Posted on 05/18/2005 6:23:41 AM PDT by TigerLikesRooster
By Andrew Balls in Washington
Published: May 17 2005 19:31 | Last updated: May 17 2005 19:31
The US Treasury, in its twice-yearly report to Congress on exchange rates and trade, stopped short on Tuesday of accusing China of currency manipulation but made clear it expected revaluation within six months.
The conclusions sparked an angry reaction from those legislators who have lost patience with the Treasury's gentle diplomacy on China's exchange rate. The report, however, marked a clear hardening by the administration. It said: “If current trends continue without substantial alteration, China's policies will likely meet the statute's technical requirements for designation [for currency manipulation].”
Seeking to cast the problem in terms of global imbalances, rather than the bilateral US-China relationship, it said: “The fixed exchange rate that China now maintains is a substantial distortion to world markets, blocking the price mechanism and impeding the adjustment of international imbalances.”
John Snow, US Treasury secretary, said China had made ample preparations for a shift in its currency regime, and there was no excuse for further delay.
He also sought to clarify US demands, saying Washington was not calling for “an immediate full float”. Instead, he said, China should take “an intermediate step that reflects underlying market conditions and allows for a smooth transition when appropriate to a full float”.
This step should be “substantial”, a senior Treasury official later added, saying that a 5 per cent revaluation would not satisfy the US or quell rising protectionist pressures in Congress.
The administration has been under pressure from Congress and US manufacturers to respond more aggressively to the trade deficit with China. Officials are alarmed at a bill put forward by Charles Schumer, a Democrat senator, that would impose heavy sanctions if China did not revalue in six months. Tuesday's report in effect sets a similar deadline, though without an overt threat of retaliation. Many China experts have suggested threats will only delay Beijing's avowed intention of changing its currency regime.
Mr Schumer said: “It is clear from this report that something is wrong in our trade relationship with China, but the Treasury Department seems to be unwilling to say that.”
The National Association of Manufacturers said it was disappointed China had not been cited but “the language in the report is about as hard-hitting as it can be without actually citing China”. Singling out China would require the administration to enter talks with Beijing over its currency peg.
The Treasury pointed out it had been involved in discussions with Beijing since 2003. The US has not accused a country of currency manipulation since China was last named in 1994. The report stressed the benefits for China of allowing its currency to rise, to allow it to run policy based on domestic needs rather than an exchange rate target.
Mr Snow said on Tuesday a shift in the exchange rate peg was in China's own interest to help prevent protectionist policies in the US Congress.
Ping!
just an FYI of something to keep an eye on Ping
Gutless demagogery. If they had a pair they'd be going after all the tigers, who rampantly manipulate their currencies.
However, someone posted a pretty good defense to the notion that we should force a China repegging, which made a good case for the idea that as long as China and the Asian lowballers want to play, we should enjoy them transferring their wealth to us. Since the commodities all have greater value than China is actually getting for them in currency, and as long as China keeps buying our debt with yuan, it's losing money twice, once in selling at a slimmer profit than the market would bear, and then again in buying the dollar debt that won't be able to pay off at that interest level without a substantial devaluation.
I'm not 100% on currency markets, but it sounded pretty good to me.
Well, when U.S. default on foreign debts or foreigners liquidate the debts anticipating default, U.S. economy will tank badly as well. Both foreigners and U.S. would hurt.
Yes if they truly are keeping their currency artificially low, then they are subsidizing us and others. Its hard to believe though, considering China has a pretty big trade deficit with the rest of the world.
Infact their total exports last year were around 590 billion, and their total imports were 560 billion.
They have been buying US debt as a way to invest the surplus, which they have to do, the way the currencies work. But since the US dollar depreciated against the rest of world currencies so much in the last couple years.. The Chinese lost something like 100 billion dollars in real wealth.
Helping to subsidize our government spending.
Infact their total exports last year were around 590 billion, and their total imports were 560 billion.
How is that a deficit? Looks more like a overall surplus to me and you don't take into consideration all of the foreign investment being poured into China and all of the benefits of a exceptionally robust economy.
I believe that the poster is referring to trade excluding China-U.S. trade when he refers to "rest of the world", not to simply all of China's foreign trade.
However, I am not sure how well this will hold in the future. If the current pattern of the last few months holds, China looks to make more like $60-80 billion this year -- and maybe a lot more if there is another big burst of high surplus months like at the end of the year.
I suspect that the majority of any PRC trade deficit is due to the massive buildup in their offensive military capabilities, which is by their own choice.
What "statute"? Does the reporter himself even know, or is he just trying to bluff his ignorance?
Who said they'd default? What will happen is they WON'T default--they'll just do what the Chinese are doing, devalue in a big way. And the Federal Reserve will have to deal with it, because there is essentially no other way out of this mess palatable to the politicians. Think about it. They won't raise taxes--they'll get voted out. They won't cut spending--they think they'll get voted out. Accounting parlor tricks won't change the balance of the national debt. Eventually the baby boom will have a hand out and Gen X will leave or simply quit paying into the system. I know I've already done that (legally, of course).
