Will someone in the United States Congress stand up and thank China for the favor? If the order is filled – for a reported US$6bn – it should roll back the US trade deficit with China by almost a month. A Boeing order, once the great corrector when imbalances were smaller, no longer means what it used to now that the trade surplus grows by US$7bn a month. Added to orders for 737s and other Boeings that China has committed to purchase, the plane maker might eliminate nearly two months' surplus altogether. With 12 months in the year, Washington must find it all very discouraging.
The Boeing announcement came within weeks of the yuan revaluation and its formal and at least theoretical de-linking to the US dollar, and it makes one wonder what other Sino-American deals will be rushed to signature ahead of President Hu Jintao's fall visit to Washington.
The problem with these gestures is that they now seem so paltry contrasted with the gargantuan deficit that they only encourage the Americans to lash out in anger. When US Treasury Secretary John Snow made his early summer visit to Beijing, revaluation was at the top of his wish list. And within a month or so of his departure for home, it came, all 2.1% of it. Hardly surprising, the minuscule revaluation July 21 did little to calm Senator Charles Schumer, one of America's leading China bashers. The Democrat from New York warned that he will still push ahead with legislation that would put punitive tariffs on Chinese imports if the yuan isn't pushed up to a value commensurate with his Technicolor expectation-which was 27.5% before the July 21 announcement.
It usually takes some time, but China tends to respond to US pressure on economic questions, usually with little gestures that grow into bigger gestures. Beijing, for example, replied to American complaints over soaring apparel shipments after quotas were lifted in January by levying tax penalties on exporters. When, as easily predicted, that gesture did nothing to slow the export tide, China agreed (after some convincing) to new limits that capped export growth on different items for three years.
When all is said and done, China's piecemeal opening up was really a series of halting responses to outside pressure. So despite Beijing's staunch words to the contrary, nearly everyone is counting on more revaluations coming in dribs and drabs-the next one coming, some think, before Hu climbs aboard his Boeing 767 and heads for Washington.
So instead of ending speculation, or dampening it, the 2.1% rise only encouraged it, raising the prospect of endless revaluations. As one economist after another has warned, this virtually ensures that hot money will keep pouring in, both foreign-held US dollars, and US dollars borrowed by Chinese in the expectation they can get away with free loans when interest owing is canceled out by successive increases in the yuan. Instead of stability, China seems set on a course of instability.
Stanford economist Ronald McKinnon months ago argued in this magazine for leaving the peg more or less as it was, warning that to fix what wasn't broke risked an economic slowdown on a scale that enveloped Japan for over a decade – a subject he returned to in a post-revaluation comment in the Wall Street Journal last month.
"If the PBC allows only small appreciations…with the threat of more appreciations to follow, then hot money inflows will accelerate," he wrote. "If China attempts further financial liberalization such as interest rate decontrol, open market interest rates in China will be forced toward zero as arbitrageurs bet on a higher future value of the RMB. China is already very close to falling into a zero-interest liquidity trap much like Japan's – the short-term interbank rate in Shanghai has fallen toward 1%. In a zero-interest liquidity trap, the PBC (like the Bank of Japan before it) would become helpless to combat deflationary pressure."
Then he offered this capsule history of what happened in Japan: "from the 1980s into the mid 1990s, Japan bashing was in vogue in the United States, much as China bashing is in vogue today. Back then, Japan had the biggest bilateral trade surplus with the United States and was continually threatened (more by the US Congress than its president) with trade sanctions unless there were temporary 'voluntary' export restraints on particular exports, and the yen be allowed to appreciate. Indeed, the yen appreciated episodically all the way from 360 to the dollar in 1971 to touch 80 to the dollar in April 1995. This unhinged the Japanese financial system (the bubble economy of the late 1980s) and eventually resulted in Japan's unrelenting deflationary slump of the 1990s-its 'lost' decade. Japan has yet to recover fully and remains today in a zero-interest liquidity trap, which prevents the Bank of Japan from reigniting economic growth. And Japan's trade surplus as a share of GNP has not been reduced in any obvious way."
Chinese University of Hong Kong Vice-Chancellor (and fellow Stanford economist) Lawrence Lau and Columbia economist and Nobel laureate Joseph Stiglitz similarly warned in the Financial Times (before Beijing moved to revalue) that it would only egg on the speculators and create instability. In the jointly written opinion, they argued that China's overall multilateral trade was barely in surplus and could easily slip into deficit given its rising oil needs – and it was incumbent on the US to correct its imbalance with China – by doing something to fix its abysmal savings rate.
Predicting China could be in for a season of woeful price instability, Carl Weinstein, chief economist of High Frequency Economics, has said that scrapping the peg looked like a policy specifically devised to bring a flood of foreign currency into the country. "We could not invent a better one," he wrote in his newsletter, which is widely read by the world's top banks.
Weinstein, as other economists did, also complained that China discarded the yuan's dollar peg for a basket of currencies – without divulging what they were. Two weeks after the announced un-pegging, the People's Bank of China did reveal which ones they were-the Japanese yen, the South Korean won, the US dollar and the euro – but declined to reveal their respective weightings in the basket.
The revaluation and de-pegging were designed to placate hysterical trade partners, cut speculation (and stop forex reserves from growing at 50% a year), and also to show the world that China was moving further toward adoption of market principles – and away from administrative decrees.
The revaluation looks set only to encourage speculators, and more hysterics from its trade partners who will keep pressing for more. And by not revealing how the basket is weighted, everyone but the leadership is left in the dark, which leaves Beijing free to issue decrees as before. China cannot afford to go through what Japan went through, not with hundreds of millions of peasants still waiting for their turn at the wheel of fortune.
The shopping continues
CNOOC finally succumbed to political scaremongering and dropped its bid for Unocal. But the battle did a heap of brand-building for China's oil giant. Even viewers of Fox News, who don't get much foreign exposure beyond terror reports and heroics in Iraq, recognize the name now.
Haier, too, pulled out of a competition to buy washing-machine maker Maytag. China, on the other hand, generated some shopping news in the UK: Huawei, China's big name in wireless communications, was preparing a bid for the UK's Marconi, the original name in wireless, as radios were known in empire days. And Nanjing Auto was reported to be taking over MG Rover, although just what it was taking over was unclear: Shanghai Auto had already reportedly secured the rights to make two of the British carmaker's most promising models.
That mystery aside, the difference between China's US and UK shopping expeditions was stark. Both UK companies China was targeting had long since fallen far from the summit of earlier days – while both American companies continued to be substantial players in their respective segments. Chinese companies are unlikely to give up on the US market, though they will have to work harder to avoid spooking Americans, who are easily spooked these days.
"Denying China a shot at Unocal also invites retaliation," warned The New York Times in an editorial, noting that China might buy Airbus aircraft over Boeings to get even, inspiring the US to strike back in a widening spiral of craziness.
"Because China and the United States are co-dependent…it's generally assumed that government and business leaders in each country will always, in the end, act rationally to avoid self-destruction. But an ongoing policy of brinksmanship is itself irrational."
Worthy sentiments. If only they weren't completely drowned out by America's increasingly jingoist media.