Renminbi, dollars and markets
The exchange rate has been another sticky issue in Sino-US relations. The U.S. has been advocating for a quicker appreciation of the Renminbi for some time now. Chinese scholars who have researched the issue at length maintain that in today's globalized world, sharp movements in the exchange rate of one country have very little effect on another country's trade surplus or deficit. General market forces and comparative advantages and competitiveness among trade partners exert substantially greater influence on a country's balance of trade.
The competitiveness of a country's economy is of course determined by many factors, but it is an obsolete and disproven argument in international trade theory that a marginally stronger currency of one trading partner alone is enough to close a large trade deficit.
On June 4, 2011, the Daily Telegraph published an article, "A Sudden Rise in the Yuan Would Solve Nothing" by Malcolm Moore. In the article Moore argues that the long-term beneficiaries of a stronger Renminbi would not be American and European companies but rather the factories of Vietnam and Bangladesh. In the short term, the author says, a sharp upwards movement in the Chinese currency would simply cause a spike in the price of America's baseball caps and Nike shoes. "The main victims of a rapid currency appreciation would probably be companies like Apple -- their enormous profit margins would melt away," he wrote.
A stronger Renminbi would certainly dull the price edge Chinese manufacturers currently enjoy in the global market. But a brighter side to an appreciation would be the increased imperative to produce more value-added, higher technology products to move up the industrial value chain. Such changes to China's industrial structure would strengthen the Chinese economy but must be made over a longer period of time that a sudden appreciation would allow for.
China has been carrying out consistent reforms and opening-up policies for 32 years now. It has been a member of the World Trade Organization for 10 years and officially recognized as a market economy by more than 80 countries, but the U.S. and E.U. refuse to grant China this status. This lack of recognition has been detrimental to relations between China and those two economic superpowers.
Only by being recognized as a market economy can China's exporters move away from the anti-dumping (selling exports below cost) lawsuits launched against them. For a country whose economy is deemed non-market, the price of a product in the home market is not taken as the good's "normal value." A constructed price in the adjudicating country is used in the calculation of the good's fair value. In this manner, Chinese companies, which battle in some of the most competitive markets in the world, are wrongly accused of dumping.
In the three most recent China-US strategic dialogues, the US has promised to step up its efforts to recognize China as a market economy. Three years have passed and it's still "all talk and no cider."
The US economy has long been plagued with high fiscal deficits, runaway debt and a burgeoning trade deficit. These problems are only getting worse as the U.S. and world financial and economic crises and the slow recovery from them severely dent U.S. government income.
In order to cope with the crises, the US government implemented a financial relief program and several economic stimulus packages that, although regarded as necessary at the time, have only worsened the government's fiscal situation.
Since the beginning of the new millennium, China's foreign currency reserves have grown significantly. Part of this increase has come from China's continued purchasing of US Treasury securities, and this had contributed to the stability of US financial markets and helped expanding U.S. firms secure cheap credit before the financial crisis.
In March 2000 China held $71.4 billion of US Treasury securities, less than Britain and one fifth of the amount held by Japan. By September of 2008, China had surpassed Japan to become the biggest foreign holder of US Treasury securities.
In 2008, the worst financial crisis in half a century erupted in the U.S. and caused the most serious economic contraction witnessed since the Great Depression. As the crisis hit, China rapidly increased its holdings of US Treasury securities in order to facilitate the U.S. Federal Reserve's injecting much-needed liquidity into money markets.
According to data released by the US Treasury, China's holdings of US Treasury securities grew from US $518.7 billion in January 2008 to US $1.1753 trillion in October 2010. Even by the end of July 2011 China's holdings had exceeded the US $1.1735 trillion offered in President Barack Obama's two economic stimulus packages. Seen in this light, China helped to fund U.S. policy makers' measures to fight the effects of the financial crisis.
These actions by China to sure up the U.S. financial system should not be overlooked or distorted by the media into something sinister. It is a base truth that China-U.S. economic and financial cooperation has supported growth in the U.S. economy and reaped benefits for its consumers. The economic systems of the two countries have become so closely intertwined that they have become interdependent. The renowned historian Niall Furguson has termed this interdependent state of affairs "Chimerica." As the economy of this transatlantic entity roars on, further strategic cooperation between governments is needed.
The leaps and bounds China has made in its modernization have benefited the U.S. economy and allowed its citizens to continue to enjoy a high standard of living. Nevertheless the biggest beneficiaries of this 32-year development drive are of course the 1.3 billion Chinese people who represent close to one fifth of humanity. China's rise out of poverty towards prosperity is not over yet, but the progress it has made so far is truly remarkable.
The author is a senior research fellow with the Center for US-China Relations Tsinghua University. The article was translated from the Chinese by Wang Lijun, an associate professor at the Capital University of Economics and Business.