It's Halloween, and the Bush administration is going all-out to frighten Americans into believing China is an evil monster trying to steal their jobs and the future.
Don't let it frighten you. This week, and probably for the next several months as the presidential election gets closer, we're going to hear a lot of noise, especially from Washington, about China's currency -- known both as the renminbi and the yuan -- and that nation's manufacturing policies. It's important that you not tune it out.
Essentially, the administration will try to blame the high U.S. unemployment rate on the Chinese. It's going to claim that Beijing is violating World Trade Organization and International Monetary Fund rules by "manipulating" the renminbi through complex currency transactions in a blatant attempt to keep it undervalued. A purposefully undervalued currency makes a country's exports cheaper than they would otherwise be, providing an unfair trade advantage.
You won't have to wait long to see how this plays out. On Capitol Hill Thursday, the Bush administration's stance toward China will come into potentially explosive view in testimony that could affect everything from the prospect of financial stability in Asia to the value of tech stocks on Wall Street and the price of pajamas in Arkansas.
The venue will be Treasury Secretary John Snow's annual testimony to the Senate Banking Committee on trading partners' currency practices. For years, this has been just another obscure date on the congressional calendar, but since the political wing of the White House decided that President Bush's standing in industrial states would improve if he blamed the decline in U.S. jobs on China, the secretary's appearance has taken on a new level of importance.
A Big Deal Either Way
Technically, the administration is required only to declare whether countries are manipulating their currencies to keep them artificially undervalued. If Snow finds China guilty of unfairly weakening the renminbi, then his team must initiate formal negotiations to resolve the complaint.
Big deal, right? It is a big deal whether Snow -- who has been humiliated by unsuccessful, informal renminbi negotiations for months -- declares the Chinese guilty of manipulation or not.
A positive finding would push the executive branch deeper into a financial Cold War with the world's most populous country, with ever-escalating demands that China believes it cannot meet without destabilizing its social structure. China could retaliate by halting its massive purchases of U.S. government bonds, which helps finance our budget deficit, or by switching gradually to the euro as its reserve currency. Either result would push U.S. interest rates up and potentially stall the global economic recovery. (Asian central banks keep 80% to 90% of their $1.7 trillion in reserves invested in U.S. debt, according to government statistics.)
A negative finding would encourage opportunists in Congress to take up the fight instead, pushing forward on bills to impose big new tariffs on Chinese imports. Not only would that boost the cost of things like children's sleepwear at
, it also could lead to economic brinksmanship around the world. Virtually every major financial crisis in modern history has started with politically motivated protectionism.
U.S. monetary hawks contend that the renminbi is 25% to 40% undervalued, making the price of Chinese goods so cheap that American manufacturers can't compete. Few experts disagree.
Chairman Alan Greenspan, in testimony this summer, said there was "no question" China was "suppressing" the value of its currency. And academics such as George Mason University professor Patrick Mulloy, an expert on international trade law and former counsel to the Senate Banking Committee, believe that Snow "should take on" the Chinese with a finding of manipulation.
Yet skeptics believe that debate over Chinese currency puts the blame for the loss of manufacturing jobs entirely in the wrong place. They insist that we are simply witnessing economic evolution at work and that protectionism would make America weaker, not stronger.
Critics of U.S. policy think confrontationists ignore ample facts to the contrary when they say that if the yuan were to float freely on currency markets from its current peg at 8.3 to the U.S. dollar, the Beijing behemoth would not be in a position to "steal" so many jobs from the U.S. heartland.
For one thing, manufacturing job losses are primarily a historic inevitability propelled by technological advances just like the loss of agricultural jobs was at the turn of the last century.
For another, it might surprise many to learn that China is far from a financial powerhouse: It is deeply impoverished except for a few tiny pockets of free enterprise near the coast; it is ravished by drought and pollution; it has managed to develop no major companies with global markets or brands; and its banking system is incredibly fragile.
China has just two companies in the Financial Times 500, which ranks companies by market capitalization: the state oil company
and the domestically focused
It's not as if the Chinese equivalent of
has enriched itself at the expense of U.S. working people and consumers. It is Motorola and Ford themselves -- and their customers -- that have been so enriched through lower manufacturing costs and lower consumer prices. American, Japanese and other foreign companies with manufacturing operations in China account for nearly half the goods being exported by China into the world market.
When the U.S. picks a fight with China over its currency, it's picking a fight with its own citizens. It's not much of an exaggeration to suggest that the largest Chinese company in the world is Wal-Mart, which makes its popular house-brand goods there.
Foreigners With Money Welcome
In testimony last month before a blue-ribbon panel assigned by Congress to study U.S.-China trade, Chicago economist David Hale pointed out that the major cause of China's booming exports is not an undervalued currency but a surge of what academics call "foreign direct investment." China now has $400 billion in such investment, compared to $497 billion for the U.K. and $480 billion for Germany, according to Hale.
As this investment is expanding by $55 billion per year, Hale says, China will soon have the second-largest investment by foreigners in the world, after the U.S. He notes that China's openness to direct investment is in "striking contrast" to Japan and Korea, which banned direct investment for a half-century to nurture domestic companies and still have comparatively little.
Hale observes that the major complaints from corporate America on China are coming from small- or medium-sized companies that don't have the capital to invest in China or penetrate its market. He concludes that if Beijing simply improved market access for small companies, there would be fewer demands for trade protection or currency revaluation.
Protectionism, indeed, could backfire and delay China's progress toward becoming a terrific market for Western finished goods. Forget about the fearsome image of China conjured up by U.S. politicians focused on making it more of a strategic enemy than partner. In another paper submitted to the U.S.-China Economic and Security Review Commission last month, Peter Nolan, professor of Chinese management at the University of Cambridge in London, made several interesting points about a country we probably ought to be helping, not impeding:
China's population of almost 1.3 billion increases by 15 million a year. Almost 70% still live in the countryside, where agriculture employment is stagnant and real incomes are dropping. There are estimated to be 150 million "surplus" farm workers. Unemployment has increased explosively as a result of reform in state-owned enterprises.
Privatization has led to a wide gulf between the few haves and the many have-nots. Just 0.16% of the population controls 65% of the country's $1.5 trillion in liquid assets in mainland banks.
About 38% of the country suffers from serious soil erosion. The area of desert is increasing at 1,500 square miles per year. In the past four decades, almost half of China's forests have been destroyed, there is a serious shortage of fresh water and water pollution is rampant.
China's industrial growth has obviously led to an expansion of energy-intensive industries. China has overtaken the U.S. as the world's biggest coal producer, accounting for 30% of global output. The ways in which coal is mined, transported and used as a fuel for 70% of electricity generation approximates that of advanced economies before the 1950s, creating a widespread air pollution problem.
China's largest financial firms have been plagued with corruption and saddled with billions of dollars in nonperforming loans. They are nowhere close to Western banks in terms of size or capabilities. Citigroup alone has annual revenue of $93 billion, many times greater than all of China's four big banks put together.
In short, China is more bogeyman than bully in its trade relationship with the U.S. An attempt to vilify it over the loss of manufacturing jobs is short-sighted, giving fuel to critics who believe that the Bush administration has progressed from a militarization of its foreign policy to a criminalization of its trade policy.
President Bush is walking a tightrope as he balances an economic policy bent on antagonizing China with a foreign policy that desperately needs China's help on North Korea. At the moment, it seems aggression is winning out over diplomacy, and one wonders if that could be bad news for investors.
Jon D. Markman is publisher of
StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
firstname.lastname@example.org. At the time of publication, Markman did not own or control shares of any equities mentioned in this column.