergraduate engineers to continue their eductation is telling -- why put in the time and money when there's no reward here?

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.

Sadly, as far as I know nobody keeps statistics on this particular topic, though I can tell you that of the three pitches I've consulted on over the past three years, in 31 of 33 VC meetings, the first or second question was "how do you feel about moving to China (or India)?".

Techology innovation is a pipeline process, and it's important to remember that the output of the pipeline tells you nothing about the health of what goes on inside.

[NewLand]

The Chinese are doing exactly what the Japanese did in the 70s and 80s. The world did not come to an end.

Exactly, as I have previously stated and detailed in Post #100 as well as #'s 15,26,33, 67.

Hike!

[BlackElk]

We should destabilize and destroy the Chicom regime and any would-be totalitarian successor. We should defend Taiwan and put Red China's second hand navy on the bottom of the sea by fast attack sub if the Chicoms attack Taiwan and maybe if they don't.

I certainly agree with you that tariffs and withdrawal from these internationalist trade schemes is step one back to sanity on trade. Tariffs are far superior to income taxation, payroll taxation, VATs, property taxes, etc.

[AmericanVictory]

Why is it a good idea to allow them to prop up their bad banking system? A free floating currency would expose its flaws and the flaws generally in their industrialization along the lines of Mussolini's Corporate State, a sort of main chow for the party cow system.

[familyop]

Here's an interesting chart from what appears to be a pro-immigration site (Migration News, UC Davis, California).

[snowsislander]

Why is it a good idea to allow them to prop up their bad banking system? A free floating currency would expose its flaws and the flaws generally in their industrialization along the lines of Mussolini's Corporate State, a sort of main chow for the party cow system.

I don't know if that would happen.

In general, if the yuan gains in value, then we will have to send more dollars to get the same volume of goods from China.

Since I think our import volume is very likely to stay the same (since I don't believe that even a moderate increase in China's prices will move them into the range with other countries) it means that there may well be many more dollars going to China to prop up their banking sector.

[groanup]

Hike!

All of these isolationists and alarmists are blaming the loss of American jobs on lack of tarriffs and low wage labor in the developing world.

I talk to business owners who can't find even minimally skilled labor. I heard one say that the lowest wage he pays is $20.00 an hour and he has to get up early enough to call his workers and get them into the shop every morning. You hear stories about people who don't show up for work and can't understand why they get fired.

I'll bet you in China they get up. If they don't they don't eat.

Tarriffs? Exactly what will that do? Create demand for domestic products? So what? Union labor gets cranked up again and the factories start smokin'. So what? Just how much are those domestic products going to cost after domestic labor is factored in? The only way tariffs will work to increase domestic jobs is if the cost of goods skyrockets. Is anybody aware of why companies seek out cheap labor? It's to keep the cost of goods low and be competitive.

[familyop]

The dollar fell a little again today. ...only found the news from Bloomberg, so far, which publication won't let us post news from it.

[familyop]

Ah here's one. ...early morning news late in the day.

Dollar rally flags before inflation data [Dollar is falling again.]
http://www.freerepublic.com/focus/f-news/1405967/posts

[Euro-American Scum]

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

I'm sure China is just scared to death about this in general, and of George W. Bush in particular.

/sarcasm

[simon says what]

And, you seem to have forgotten one little detail that occurred in that time frame:

September 11, 2001

It is pointless to condescend by assuming anyone on FR has forgotten 9/11 or its effects.

Whoa now, let's slow down a minute. I entered this discussion on this thread because another poster made this comment in post #6:

And I entered the discussion because you responded to the poster with this comment in post #15.

Please, do not insult us with such nonsense. Technology driven business, logistics driven business, transportation business, etc, PLUS all the infrastructure support required for those businesses, will all remain strong.

When I disputed your argument you called my facts "strictly anecdotal" and referred me to review the facts from the link you provided in Post #65. I reviewed the data from Post #65 and provided detailed analysis of manufacturing losses including the industries you spoke of above. Your response was to request "we slow down" and simplify your argument back to a statement I did not address in response to your Post #65.

You continue in this latest post to ignore the facts. Facts obtained from the very link you provided. Technology manufacturing has shrunk. Transportation manufacturing has shrunk. Below is each subcategory of manufacturing data and the associated percent increase or decrease between 1998 - 2003. Again, this is the data you provided for all of us in Post #65.

