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.

[Southack]

"That is why the USA will continue to be the leading economic force and technological power for the forseeable future. Just because we lose some of the lower value manufacturing industries does not mean we are losing our position of leadership *or* mortgaging our future, as some of the other doom & gloom posters like to wring their hands about."

Yes, that's all true...but it's only true because the low-cost, simple industries were the first to fall to Chinese dumping. The longer that China under-values its Yuan, the more U.S. industries will fall.

Likewise, because China is losing so much money to under-value their Yuan in order to conquer American industries, the more that China is suffering.

Which is to say, the longer this currency manipulation goes on, the MORE damage it will do to the global economy when it all unravels.

China's banks are in trouble. Various U.S. industries are in trouble. Continue with the cause of those troubles and you will exacerbate the eventual pain.

[simon says what]

the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives

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.

Yes !! Apologize for the insult of pointing out the obvious.

Let me ask you this. The technology business will remain strong ? How are technology stocks doing lately ? Not so lately...say 5 years ? Transportation business ? How are those airlines ? How's Detroit been doing ?

[Brilliant]

"Business losses..."

You don't get my point. What business losses? All the American TV companies that will be driven out of business? All the American radio companies? All the American camera companies?

I've got news for you. There aren't any American TV companies, radio companies, or camera companies. They went out of business back in the 1950's. Even Kodak relies on Chinese cameras to compete with the Japanese cameras. We don't make any of that stuff in the US. The Chinese are competing with the Mexicans and the Japanese, maybe the Koreans. So why do I care? Frankly, I don't.

Of course, there are a handful of pathetic American textile companies that employ primarily illegal immigrants from Mexico. They'll be hurt... But why does that justify the action you are proposing, which is bound to hurt the consumer in a big way?

[Southack]

The business losses to which I'm referring are business *investment* losses.

In other words, money that was invested into China rather than into the U.S. because American firms realized that they had to join 'em, couldn't beat 'em...ala Kodak investing into China to make cameras rather than investing that money here.

...And the money goes into China because China is manipulating their currency, which distorts the Market picture (making China appear to have lower cost goods than they really do).

Chinese exports should have been at least $75 Billion more expensive last year...and would have been in a Free Market (that's how much China lost on the currency markets to keep their Yuan devalued).

So business money is going into China thinking that they can get a piece of that $75 Billion cheaper per year manufacturing...and as long as China keeps paying to prop up the Dollar (i.e. to keep their own Yuan under-valued), then those businesses will be correct.

But that's $$ Billions $$ of annual business investment money that is going into China that shouldn't be, and wouldn't be going there were it not for China's currency manipulation.

This is setting the stage for global repercussions when the Yuan is finally forced higher. Companies such as General Motors with multi-Billion Dollar investments into China are going to get BURNED when the Yuan pops up 40%...making everything exported from China instantly 40% more expensive.

And the longer that this re-evaluation is delayed, the more damaging the repercussions will become.

[NewLand]

with what industries are we going to be this "leading economic force"?

Why don't you review this list and tell me sector by sector, category by category, industry by industry, what the numbers will look like in 5 years, 10 years, 20 years? Then, we will have something specific to talk about. Until then, you are merely playing Chicken Little with no facts, just hysteria.

Gross Output by Industry in Current Dollars

[simon says what]

Just because we lose some of the lower value manufacturing industries does not mean we are losing our position of leadership *or* mortgaging our future, as some of the other doom & gloom posters like to wring their hands about.

I hereby deem all those using the crutch name calling argument of "doom & gloom posters" will be from this point forward referred to as Ostrich Optimists because heads in the sand and asses in the air will not change economic realities.

[NewLand]

Which is to say, the longer this currency manipulation goes on, the MORE damage it will do to the global economy when it all unravels.

I agree with you, and I do agree with the Bush admins actions, although I would categorize them as 'appropriate', not 'required'. Don't mix up my comments about China's actions around their currency (where I mostly agree with your position) and the future of the USA industry/economy versus China, where I TOTALLY disagree with the doom-and-gloomers on here who are parroting the same message we heard 20 years ago, and 20 years before that, etc.

