http://www.iht.com/articles/2006/11/22/business/trip.php?page=2 United States plans full-court press on Chinese High-profile officials to push for changes in economic policies By Steven R. Weisman The New York Times Treasury Secretary Henry Paulson Jr. has enlisted Ben Bernanke, the Federal Reserve chairman, to join an unusual high-profile delegation of cabinet members to China next month to press for changes in Chinese economic policies long criticized by the administration and Congress, officials said Wednesday. The trip, to be led by Paulson, a former Goldman Sachs executive with extensive experience in China, increases the pressure on the Beijing leadership to crack down on piracy, open up its economy to outside investors and allow the value of the Chinese currency to fluctuate more freely, Treasury officials said. These steps, long demanded by Democrats and Republicans in Congress, are being sought by the United States and European countries as a way of reducing China's huge trade imbalances with the West. Because China exports far more than it imports, its reserves of foreign currencies will be approaching $1 trillion in coming months. Bernanke is not expected to join in any direct pressure applied by the Bush administration, officials said. Rather, he is expected to repeat what he and other central bankers have been saying in recent years - that the American trade and current-account deficits with China and other trading partners are not "sustainable" in the long run. Paulson's trip, and the fact that he is to be accompanied by Bernanke, who as chairman of the Federal Reserve is supposed to be independent of the administration, is aimed at getting the Chinese to take Western demands more seriously. But it also has the effect of putting pressure on the American Treasury chief to get results from the Chinese. "This is such a high-level delegation that it's going to raise the bar for China, especially on issues of currency, by demonstrating the breadth of our economic interdependence," said Michael Green, a former director of Asian policy under President Bush. "It's a smart strategy by Paulson, and it's showing the Chinese enormous respect." But Green, a scholar at Georgetown University and the Center for Strategic and International Studies in Washington, added that "by the same token, Paulson was putting enormous pressure on himself to deliver." Bush administration officials say they recognize that in the new Congress, led by Democrats, anger at China will quickly reach a fever pitch if the Beijing government does not take further actions to ease the trade imbalances brought about by the flood of cheap Chinese exports that many politicians blame for throwing Americans out of work. Representative Nancy Pelosi, the California Democrat who will serve as speaker of the House, beginning in January, has been a vocal critic of Chinese economic policies and also of its human rights record. But Republicans in Congress have also declared a loss of patience over what they regard as predatory Chinese economic policies. Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, yielded to pressure from Paulson this year and withdrew a bill that would have threatened China with increased tariffs if it did not let the value of its currency rise in the open markets. A higher value of the Chinese currency, the yuan, would make exports to the United States more expensive and imports cheaper, presumably reducing the trade deficit. But Schumer and Graham said they would come back with another form of the legislation in the coming year if China did not respond more positively to the economic pressures from the United States. In an interview, Schumer praised Paulson for organizing the trip with Bernanke, saying "the more the merrier" when it came to sending a message to Beijing. "Nothing has gotten the Chinese to budge so far," he added. "Taking such a large delegation is a demonstration of how important this is. The liability is that if Paulson goes with all these people and once again brings back nothing, it's going to turn up the heat in Congress." Paulson's strategy, according to his aides, is to engage the Chinese on a broad range of issues so that progress on some might lead to progress on others. The Treasury Department has not announced who is going, but administration officials say the delegation is to include Susan Schwab, the United States trade representative; Energy Secretary Samuel Bodman; Commerce Secretary Carlos Guttierez; and Michael Leavitt, secretary of Health and Human Services. Paulson won approval from President Bush to lead an inter-agency group of these and other officials to negotiate with China on such matters as the piracy of software, name-brand designer goods and pharmaceuticals; and on steps that would allow European and American banks to expand their operations for Chinese customers. On the energy front, the Bush administration wants to join with the Chinese to talk about sharing technology - and possibly encouraging American investment - in conservation efforts and energy-saving equipment. In the environmental area, China has expressed an interest in American techniques for cleaning up air and water. And in health, the United States is eager to help China with immunization and disease- prevention programs. All these steps could lead to the more immediate gains of getting China to adjust its major economic policies that have run up trade deficits with the West. The major steps the United States is encouraging are meant to help the Chinese to set up education and pension systems and social welfare programs so that the Chinese save less and consume more, buying more imported goods. The United States also wants China to free its banking system from political controls and politically driven loans. What the Bush administration can offer China in return, many experts say, is a pledge by Bush to block projectionist measures in Congress like the one pushed by Schumer and Graham. "The Chinese are very unsettled by the results of the election," said Jeffrey Bader, a director of Chinese studies at the Brookings Institution. "They're trying to figure out how much to give to Paulson so Paulson can keep the wolves at bay."
