China runs circles round adversaries

By J Saft
October 5, 2010

If the global currency war was a baseball game, they would have to invoke the “slaughter rule” and send China home the winner.

Motivations and consequences aside, China is so adroit in melding diplomacy, jawboning and action to keep the value of its currency low that you have to feel something approaching compassion for its plodding adversaries from the U.S., Europe and Japan.

China’s latest well played move is its pledge to use some of its massive foreign currency reserves to support poor Greece, which the markets widely believe will default some fine day, European Union support or not.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Chinese premier Wen Jiabao said in Athens on Saturday.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

While China does have an interest in global economic stability, especially stability in currency regimes, this was not a move primarily motivated by a regard for European solidarity or even the principle that cheaters deserve a second chance.

Lombard Street Research economist Gabriel Stein nailed this in a note to clients:

“Fiscal troubles in the euro area mean a volatile and most likely weakening euro. By contrast, support from a large outside player like China is likely to strengthen the euro. But against whom will the euro strengthen? Primarily against the dollar — to which the Chinese authorities have pegged their own currency at a rate generally accepted to be considerably undervalued. (If it is not, why the strenuous opposition to yuan flotation?)”

A weak euro means that Chinese exports to the euro zone become more expensive, hence the support, which is cheap at the price, because, after all, Greece is not currently issuing bonds and talk is, the last time it traded on the exchanges, fetching absolutely nothing.

That China was not in Europe solely on a mercy mission became apparent Monday when it met calls from EU officials for a flexible yuan with counter-calls for stability in major currencies.

Stability in currency markets, which by the way is highly unlikely going forward, is good for China because it makes the task of manipulating the value of the yuan to its best advantage that much  simpler.

“Hold still,” the shearer said to the lamb.


As it is in Europe, so it was in Asia, where Chinese purchases of Japanese government bonds, made in the name of “diversification” drove the yen higher, potentially undermining an already flagging economy. Japan acted in response by buying dollars to drive down the yen, in effect doing China’s currency manipulation for it. China gets a more diversified portfolio, insurance against any fall in Treasuries, and still gets its near-term goal of a continued strong dollar and the exports and jobs that means.

As for the U.S., there seems to be no consensus, at least yet, to take a hard line. The House of Representatives passed a bill that would allow the U.S. to treat undervalued currencies as an illegal subsidy and impose penalties in kind, but this may not make it through the Senate and is unlikely to be signed by the President if it does.

There are two points to be made in China’s defense. First, the stakes for it are arguably higher, its people being poorer and its social welfare net thin. While high unemployment and deep benefit cuts may result in strikes or airport delays in Europe, the equivalent in China could be far more destabilizing.

Secondly, China is like anyone who, having enjoyed a good thing, finds lots of competition arising: unhappy. China for years kept its currency low and its exports high, but now that the bill has come due everyone else wants to get in on the game.

The International Monetary Fund, in its World Economic Outlook, touches on this:

“Because not all countries can have real depreciations and increase their net exports at the same time, simultaneous fiscal consolidation by many countries is likely to be particularly costly.”

No one, at this point, seems to have both the courage and the political will to stimulate when all around them are consolidating, and that means that everyone, almost literally, is going to be trying to export, and is increasingly likely to try to manipulate their currencies to support that effort.

Smaller nations, such as Brazil and South Korea, are either already doing it or making threats.

China’s very success and skill bring with it risks: that its main adversaries are ultimately goaded into taking more extreme and unpredictable action in their frustration and failure.


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The author’s reasoning is illogical on some points. The strenuous objection to flotation is to avoid wild fluctuations and DEVALUATION (inconceivable to short-sighted people but true). The benefit of currency stability is not uniquely beneficial for china, e.g. to “manipulate” any more so than it does for any other country. And his statement of Japan doing the manipulation for them insults the concept of Japanese free will.

“Undervalued currency”, “Currency manipulation” where were all these terms and concepts 10, 20, 30, 40 yrs ago when emerging economies were imploding under western speculators with runs on their currency in Brasil, Argentina, Mexico, Thailand, Indonesia, Vietnam, Mal…aysia, Taiwan, Singapore, etc. etc. etc.???

These terms were nowhere to be found. The emerging economies eventually adapted by pegging their currencies to the dollar to maintain STRENGTH in their currencies. (china is NOT the only country that pegs) Again, the purpose was to instill stability, credibility, and STRENGTH (not weakness) in their currencies.

Now with Europe and America suffering from their own overspending, corruption, wars, bailouts, etc. they need a scapegoat rather than admit wrongdoing. Hence the creation of these concepts to justify the scapegoating. No one forced the US and Europe with their ideal situation of low inflation and low interest rates to invest so poorly and overspend on entitlements and wars.