Continue with the cause of those troubles and you will exacerbate the eventual pain

Again, I primarily agree and believe we should address those. One way is to call for a real valuation of the yuan. But the other way is to continue to innovate and stay ahead in the high value businesses. As you stated, we have lost some 'low end' industries, which we would have seen go somewhere anyway. It's OK, as long as we keep feeding the funnel from the top.

Until China produces equivalents to Microsoft, Oracle, Cisco, Boeing, ADM, P&G, Intel, Merck, Coca Cola, International Paper, HP, Xerox, etc etc etc by the hundreds, I am not overly concerned about our leadership.

[WilliamofCarmichael]

China must repair its corruption-ridden and bad-debt burdened banking system.

How can they do that without closing down tens thousands of worthless, nonperforming-loan-supported Mao-era "enterprises" and throwing tens of millions more people out of work -- and avoid revolution?

Come on, "free traders!" Your buddies need your money. They need your investment to cover their corruption and bad-debt. What's a few tens of billions dollars more?

It's for the children's toys, clothes, computers, TVs, and advanced nuke missiles. Ooops. That last one is for the PLA, sorry.

[NewLand]

How are technology stocks doing lately ? Not so lately...say 5 years ? Transportation business ? How are those airlines ? How's Detroit been doing ?

Stock prices are not the primary measure of the total strength of the US economy. The US is by and far the world leader in technology R&D, product development, sales, distribution and licensing.

Airlines are service businesses, and the conversation I was in was around manufacturing businesses. Does China have a competitor to Boeing and Lockheed?

Detroit has been hurting for a long time, and quite honestly, got what it deserved. In general, most automobile manufacturers are not doing too well worldwide except for a select one or two in each section of the world. I predict the major consolidation will continue (i.e. Ford buying Volvo, GM buying Saab, Daimler buying Chrysler) with a Toyota-GM merge in the cards.

This is all part of business...only the strong survive.

[NewLand]

I hereby deem all those using the crutch name calling argument of "doom & gloom posters" will be from this point forward referred to as Ostrich Optimists because heads in the sand and asses in the air will not change economic realities.

Congratulations!

[familyop]

Thank you for the information in comment #28. ...history in the making.

[NewLand]

I understand your points, and don't necessarily disagree with much of it, but the alternative to your extreme analysis would have been to boycott or tariff or not trade with China, and watch them become a giant North Korea.

So, I see this as a game of chess which we can always take out their 'king' if necessary. They cannot do the same.

We need to ratchet the pressure on their Chicom govt slow, steady, and non-stop, until they collapse and the rebuilding begins.

Checkmate.

[Southack]

"I agree with you, and I do agree with the Bush admins actions, although I would categorize them as 'appropriate', not 'required'."

Yes. Prudent steps to take for a variety of valid, appropriate reasons, but not mandatory for an economy as large and robust as our own. For the U.S., this is no crisis. There is a little pain and it should be addressed... and it is being addressed.

Life is good.

[lucysmom]

They are in a rut. Mao doesn't hold a candle to Greenspan.

Mao is long gone, China's moved on. Try to keep up.

[Soothing]

Agree.

[simon says what]

Stock prices are not the primary measure of the total strength of the US economy. The US is by and far the world leader in technology R&D, product development, sales, distribution and licensing.

But they are A primary measure. A business produces something or provides a service to make a profit. The larger the profit, the more attractive the stock of the company. The stock market is a discounting mechanism. A steady or dropping stock price is not indicative of future growth. To squeeze more profits out of the same revenues, technology companies are outsourcing to China and India. I work in the tech industry and I have seen it at dozens of customers.

Airlines are service businesses, and the conversation I was in was around manufacturing businesses. Does China have a competitor to Boeing and Lockheed?

Is Boeing all by itself going to counter the job losses or revenue losses of other manufacturing moving to China ? The argument you were having with oceanview was this....

oceanview:the US economy is drivien down to only service jobs, government jobs, lawyers, real estate agents, and corporate executives

you: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.