It's ironic how China is pro-Bush but the people are pro-Democrats But anyway, I think it's good we are pressuring them on the trade deficit we have with them. They've got to allow their currency to float.
I doubt that US has many attractive products to China outside of those HI-TECH stuff. Guess what, China isn't even allowed to buy them.
Gonna be tough to do this while on the other end have us try to use them to negotiate with North Korea. It'll be interesting to see how this plays out during the lame duck period because before we would have put the national security angle before the economy. Now, I'm not so sure.
I'm a free trader but I agree that the PRC should let its currency float instead of pegging it to the US dollar. As much as the PRC exports I agree with deepblue and others posters there are many hi-tech products that they should be looking to purchase to aid their own development. The PRC is benefitting hugely now from the trade imbalance but a long term trade imbalance isn't good as they are holding vast amounts of US debt. If they ever want to get anything back on that they should be looking down the road to having more balance between the two economies.
I could be wrong, but I don't think that China is holding back on importing these goods. However, they are still not enough to balance the trade between China and US. I believe that the major grief from US is about the intellectual proterties. The currency issue is another one.
American buyers will be hurt at the end. No job will be created here. Get real, salary over there is 50c per hour. There is simply no way american manufacturers can compete with that. Even if import from China is reduced, the market share emptied will be filled by Indians, Phillipinos, etc, AT HIGHER PRICE! This is like an additonal sale tax. China doesn't let its currency float because there is too much hot money. The same group of people already bet on the appreciation of the chinese currency and then lobby politicians to press china let it happen. What are the chinese doing? Keep the interest on RMB at close to 0%, and let it appreciate 3-5% a year. This way, the hot money invested get no extra profit. Once the hot money is divested, the appreciation will be faster.
The problem is though is that the PRC has created a monetary system that has no value of its own but is only based on the value of the US dollar. While they are letting the RMB appreciate they are doing so in an artificial way rather than reflecting any real value.
HK$, and a few other currencies, are pegged to US dollars. How artificial is that? Real value? There is NO formula that tells you real value. China is doing it the way to ensure no arbitrage.
^ I agree that many people peg their currency to the US dollar, its taken the place of pegging it to the gold standard. That said its artificial because you're not relying on the strength of your own economy but on the strength of another. While this may work for smaller export oriented economies it does create problems for larger economies that also have a fair amount of domestic consumption. The PRC is currently an export economy but given its size and rapid development that might not always be the case and an artificial standard of value or pegging it to another countrie's isn't the way to go in the long run. As noted it pisses off the countries you are importing to but it also creates problems in the long run if your own policies kill the goose that is laying that golden egg by harming the economies of who your export to. Also it is in the PRC's interest itself to import to build up their own economy and to support other economies that are potential markets but that is harder to do if your currency has no real value as determined by financial markets. In the end you are dependent on foreign reserves to do so.
There are a few things here: 1) China wants to let RMB appreciate, but they will only do it on their term, and they will not let arbitragers profit from this procedure. Honestly, 5% appreciation every year is not bad. In about 14 years, RMB/US$ will be cut in half at this rate. The hot money want RMB appreciate 40% overnight so that they pocket 40% profit overnight. That is not gonna happen. 2) a lot of americans think RMB appreciation is gonna do them a lot of good. They are DREAMING. They will only be worse off when RMB appreciate, unless they learn how to SAVE, and not spend 104% of what they earn. If they keep spending at this rate, they will only end up with fewer goods for the same expenditure as RMB appreciates. 3) What chinese want to buy, westerners don't want to sell in fear of chinese catching up on technology. The congress should work on relax the rules to faciliate more export. 4) Notice this year the increase of China's foreign reserve is much slower than the accumulation of its trade surplus. This is because a lof ot chinese foreign reserve is hot money, and they are slowly flowing out. As hot money divest, RMB appreciation accelerates, just like it did this year. 5)countries do things to protect domestic industries. it is not unique to China. US did it to the steel industry 2-3 years ago. Japan has been doing it for decades now. I had conference calls with a couple of Japan funds managers and they both admitted that Japanese domestic market is a big mess because of the protectionist. Yes, China needs to open up more, and I believe it knows it and it will open up more every day. There is just NO need for the congress to blow the problem out of propotion.
