China fears "social and economic turbulence" if it balances currency

As G20 Summit Nears, China Is Unlikely to Budge on Currency

Excerpts:

The idea of "rebalancing" the world economy is simple. Before the financial crisis, some advanced countries (led by the United States) were overspending, and some poorer countries (led by China) were oversaving. The two offset each other. The big spenders ran large trade deficits, and the big savers ran large trade surpluses. Now the financial crisis has dampened the overspending. If the big savers don't increase their spending, the world economy faces prolonged slow growth. Countries may battle each other for shares of that weak demand by managing exchange rates, subsidies, or tariffs.

This is a formula for economic strife, whether called "currency wars," protectionism, or economic nationalism. As wealthy countries wrestle with stubborn unemployment (9.6 percent in the United States, 10.1 percent in France, 20.5 percent in Spain), it will become harder to resist policies that favor local businesses and workers, especially if other countries are doing the same. Avoiding this future is the central issue facing leaders of the Group of 20 economies when they meet this week in Seoul.

...

In many ways, China's sophisticated economic management is admirable. Periodic warnings that a popped real-estate "bubble" would trigger a broad slump have (so far) proved hollow. When housing prices get too high, notes economist Nicholas Lardy of the Peterson Institute, the government raises interest rates, down-payment requirements, and taxes on speculators (buyers of second, third, or more properties). "These let the air out of bubble," he says. Housing prices moderate or fall. Similarly, China alters its exchange rate to sustain rapid economic growth by regulating demand for its exports.

But now this model is encountering political and economic limits. It's not just Americans who resent the unfair export advantage of an undervalued currency; Europeans, Japanese, Mexicans and others are also unhappy. Although no one has imposed tough import restrictions, these are no longer unthinkable. Meanwhile, China's high savings rate frustrates domestic spending. In the United States, gross national saving is about 15 percent of GDP; in China, it's about 50 percent. Savings normally go toward new factories, machinery and offices. But China's domestic needs for these aren't large enough to absorb all that saving.

...

That's why it needs more consumer spending, lest it export more to compensate for lack of domestic demand. Economists Lardy and Prasad have long advocated measures to increase Chinese household income and spending: a more generous safety net to limit saving for health emergencies and old age; higher bank-deposit interest rates so that consumers would earn more on their accounts; and requirements for companies to pay dividends and not reinvest most retained profits.

The Chinese know this. They even embrace the goal of stimulating consumer spending and are trying to do so. But until they succeed, they won't relinquish the crutch of an undervalued exchange rate. "Do not work to pressurize us on the renminbi rate," Prime Minister Wen Jiabao recently warned. Exporters would close; workers would lose their jobs. "If China saw social and economic turbulence, then it would be a disaster for the world." Jobless workers elsewhere may find this argument unpersuasive.

If China resists global rebalancing, it won't happen regardless of what this week's communiqué from Seoul pledges. The omens seem unpromising. The United States has let the dollar depreciate to cut its trade deficit. Because the renminbi is pegged to the dollar, the depreciation actually improves China's export competitiveness against some countries. All this looks less like rebalancing than a dogfight —among China, the United States and others—for competitive advantage.

Comment: If I understand this correctly (and perhaps I don't), if China rebalances its currency it could face unemployment and those unemployed workers ... well you know!

The dollar? Our Problem!

China warns US against making yuan dispute a 'scapegoat' for a flagging economy

Excerpt:

Yao Jian, a Chinese Ministry of Commerce spokesman, rejected US complaints as unfair. “It's totally wrong to blame the yuan for the Sino-U.S. trade imbalance,” he said, “The Chinese yuan shouldn't be a scapegoat for the U.S.' domestic economic problems.”

The artificially weak Chinese currency, which some analysts say is trading up to 25pc below its true market rate, has become a growing political issue in the US where it is blamed for giving Chinese exporters and unfair advantage at the cost of millions of US jobs.

However China has repeatedly said it cannot afford the costs of substantially re-valuing the yuan at a time when global demand for its exports remains weak and the recovery from the global recession remains fragile.

“Job losses would hurt the Chinese economy and domestic consumption. A relatively large yuan appreciation would definitely hurt Chinese exports, so a stable yuan exchange rate is needed for domestic consumption and the stability of the world economy," Mr Yao added.

The dollar? Someone else's problem

Excerpt:

Amid the dollar rout of the 1970s, Treasury Secretary John Connally famously told a group of fretting Europeans that the greenback "is our currency, but your problem." If you read between the lines, that's also more or less what Federal Reserve Chairman Ben Bernanke said yesterday as he made the case for further Fed monetary easing.

Mr. Bernanke broke no new ground in explaining why he believes inflation at less than 2% is too low and why the Fed must encourage greater inflation to reduce the 9.6% jobless rate. "Inflation is running at rates that are too low [his emphasis] relative to the levels that the [Fed Open Market] Committee judges to be most consistent with the Federal Reserve's dual mandate in the longer run," he said. That dual mandate is to maintain stable prices and low unemployment, and Mr. Bernanke's message couldn't be clearer that cutting the U.S. jobless rate is now Job One at the Fed.

We were more struck by what Mr. Bernanke didn't say. In a nearly 4,000-word speech about inflation, the Fed chief never once mentioned the value of the dollar. He never mentioned exchange rates, despite the turmoil in world currency markets as the dollar has fallen in anticipation of further Fed easing. He never mentioned rising commodity prices or soaring gold, and his only reference to the recent increase in the price of oil was by way of dismissing it in the context of overall low inflation.

The chairman's message is that the Fed is focused entirely on the domestic U.S. economy and will print as many dollars as it takes to reflate it. The rest of the world is on its own and can adjust its policies as various countries see fit. If other currencies soar in relation to the dollar, that's someone else's problem.

Comment: Yup! Fix our own economy by cutting government expenses and balancing the budget. Make the $ worth something!