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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A very interesting article,I have long wondered when the recent upheavals would lead to a potential trade war/dispute between countries under pressure from within.

Posted by treetop91 | Report as abusive

while china slowly progresses, all these other so called ‘players’, are busy trying to screw each other for every penny they can get. all may be in peril if china decides to play ‘hard ball’ for real.

Posted by hapticz | Report as abusive

A great post by James Saft. However, China’s move is not a pure currency play. As The Telegraph UK reported (see URLs below), China leased one port in Piraeus, Greece and is building another, aiming to create a hub to rival Rotterdam, Europe’s largest port. China is killing two birds with one stone, protecting its currency and its ever-growing exports to Europe. 89/China-invests-billions-of-euros-in-de bt-laden-Greece.html s/europe/greece/7869999/Chinas-new-Silk- Road-into-Europe.html

Posted by saucymugwump | Report as abusive

I saw an interview with the Chinese premier and I was extremely impressed. This man knew US history, knew what was happening in our economy and in China’s economy. We elect a bunch of “movie stars” who don’t seem to have any clues about anything but getting re elected, while the communists in China have intelligent people running their country. Wake up folks, a few more cycles of our system and we will be like Europe, which depends on us for their defense. Who are we going to turn to when China decides it needs our resources and can outgun us?

Posted by zotdoc | Report as abusive

If you only have a hammer, everything looks like a nail. Likewise, if you already have a tone of labels saying “currency manipulation”, it is easy to stick them everywhere.

China is a surplus nation. Surplus nations naturally like stable exchange rates. Before China, Malaysia managed its currency accordingly. Before Malaysia, South Korea did so. Before South Korea, Taiwan. Before Taiwan, Japan. By most metrics, Chinese intervention has been to a lesser degree than many of its predecessors. The reason why it stands out is China’s sheer size.

Even today, Germany is enjoying the lock-in peg among euro countries. Going further back, when the US was the surplus nation on earth, it forced a formal peg on everyone! (Remember Bretton Woods and the Gold Standard?) Furthermore, the US rejected the UK proposal of an independent world currency and made dollar the default reserve currency. Once the US became a deficit nation, Nixon unilaterally junked the Gold Standard, but the dollar still dominates the foreign reserves. Now that’s having your cake and eating it too.

No matter how China (or any other countries) manages the currency issue, it is merely struggling to delay the inevitable in a ultimately rigged game. Whatever surplus it accumulates has to be in the form of the worthless IOU AKA dollar. No matter how skilled a player is, the house (i.e. the one who owns the reserve currency and gets to print $2.5T of it in past three years) cannot lose.

“If it is not (undervalued), why the strenuous opposition to yuan flotation?” Really, you have to ask? How about avoiding artificial volatility created by and for hedge funds? How about focusing energy on real industry instead of Wall Street style finance? How about doing away with the boom/bust cycles resulting from unfettered capital market that has already wrecked Japan and the UK and the US? It is amazing that Americans still automatically associate free market with fair valuation after their free capital market mispriced their free real estate market by trillions of dollars. The rest of the world tends to learn something from mistakes of such a recent nature.

When China pegged Yuan to the dollar at 8-to-1 in 90’s, it was not considered undervalued. The trade imbalance grew over the years by more than 20-fold while the yuan has gone up 20%. Now to blame this on the currency is just shameless. The US got into this mess by mismanaging its own finance and economy, while China made the necessary sacrifice. The latter looks more like the real victim to me since all it gets for its efforts is pieces of paper Bernanke prints at will.

The most ridiculous thing about all this brouhaha is the invocation of the hot-button issue: jobs. Which planet do the US congress and its economist allies like Krugman think we live on? If the yuan appreciates dramatically today, say by 100%, does anyone seriously expect the US trade deficit to go down by any meaningful amount? The multinationals will simply move their factories to India, Vietnam or Indonesia. Americans will not toil in garment factories for $1/hour any more than they will toil in the farm for the same amount. Anyone who think otherwise has been to fantasy land one time too many.

Posted by duduong | Report as abusive

A weak Euro will encourage EU nations that don’t stick to German’s financial discipline to continue with their relentless borrowings, since they can pay back cheap, which ultimately will lead the whole EU to the present US position.

Such damage can happen in US but not in the EU because the ever reliable Germans are there.

In short history of last 10 years the US spent a lot in war and finance. Property was sold in sky high prices which means US property developers got the money from the banks when consumers buy. US Banks sold these loans to others meaning US banks got paid too. Then the US weapons industry should make good money supplying weapons to the US Governments for the wars in Asia.

Now why don’t the US citizens ask where the money is being held by US business elites? In both cases business and war, US Governments borrowed to fund them if not mistaken. Funny the problem is with this and that country when the money was made by the US businesses funded by the US Government.

Posted by biztru | Report as abusive

China is playing chess, while the rest of us play checkers. A US recession can actually help China. They own over a trillion dollars of US debt and the great recession forces the FED to administer QE 2.0, essentially propping up their biggest investment. Chinesse Yuan devaluation will start when they will be unloading US debt.

Posted by beardown | Report as abusive

Well done China, keep on assuming a World leadership role because YOU can afford it

Posted by Pedro07 | Report as abusive

It seems to me that China is helping the U.S., or am I missing something. By strengthening the euro the dollar weakens and U.S. exports become more competitive ,albeit not vis-a-vis the Yuan,given that the yuan is pegged to the dollar. And that peg has started to move a little faster in appreciating against the dollar.

China seems to me to be behaving responsibly for the benefit of its people while indirectly appeasing the U.S. One can only hope that the U.S. would one day grow up and behave as responsibly as China.