Japan, only the 2nd largest economy in the world, is an export-oriented economy, and has been artificially pegging its currency w the USD for over 50 years. it is no accident that Japan's economy enjoyed a metoric rise during the past 50 years. What China is doing is just following suit. don't think you know what you're talking about.
you're implying that the RMB has no real value. if that's the case, letting it float in open market would have no impact on the RMB. it will lead to the ultimate lose-lose situation. run-away inflation in the US; run-away unemployment in China.
IIRC Japan currency has not been pegged to the dollar for a very long time. IIRC2 China has switched from pegging its currency to the dollar to a "basket" of devloped countries' currencies.
I think he was refering to Japan prior to 90's, by then Japan was already the 2nd largest economy in the world.
to re-iterate, japan---pegging its currency against the strongest and stable currency in the world (USD)---successfully penetrated the largest consumer market (from apparel, to electronics, to automotive, to steel, etc.) in the world. Japan leveraged its core competence to compete successfull. Pegging its currency against the USD has catapulted its once worn-torn economy to become the 2nd largest economy (export-driven) in the world. Arguably, it was rising at a pace to surpass the US until derailed by a series of bad investments in real estate in North America, in the2nd largest economy in the world. Here are my observations on the current China/USA economic inter-dependency: China knows its core competence, that it is by far the lowest-cost producer of consumer goods at acceptable quality. It is leveraging its competitive advantage---low cost, acceptable quality, efficient supply chain infrastructure, etc.---to penetrate the largest consumer market in the world. It has been successful. the most effective deterrent against social unrest is employment. the export-driven economy has helped China to create tens of millions of new jobs annually. Unlike their American counterparts, Chinese workers have been able to save ~15% of their wage. This makes for a fledging middle class. Increasing employment (thanks to the export-driven economy), coupled w a build-in insurance against currency speculation (pegging RMB to the USD), adds social stability to a population of 1.3 billion. The fledging middle class is fueling the demand for more domestic consumption, this upward trend will continue the US consumers have a viable low-cost alternative for consumer goods. This viablle alternative has the effect of lowering the cost of living for US consumers. insofar as the loss of US mfg job, because of the relative high wage in the US, the US would have loss the mfg jobs anyway. if not to China, then other low-cost mfg such as India, Vietnam, Phillipine or others the US does not have the cashflow to pay for the trade deficit. Instead, it issues IOUs (US Treasury notes) to China. China has become the 2nd largest holder of US IOUs, and will soon surpass Japan for the #1 spot. This means that, effectively, China is one of the principal financier of US's day-to-day operation---including the Iraq occupation. Other low-cost mfg---India, Vietnam, Phillipines, and other---do not have the financia wherewithals to extend US IOUs, to China's extent. Should China flow it RMB in the open market, its value relative to the USD woul probably rise 17-25%. can US consumer afford that ? China's employment situation would suffer, lessening its ability to extend IOUs to the US. who then will replace China to lend $$$ to the US ? certainly not japan, nor EU. This scenario has the effect of running-away inflation in the US---hurting both US consumers and US business. While it is fashionable to bash China, politicians such as Pelosi, Shumer, King, et al, need to consider to economic consequences--- the ultimate "lose-lose" scenio---of a floating RMB. IMHO, it has more to do with the fact they can't accept the reality that a Communist country is beating the captialistic USA in its own game of capitalism. do you not understand that it is a good thing to have foreign reserves, as compared to having a trade deficit===particulary for an economy that is ~ 27 years old. fyi, the economies of Japan and the USA, at age 27 , were export-driven.