My argument is with the tech industry offshoring and laying off workers and the other manufacturing businesses you mentioned declining (accept Boeing of course), where are the new jobs going to come from ? You asked oceanview not to insult us but his argument was right on.... the top job growth positions the past few years have been real estate, government, and retail service. Here is the government's own projections on top job growth positions between 2002 and 2012:

Registered nurses
Postsecondary teachers
Retail salespersons
Customer service representatives
Combined food preparation and serving workers
Cashiers, except gaming
Janitors and cleanersGeneral and operations managers
Waiters and waitresses
Nursing aides, orderlies, and attendants

Where are all of these upper level manufacturing jobs you are talking about ? If we do not push China to revalue their currency now, they will suck us even drier and then revalue when it best suits them. We need to clean up our own house in addition by promoting and rewarding savings in this country. We are a country living on debt now. Debt is a means to the illusion of wealth but it will not build long term wealth for us as a nation.

[simon says what]

accept = except

[NewLand]

Its happening already - parents are pouring their kids into law schools, engineering programs are collapsing.

Let's see what the stats say:

Engineering on the Rise: Engineering Degrees More Popular Now

Atlanta (September 8, 2003) — Across the nation, engineering is gaining in popularity at all degree levels and bachelor’s degrees could be on their way to surpassing the 70,000 mark last reached in 1988, according to a recent survey by the American Society for Engineering Education (ASEE).

The ASEE reports bachelor’s degrees awarded in 2001-2002 increased 3.4 percent to 67,301, marking the third year of growth nationally at the undergraduate level. Overall, bachelor’s degrees increased by 7.9 percent since the 1998-1999 academic year.

The latest enrollment figures show the upward trend continues at Tech. In the 2003 fiscal year, 1,286 bachelor degrees were awarded in engineering. Tech’s strengths in its undergraduate recruitment program have led to the Institute’s status of being the largest producer of engineers in the country. In turn, that’s helped the College of Engineering maintain its focus on quality and diversity, rather than quantity, said Narl Davidson, associate dean of engineering.

“Our undergraduate enrollments have grown in the past two years due to the success of the Georgia Tech Regional Engineering Program at the GT-Savannah campus and due to the recruiting efforts of the Women-in-Engineering program here in Atlanta,” Davidson said.

The ASEE study found that growth in undergraduate degrees is not consistent across the disciplines. For example, in the past three years, biomedical degrees nationally jumped 49 percent at the bachelor’s level, while chemical engineering degrees decreased by 11 percent. Electrical and computing engineering bachelor’s degrees rose 18 percent.

The ASEE confirms this growth trend continued through 2004... The Year In Numbers

Law School Application Trends...(Data from LSAC Reports, 1989-2005)

From about 1994 through 2000, the number of applications to U.S. law schools was fairly constant. In 2001, however, there was a large increase in the applicant pool -- about 10% nationally. This increase was not evenly distributed across law schools; some had increases of nearly 50%, while a few had a slight decrease. In 2002, the increases, and the extremes of variance, were even greater. In 2003 there was an increase in apps, but law schools were better at dealing with it, so there was less chaos. In 2004 there was a slight downturn, which seems to be continuing in 2005.

- - - - - - - - - - - -

So, you were saying?

[NewLand]

Please review the data on Post #65 and follow the instructions I put forth there.

Your data is strictly anecdotal about layoffs and revenue losses as our economy continues to grow, unemployment remains low, and as far as those 'growth' jobs you listed below, those probably were similar to 10 years ago and 10 years from now. Those jobs represent low paying, high turnover jobs that are not the broad measure of our economic power. Aside from the perennial nurses, nurses aids and teachers, some of those jobs could even be tied to growth at manufacturing sites (i.e. janitor, CSR, cashier).

As stated by others on here as well, our economy is way too large, wide, deep, and diverse to have the dire impact from China as predicted by some.

Until I see some data to challenge that, I see these fears as more emotion than reality.

[NewLand]

Yes. Prudent steps to take for a variety of valid, appropriate reasons, but not mandatory for an economy as large and robust as our own. For the U.S., this is no crisis. There is a little pain and it should be addressed... and it is being addressed.

Exactly. We are on the same page.

Life is good.

Amen. And on that note, good night my friend.