And they're going to lose even more when the U.S. defaults on the debt or depreciates its currency to pay it (which I think is what will happen). Americans won't accept the taxes necessary to sustain the welfare state into the baby boomers' retirements.
Well, depreciation of the dollar against the yuan is exactly what we are asking the Chinese to allow. Such appreciation of the yuan is going to make China more wealthy, just as when Japan allowed the yen to become stronger. It will also likely mean that we will be sending more dollars to buy the same constantly increasing volume of goods from China.
As to defaulting, if we were to ever make such a move, the entire global system would lock up. I am not sure what could unwedge it, but it would hideously unpleasant for us.
"It will also likely mean that we will be sending more dollars to buy the same constantly increasing volume of goods from China."
We only disagree in one place, and that is here--we will be buying LESS from China, because the value of the dollar will buy less. And that is part of why Japan's economy went into the crapper as it got so paper "wealthy," because it had to retool to accommodate a higher cost for the products it produced. Obviously, it's not that simple, since China will now be the primary producer of a lot of that crap we'd be unable to afford after devaluation, and some purchases are necessary--but we agree neither default nor devaluation will be a good thing for the U.S.
Yes, we agree on most of the major points. And of course, we can only speculate about events in the future.
My own guess is based on the observation that imports don't actually seem to track exchange rates. For instance, our purchases from Japan seem to have very little correspondence with the yen / dollar rate. In fact, in some of the years where the yen was at its strongest, there were record imports. Here are the values from 1991 through 2004:
| Year | Number of yen needed to buy one dollar | Imports from Japan to the U.S. in millions of dollars |
|---|---|---|
| 1991 | 125.25 | 91,510 |
| 1992 | 124.65 | 97,413.7 |
| 1993 | 111.89 | 107,246.4 |
| 1994 | 99.83 | 119,155.8 |
| 1995 | 102.91 | 123,479.3 |
| 1996 | 115.98 | 115,187.1 |
| 1997 | 129.92 | 121,663.3 |
| 1998 | 115.20 | 121,845.1 |
| 1999 | 102.08 | 130,863.8 |
| 2000 | 114.90 | 146,479.4 |
| 2001 | 131.47 | 126,473.1 |
| 2002 | 119.37 | 121,428.6 |
| 2003 | 106.97 | 118,036.6 |
| 2004 | 103.78 | 129,594.7 |
Notice the progress from 1991 to 1995, the yen grew quite strong (only needing 99.8 yen in 1994 to purchase $1), yet imports from Japan increased markedly.
Yet from 1995 to 1997, the yen grew weaker, and imports held steady.
Again, from 1997 to 1999, the yen grew strong and imports increased.
1999 to 2001 saw the yen grow weak, and imports did indeed hit a peak in 2000, but then imports were weaker in 2001 despite a far weaker yen.
From 2001 to 2004, the yen became quite strong, and indeed imports generally dropped from 2001 to 2003, but then note 2004, where the yen was at its strongest (only taking 103 yen to buy $1), yet imports from Japan were at their highest in the 2001-2004 period.
Now, one would think that since Japanese goods are generally competitive in price with other countries and with our own that there would be more price influence from exchange rates. Yet that does not seem to hold.
This however is not true for China, which has a major advantage in prices with markedly cheaper goods than any of its major competitors. I personally guess that China has a lot of pricing power, and that we will continue to buy increasing amounts of goods from them even if there is a mild appreciation in the yuan.
But it's just a guess. It could certainly be wrong, and the future has a way of surprising us all at times.
My own feeling is that our imports tend to track the strength of our economy. If our economy is steaming forward, as it started to do a bit of in 2004, then I think we tend to see more imports. While that doesn't correspond perfectly with our imports from Japan (failing with the 1991-1993 years where we were in a weak economic period but imports from Japan grew strongly), it does seem to make for a somewhat stronger correspondence in my opinion.
I thought I'd check to see what the dollar converted to in yen, given the exchange rate, which might make more evident the 'real' impact of exchange rates was on Japan, and then compare the rates of exchange to the trade in dollars and yen (divided exchange by 100, multiplied yen by 100, and divided dollar by 10 to get a close enough number to watch the tracking). If you do that you can see a definite relation to the exchange rate and sales. I don't know exactly what it shows, though. It seems like it shows that as the rate dropped imports picked up, and from there, whenever the rate rose to a level that it crossed the line with dollar imports, the rate dropped. That seems odd, unless there is manipulation going on--and of course, there is.
Even under your scenario, America would go into real economic mess, not just the Chinese who accumulate dollars which would be increasingly worth less. That was the point I tried to get across.
"Even under your scenario, America would go into real economic mess, not just the Chinese who accumulate dollars which would be increasingly worth less. That was the point I tried to get across."
I don't think anyone will "win." But I'm not sure who I'd rather be, the Americans with all the stuff and no money to buy more stuff, or the Chinese with no stuff, no money, and all the manufacturing implements to make more stuff.
I think I'd rather be in China's shoes...but it's still a close bet.
Hmmmmmmmmmm...time for some letter writing and phone calls?
Not sure
I remember hearing a Senator on the floor the other day talking about a bill regarding China trade .. I can't remember which on it was though
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