Posted by Biscayne | Report as abusive

The elephant in the room is ‘exports’and not the exchange rate. What is being ignored by all players is that western countries have destroyed their domestic manufacturing industries in favour of cheaper imports. Of course the general public wants cheaper goods, but a nation needs to export something to pay for this luxury. The question down the track is what does a nation do if its exports fail or become unwanted internationally? Having destroyed its domestic manufacturing industry there is no option other than to continue importing. And of course when China eventually owns the game, having wiped out all of its competitors, the price of the cheap goods will rise. It happened with Japan. It will happen with China. At that time there will be blame shouted from the top of buildings, but to no avail.
The US prospered from hard working Americans who produced goods and exported worldwide. Contemporary America seems content to make ‘easy’ money, having abandoned its historical formula for success. Sadly, no president or business leader will change the inevitable results.
The US is not alone in this dilema as this is a worldwide disaster in the happening.

Posted by rambotrader | Report as abusive

@ Biscayne

If I didn’t think you were Chinese to begin with, I would suggest you went to China for a reality check and see for yourself how “responsible” China is.

Greeks have been living far above the standards of the Chinese, this for as long as we can remember and still today. The Greeks will continue to enjoy what no ordinary Chinese could ever expect for himself, and yet China comes to the rescue!!!!

No pessimism can be dark enough when such crassness and delusion takes over the world. The Chinese government plays financial games on a global basis and it does not care for its own people, who for the most part are living a life that the West does not consider worth living.

Posted by Neander | Report as abusive

China absolutely is the most responsible country around the world.God,please come to china in person to feel and taste what the real china is before you judge china.

Posted by wandererc | Report as abusive

I think it is very refreshing to see a new mindset coming into play on the global economic and financial scene. The Chinese intelligentsia is adroit, sophisticated and more than a match for the West – so globalisers beware!

Biztru’s contribution hits the nail squarely on the head: both the US and China will benefit from a strengthened Euro. The European economy, on the other hand, will find life more difficult.

Posted by pincopallino | Report as abusive

The answer is in the article. Leave China’s currency low. Europe and the US slightly devalue through congressional infrastructure spending. Everyone grows…. The dispairity will equalize in about 100 years. By then we will realize that we are all in it together.

Posted by dr.bob | Report as abusive

Of course the Chinese have little motive to end their currency manipulation. Its to their advantage.
Think, Saft – THINK: How can you demand that someone end a practice that has been (and continues to be) so profitable? One that you (US) encouraged in the first place?
Every time some ‘other’ country makes a run economically, we (who invented the game) demand that the rules (that we made) be changed so that only WE can profit… Just as the US has manipulated its currency at the expense of other countries for the past 50-60 years, the Chinese have learned from our play-book, and are now emulating us more than we do….. And we don’t like it.
The US can’t print more and more money – which has the effect of lowering its value – then cry out that the value of other currencies is too high… It makes for great sound bites in an America that is frustrated, unemployed and generally lacks self confidence, but its bad politics forcing bad economic decision making.

Posted by edgyinchina | Report as abusive

And I forgot: Your friend, Lombard Street Research economist Gabriel Stein cannot be an economist of any stature, if he doesn’t understand the social cost of destabilizing an entire country by an instant currency revaluation. Have him study the Plaza Accord, and what it did (and continues to do) to Japan….

Posted by edgyinchina | Report as abusive


I’m living in HongKong with a per capita GDP higher than Greece. However the median household income for Greece is higher than that of HK. So as long as Globalisation exists the jobs will flow from high costs (or less competitve area) to the lower costs area. That is a fact unless you can stop the globalisation which benefits the mutlinational companies most.

We have jobs moving from HK into China for the same reason. However on the other hand there are more tourists from China to spend their holidays here as they climb the ladder and what make you think that the Chinese should be poor forever.

As both HK dollar and the renmenbi are pegged to the US dollar, RMB has been forced to appreciate more relative to HKD in the past 2 years. The goods and services in HK becomes cheaper for the Chinese tourists and they just flood our city.

However, the appreciation of the RMB against HKD brings inflation and the food & clothes from China become more expensive. So when you play with the currency game, remember it’s always a double-edged sword. Forcing the RMB to appreciate considerably will bring pain and chaos to the majority common people and only benefits the currency traders (gamblers) most.

Our trading business has been badly hurt by the fluctuation of Euro with ups and downs of 30% in half year. If that is the reasonable way of currency valuation, show me the logic.

Posted by Ben_s214 | Report as abusive

Why not all the governments go back to the gold standard and all the problems of the exchange rate will be gone. I think it is fair to everybody.

Posted by juliguli | Report as abusive

The author is avery good observer but qualified financial or economic experts of to day’s standard. Equally the statement made by gabrael stein to its clients is a biased abd reflects his faulty judgement. In my view he needs to go to china and do a refresher course in Economics. Each of the economists in the western world wish that chinese govt revalue its currency so that the chinese goods become expensive and therefore uncompetitive. China on the other hand has been taking steps over a period to support and stregnthen the domestic economies of several countries. The economic power support their buying power of imported goods. They are not adopting the outmoded method of revaluating their own currency so that their goods become expensive and therefore less competitive. At least the chinese are not mucking about with their reserve currencies and not replacing it with Gold.
Rex Minor
PS It was a mistake that the new usa administration brought in the wall street experts in his economic team who were incompetent for the new situation in the world.

Posted by pakistan | Report as abusive

PS correction, the author is NOT repeat NOT expert of today’s standard.
Rex Minor

Posted by pakistan | Report as abusive

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

[…] ‘China runs circles round adversaries’ Posted on October 6, 2010 by investorsportugal 10/10/05/china-runs-circles-round-advers aries/ […]

Posted by Investors Portugal » ‘China runs circles round adversaries’ | 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