U.S. and China must both give way in currency war

September 23, 2010

Tensions over the cheap yuan are running high amid Chinese Prime Minister Wen Jiabao’s visit to New York. Japan’s deliberate weakening of the yen further aggravates China. The irony is that America, too, might be said to be pursuing a weak currency policy. And there are other, quieter, victims in the currency wars.

Currency strains are proliferating because global growth is scarce. The United States is not recovering fast. Many American businesses and politicians accuse China of taking away American jobs. A congressional committee may vote for trade sanctions on China on Friday. Quarrels could get nasty and lead to reprisals.

American critics of China have a case. The country’s trade deficit with China was $25.9 billion in July, more than half the total. China froze its exchange rate in 2008 to be a global Wal-Mart: a cheap shop when world spending was tight. Only in recent weeks has it allowed a little yuan appreciation. But China, too, has pressing priorities. Wen warns realistically that a 20 to 40 percent appreciation of the yuan, as American lobbyists want, could close Chinese companies, send rural workers back to their homes and threaten “major turbulence in Chinese society.”

As the two major players tussle, others are getting hurt. The Federal Reserve’s intimation of more money printing this week has driven the dollar down. The currency is cheap in yen. And the euro, at $1.33, is priced high, making exports expensive. Yet Europe, too, needs growth — desperately so in its uncompetitive periphery economies. And other Asian currencies such as the Malaysian ringgit have been strengthening against both dollar and yuan.

Global compromise is needed. China should allow the yuan to appreciate more. Doing so would help China’s growth be more balanced. But the United States must be patient about the pace at which this happens. For the dollar, too, is cheap. And the big trade deficit cannot be blamed entirely on a cheap yuan. Euros and yen aren’t cheap but Americans keep buying more European and Japanese cars.


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First, the article is objective and realistic in its assessment.

Current FX market – on daily basis – is more than four times or $4 trillion or more. Tell me who are the main players dealing on FX markets, if not US corporate and banking firms? Why?

International trade changed when Nixon got US off gold standards -> back during double-digit inflationary period right after APEX took over global crude oil price monopoly and increased it 4X.

The USD has benefited under GATT/WTO rules because emerging markets trade in dollar (invoices) denomination.

US/Fed has been, in fact, depriciating dollar value over a period of time now – for good domestic reasons.

The EU-27 and Japan don’t think it is competitive global market when dollar value can make their exports expensive.

Mainland China’s international trade is a recent global phenomenon. And it has liberated more than 50 million Chinese from abject poverty – from the country-side.

It’s false economic argument to think that revaluation of Yuan will somehow reduce American dependence on goods made in mainland China.

Germany sells BMW and other expensive luxury items on US market not because they are cheap – principally because there is demand for their product quality.

Mainland China has (now) understood the global trade regime under WTO and seeks to benefit from its access, including recognition as a *market economy* by US/EU.

Trade discrimination is a tool which can be used by both sides – by-the-way.

Posted by hariknaidu | Report as abusive

what a load of crap this issue with currency manipulation. Only people who do not read news from non-western sources would comply with the argument about how China is villainous market manipulator compared with US and Europe which bailed out is bank systems with government money. As well, the subsidy that the US gives to its farmers is heretic of a free economy!

Give me a break, you wan to milk developing countries of their cheap labour to finance your innovative companies, and then you point your missiles at them so that they cannot earn their keep. Capitalist? Right!

Posted by ckwebbit | Report as abusive

[…] Tokyo and Beijing, a move certain to ease frictions between the powers. Source: Financial Times U.S. and China must both give way in currency war Currency strains are proliferating because global growth is scarce. The United States is not […]

Posted by Also sprach Analyst » Things to read for 24 Sept 2010 | Report as abusive