The creation of these scapegoat concepts is severely flawed. Every time the US historically adjusts interest rates, e.g. to control inflation, it is manipulating its currency. In fact we have declared a “strong dollar policy” for decades, an outright gov’t policy of currency manipulation.

Stability is key. The emerging economies know this, and somehow we don’t. We think shock therapy is good. Pathetic. Only our last president was PRAISING the chinese for maintaining the strength of their currency.

Accumulation of excessive foreign reserves is simply itself an imbalance, they accumulated dollars, they can spend dollars, no need for exchange rate excuses. The real problem is they invest (egads, the horror) while we spend too much.

Posted by mgunn | Report as abusive

to edgyinchina, mgunn and others,

Please note that the hue and cry in the US isn’t about the strength of the yuan; it is about the yuan’s undervaluation.

Posted by ruminations | Report as abusive

How old are you? 5 or 10 years old?

Posted by Jeanmichel | Report as abusive

The US states that the Chines Yuan is undervalued because it runs a trade deficit with China.
On this basis, the Japanese yen, the Korean Won and the currencies of the ASEAN countries are undervalued against the Chinese Yuan because China runs a trade deficit with Japan, South Korea and the ASEAN countries.
This means that the Japanese yen the Korean won and the currencies of the ASEAN countries are even more undervalued compared with the Chinese Yuan.
Why does the US not request these countries to revalue their currencies?

Posted by Jeanmichel | Report as abusive

Way too many “what-ifs” mostly designed to support analysis by someone who obviously is an adherent of the Walt Disney theory of history. Also, someone who apparently thinks nations other than the industrialized West shouldn’t maintain control over their own destiny – rather ask “how high” when the real bosses of the planet order “jump”.

Posted by Eideard | Report as abusive

“China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue…,China will undertake a great effort to support euro zone countries and Greece to overcome the crisis,” Chinese premier Wen Jiabao said in Athens on Saturday.

“Fiscal troubles in the euro area mean a volatile and most likely weakening euro. By contrast, support from a large outside player like China is likely to strengthen the euro. But against whom will the euro strengthen? Primarily against the dollar — to which the Chinese authorities have pegged their own currency at a rate generally accepted to be considerably undervalued.”

You’ve really got to hand it to the Chinese economists and diplomats: choosing Greece, of all places, to bring their Trojan Horse into Europe! Priceless!

Posted by streetview | Report as abusive

A nation of around 310 million people doesn’t have a hope in hell of competing on a level playing field with a nation of about 1.5 billion people. By the traditional bell curve, there must be nearly six million people in the USA with an IQ above 130. In China, there are 36 million people with an IQ above 130, six times the human intelligence resources. In the USA, the government is led by glib, telegenic crowd-pleasers. In China, the government is led by the best-educated technocrats, who reached their positions only on the basis of decades of demonstrated excellence and success.

The Americans promised the G20 they would throw their finance sector mafia in prison for life, and then broke their word. No one in the world believes or cares what they say anymore. Their military is useless and worthless to them; they’ve lost the capability to bomb anyone who defies them ‘back to the Stone Age’. The USA is a failing power, and nothing the Americans can do will stop, or even delay their decline. Struggling in the net of consequences caused by their own hubris only makes them look foolish and juvenile.

Posted by FirstAdvisor | Report as abusive

China needs to play its hand very, very carefully. If it bleeds the US people too much, it may encourage the restlessness there, as the wealthy currently resident in the USA are. That can be very dangerous.

Pundits need to be concerned about unpredictable, political upheaval in more nuclear powers than Pakistan. The goose is turning blue. And that is not Republican blue either.

Posted by txgadfly | Report as abusive

Using monetary tactics and part of a broader foreign policy was the first step in WWI. Don’t kid yourself…no country is playing checkers here. Strategies have been laid out to reach each players grand vision. We’re just getting past the opening and the US is playing a gambit.

Posted by neorealist234 | Report as abusive

This currency war scenario between the countries, I fear, may not lead the world ultimately to adopt gold standard as currency or old barter system?

Posted by vksaini | Report as abusive

all the reputedly best brains in the USA have gone to Wall Street and the outcome was financial cluster bombs with acronyms like CDO and CDS. I fear the same logical minds are at work again and this time the USA is demanding China to let its Yuan appreciate against printed money (the market is expecting another half a trillion for starters) because the USA wants to rejig trade imbalances. excuse me but if one country has per capita income of $US2000 and the other country has per capita income of $US20000 (for the purpose of this argument), surely the USA is not fantasizing about one billion Chinese buying one billion cans of Coca Cola as their ticket out of the economic slump. the real answer is how to get the guy with $US20000 to spend a little less on unnecessary purchases and save a little bit more. but that’s akin to asking the leopard to lose its spots.

Posted by kilosubtorra | Report as abusive