Wood products: 1.43%
Nonmetallic mineral products: -5.80%
Primary metals: -22.77%
Fabricated metal products: -3.88%
Machinery: -9.48%
Computer and electronic products: -4.46%
Electrical equipment, appliances, and components: -14.16%
Motor vehicles, bodies and trailers, and parts: -2.53%
Other transportation equipment: -5.18%
Furniture and related products: -1.31%
Miscellaneous manufacturing: 22.67%
Food and beverage and tobacco products: 8.00%
Textile mills and textile product mills: -15.99%
Apparel and leather and allied products: -19.36%
Paper products: 2.89%
Printing and related support activities: -5.03%
Petroleum and coal products: 77.88%
Chemical products: 9.61%
Plastics and rubber products: 12.43%

Yes, 74.4% of growth comes from outside manufacturing, but that is to be expected. The world is shifting towards a smaller heavy manufacturing economy and a larger role for technology, information, finances, and services.

Actually 98.19% of the 1998 - 2003 growth came from outside of manufacturing. The 74.4% figure was the top 6 areas of growth. I do not know how this is to be "expected". We should expect that Government, Real Estate, and Services to be the future source of our economic growth for the nation ? Our country built its' wealth from our historically unmatched manufacturing capabilities. Manufacturing produces wealth because the product is something tangible. I could scratch backs for a dollar but I have provided nothing tangible to the economy. At the macroeconomic level, services transfer wealth while manufacturing creates wealth.

Between 1998 - 2003 Manufacturing dropped from 24.2% of out Gross Output to 19.8% of our Gross Output. Do we really want this to continue in this direction ? I have no problem with our businesses closing if we can not compete on a level playing field but China's fixed currency does not provide a level playing field!

Look, I do admire a positive approach to our country's future and belief we will prevail. I just believe optimism is effective only when it is based in fact. To simply say our capitalist nature will prevail when another country is using parasitic policies to steal our wealth is naive. China maybe a strong ally someday but with today's circumstances it does us better to also remember this is a country that uses force to repress its' citizens, has payed influence money into our election campaigns, and done nothing to protect our intellectual property to name but just a few.

Ronald Reagan said it best... Trust but verify. I cannot trust that China is our friend or our economy will benefit from their fixed currency because the facts don't verify.

[A. Pole]

We should destabilize and destroy the Chicom regime and any would-be totalitarian successor.

Sowing the chaos is wrong and sinful. Totalitarian regimes are born out of disorder. Freedom is born from the order and virtue.

Instead of promoting international supervision of national currency we should protect the integrity of nation states. Use tariffs.

[NewLand]

It is pointless to condescend by assuming anyone on FR has forgotten 9/11 or its effects.

I did not mean to be condescending, just pointing out the event that had the largest single impact on our economy in the last 50 years. How much can we account for 9-11 in these numbers?
-1%?
-2%?
-5%?
-10%?

Not sure anyone knows for sure, but it did impact our economy and thus the volume of our output.

You continue in this latest post to ignore the facts.

Please note that my latest post focused on the fact that overall, manufacturing gross output was up 1.8% from 1998-2003. Despite 9-11. Even you confirmed that in one of your posts. That is a long way from everyone being a lawyer or real estate agent or whatever else we are supposedly becoming.

I will concede that you are correct (because the data is what it is) when taking the breakdowns of individual segments as you have done. I stand corrected.

What we don't know is how much of these drops are due to lower unit pricing to maintain market share, or lost market share. Some of both I presume.

I believe China's artificial economy is nearing it's apex. The announcement by the Bush Admin this week is the first shot across the bow. The EU will follow, who collectively (I believe) has recently become China's #1 market. China's Chicom charade can't, and won't, go on forever.

I have stated all along on this thread that I am against China's fixed currency and have suggested several opinions about how and why we should do something about it. I am not a China lover, I am an American. Optimist. Capitalist. Realist.

I have accomplished my primary objective here, which was to 'shout down' the naysayers and sky is falling crowd. You have made your point, which I concede, regarding the loss in individual sectors, some of which I stated otherwise as remaining strong. How much 9-11 has impacted those and how much they will recover in the near future is unknown. Let's agree that China is a major economic competitor, using unfair currency and labor practices, and the USA needs to attack these practices consistently AND improve our own competitiveness from the ground up.

Ronnie would be happy with that.

[groanup]

Dollar rally flags before inflation data [Dollar is falling again.]

Dollar is up again tonight. Just thought you'd like to know. The dollar has broken through all of its resistance levels and is in a bonafide bull market. Will it last? IDK.