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China’s Currency Manipulation About to Cause an Global Economic Trade War?

Economics / Global Economy May 30, 2010 - 03:07 AM GMT

By: Bryan_Rich

Economics

Best Financial Markets Analysis ArticleTim Geithner, Hillary Clinton and 200 other American bigwigs visited China this week.

First on the agenda: China’s position on the rising tensions between North and South Korea.


With the rest of the major economic powers of the world standing against the actions of North Korea — a nuclear threat run by an oppressive regime — a neutral standing China poses a reasonable concern for future global stability.

Another significant topic Geithner was hoping to make headway on was China’s currency policy. But China had little to say on the matter.

China’s currency continues to be a subject the U.S. is willing to tap dance around diplomatically. Because when the gloves eventually do come off, U.S./China relations could rapidly collapse.

That’s why China’s alignment on the Korean peninsula tensions is of particular significance …

It puts the catalysts in place for potential fallout between China and the Western world, which could mean economic war and perhaps military war ahead.

Despite the smile, Geithner couldn't get the Chinese to say much about their currency policies.
Despite the smile, Geithner couldn’t get the Chinese to say much about their currency policies.

I think China’s currency policy represents too big a risk to global economic recovery and global stability for Washington to continue granting a stay. So today I want to revisit two of the arguments I’ve laid out in past Money and Markets columns to explain why we should worry about China, despite the headlines about it being an engine of global growth.

The first is …

China’s Currency Manipulation Poses a Roadblock to Sustainable Global Economic Growth

The G-20, the IMF, the OECD — all of the major institutions and central banks of the world have been harping on the importance of repairing global imbalances over the past year … and for good reason. When they do this, they’re talking specifically to China.

Over the last 14 years, China’s economy has grown a whopping eight-fold, to $4.9 trillion, and it has quickly soared to become the world’s third-largest economy.

During the same period, the U.S. economy has only doubled in size.

As far as currencies are concerned, the dramatic outperformance of the Chinese economy relative to the U.S. economy would normally be reflected in a much stronger Chinese currency.

But China controls the value of its currency. They allowed it to strengthen only 18 percent during those 14 years — a mere drop in the bucket, keeping the advantage squarely in China’s court.

Moreover, since the financial crisis and global recession kicked in two years ago, China has returned to a peg against the dollar, artificially keeping its goods cheap for a weaker U.S. consumer and undercutting its export-centric competitors.

As long as China continues to control its currency, global trade will remain lopsided.
As long as China continues to control its currency, global trade will remain lopsided.

Here’s the problem: The global trade imbalance driven by China’s cheap currency is a recipe for more frequent boom and bust cycles. So this issue has to be addressed.

Then there is the …

Threat of Protectionism

Ultimately, the rest of the world will have to choose action over diplomacy. That means imposing sanctions on China and trade restrictions on Chinese goods.

But the problem with protectionist activity is that it tends to bring about retaliation, and it becomes contagious. That’s exactly what happened in the Great Depression. And it’s what brought global trade to a standstill.

Today, with unemployment sustaining high levels, the political support to act is there. Many would think that “standing up to China, is standing up for us.”

You see, when jobs are tight the perception by most workers towards globalization becomes more negative. And studies show that during these times, the number of people who favor the idea of higher tariffs on imported goods increases considerably. As it becomes increasingly evident that China will not play ball on allowing its currency to appreciate to a fair value, geopolitical tensions are bound to elevate, and protectionism will likely follow.

And given the sovereign debt crisis that’s already underway, protectionism is yet another risk to the global economy that increases the probability of another bout with recession.

In fact, protectionism has historically put fragile economies in a deeper and more prolonged crisis …

I want to show you a chart of the S&P 500 from the Great Depression years. This gives you a clear understanding of why protectionism is so dangerous.

Chart

As you can see, the stock market topped in 1929 and fell 45 percent in just three months. Then, it had a sharp correction, recovering 47 percent from the November ‘29 low.

In June 1930, two U.S. Congressmen, Smoot and Hawley, championed a bill to slap a tariff on virtually every foreign good. And that was the catalyst for the second leg down … a massive plunge in the stock market and arguably the catalyst for the Great Depression.

Since April 15, Treasury Secretary Geithner has been “on the clock.” He’s past due on a currency report he owes Congress. In it he is expected, under recently adopted more stringent rules, to publicly name China a currency manipulator. And with that, a can of worms would be opened.

As an investor, it’s always important that you anticipate plausible scenarios. Because if a China conflict scenario plays out, you can expect the outcome to be bad for global growth, bad for global stocks, bad for commodity demand and likely good for the continued safe haven appeal of the U.S. dollar.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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Comments

gAnton
30 May 10, 10:14
Hypocrisy, Thy Name Is . . .

Because the US dollar is the "world currency". the US receives much criticism from other countries for its currency antics, and in fact the days of the dollar being the world currency are quite likely numbered. While I don't having any quotes at hand, I have read many responses of US politicians to this criticism which in sum is "It's our currency, and we'll do what we want with it".

For years, US businesses have been buying and importing cheap from abroad and selling dear at home, and US companies have been moving their factories abroad to take advantage of cheap foreign labor and lax environmental regulation. Now that our monumental private and public debt no longer permits unlimited US consumption and unemployment is very high, our politicians want to recreate a manufacturing sector of our economy.

You can't have it both ways. If you want unfrettered free trade, and given the economic disparity between rich and poor countries, you must accept the fact that our labor is not and cannot be competitive with that of poorer countries. Recreating a manufactoring sector in the US without trade restrictions is little more than a politicians wet dream.


GenEarly
31 May 10, 08:34
"China's Currency Manupilation"

"China's Currency Manipulation"????? Is this the Pot(USSA)calling the Kettle black? Who is manipulating currency? Anything, Anything Geithner,Hillary, Obama, and the Money printing FED is for; I'm against! Who is inflating our money supply,pushing bailouts,government socialism? The Chinese? Who is being a monetary conservative? The Chinese,and they are villains for controlling their own money independent of the World Banking Cartel? When Chinese communists are the primary loan source for the USSA and we complain about their banking practices the world is truly upside down.


jmc
02 Jun 10, 14:54
china currency manipulationup

China currency manipulation not a roadblok to global economy but for china and Asia , otherwies u better know what happned with Russia,iraqe,vietnan, and recently with Europian Union, u know better tha me,who is behind fall of EUR and if Europian Union not aware, i give free advise be carefll oterwise a day come with in year eur collapse and E.U will be go into history books.


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