China undervalues its currency in order to gain competitive advantage around the world. Everyone understands that and it needs to change, but the question in the United State is how to effectively change it. The Obama administration is taking the gradual approach:
The Obama administration on Tuesday declined to label China a currency manipulator after seeing recent increases in the value of the yuan compared to the dollar.
The decision angered some manufacturing groups, which have accused Beijing of artificially holding down the value of its currency to gain trade advantages. A cheaper yuan makes Chinese goods less expensive when they are shipped to the United States. It also makes U.S. goods more expensive in China. Both could increase the U.S. trade deficit with China, which is on pace to hit a record high this year.
The Treasury Department said the yuan has appreciated 12 percent against the dollar in the past 18 months, after adjusting for inflation. In addition, the department said in a semi-annual report that China promised at two high-level meetings last month to make the yuan’s exchange rate more flexible.
Still, yuan is “substantially undervalued” and its appreciation “is insufficient and more progress is needed,” the report noted. The department will “press for policy changes that yield greater exchange rate flexibility” and “level the playing field.”
This will likely end up being a campaign issue as Mitt Romney and other GOP candidates are hammering Obama over China. But progress is being made.
Executive Vice President Andy Palmer announces that Nissan will establish a global headquarters for Infiniti in Hong Kong from April 2012. This is a big move for the automaker and demonstrates the huge importance of the Chinese car market, particularly for luxury brands like Infiniti.
Tom Friedman writes often about China, and his latest column addresses current hot issues like currency valuation, manufacturing and trade. But this paragraph grabbed my attention:
But we also need to stop thinking that a middle class can be sustained only by factory jobs. Thirty years ago, Hong Kong was a manufacturing center. Now its economy is 97 percent services. It has adjusted so well that this year the Hong Kong government is giving a bonus of $775 to each of its residents. One reason is that Hong Kong has transformed itself into a huge tourist center that last year received 36 million visitors — 23 million from China. Their hotel stays, dining and jewelry purchases are driving prosperity here. The U.S. Commerce Department says 801,000 Mainland Chinese visited the U.S. last year, adding $5 billion to the U.S. economy. More Chinese want to come, but, for security reasons, visas are hard to obtain. If we let in as many Chinese tourists as Hong Kong, it would inject more than $115 billion into what is a highly unionized U.S. hotel, restaurant, gaming and tourism industry.
The United States needs to get beyond some of the over-zealous security restrictions imposed after 9/11 and let as many Chinese and other tourists come visit as possible. Tourism has helped to sustain Europe for years, and the U.S. needs to take advantage of this as well.
Many are interpreting this move as another push by the Obama administration to push China on trade.
President Barack Obama has chosen Commerce Secretary Gary Locke to succeed Jon Huntsman as U.S. ambassador to China – signaling a more focused White House effort to press Asia’s emerging economic superpower on trade issues, according to administration officials.
Obama could make the announcement as soon as Tuesday, a senior administration official said, adding that the president has yet to settle on a list of possible replacements for Locke, a former two-term governor of Washington. Locke’s departure from the cabinet had long been rumored.
Locke, 51, is a third generation Chinese-American with roots in Hong Kong and China’s coastal Guangdong province – and the first person of Chinese ancestry to serve as a U.S. governor. He is fluent in Cantonese and didn’t speak English until he was five years old.
This will be a huge campaign issue, and any progress will help the Obama administration. It will be interesting to see how the Chinese respond.
It’s obvious to most people that China isn’t playing fair on global trade, but few people can get to the heart of the problem like Robert Samuelson. He describes how China uses tactics like subsidies, currency manipulation and technology transfer to gain advantage. Then he closes:
It’s important to make several qualifications. First, Americans shouldn’t blame China for all our economic problems, which are mostly homegrown. Indeed, the ferocity of the financial crisis discredited U.S. economic leadership and emboldened China to pursue its narrow interests more aggressively than ever. Second, the point should not be (as Chinese allege) to “contain” China’s growth; the point should be to modify its economic strategy, which is predatory. It comes at others’ expense.
The U.S. response has been mostly carrots — to pretend that sweet reason will convince China to alter its policies. Last week, Presidents Obama and Hu exchanged largely meaningless pledges of “cooperation.” Alan Tonelson of the U.S. Business and Industry Council, a group of manufacturers, says U.S. policy verges on “appeasement.” We need sticks. The practical difficulty is being tougher without triggering a trade war that weakens the global recovery. Still, it’s possible to do something. The Treasury could brand China a currency manipulator, which it clearly is. The administration could move more forcefully against Chinese subsidies. America’s present passivity encourages China’s new world order, with fateful consequences for the United States and everyone else.
I think the current administration is in a bind, as the economic crisis has made it much more difficult to take a hard line with China and risk a trade war. Perhaps President Obama can reset the relationship and alter China’s behavior. If not, he will soon need to get tough with them.
In an interview with Reuters last week, General Electric CEO Jeffrey Immelt said that he believes China and the United States need to open up their borders for trade and abandon protectionist thinking. The interview came after Immelt attended a White House meeting with President Obama and Chinese President Hu Jintao.
Just this week, General Electric signed $2 billion worth of deals supply electric turbines, railroad locomotives and aircraft components to Chinese companies.
It also agreed to work with Chinese companies on gas and coal-powered turbines in China, on high-speed rail in the United States and formed a joint-venture company with China’s AVIC to develop electronics for a new single-aisle commercial jetliner being developed by a Chinese state-owned company.
“We want to make sure we see the evolution of free trade and transparency,” Immelt said. “From China, how can they invest more in the United States? How can they grow their companies here? There’s a little bit of angst on both sides, but on balance there is comfort that over time a lot of these things will get solved.”
It’s certainly an interesting take in the age of ‘Buy American’ campaigns. For the full story, head over to Reuters.
The United States is losing patience with China as the Chinese move slowly on their currency policy. Many in the US believe correctly that the Chinese are propping up their exports, and hurting US imports, by undervaluing their currency. Larry Summers visited China but no progress has been made . . . at least in public statements.
China rejected pressure over currency Tuesday amid a visit by two high-level U.S. envoys, saying Beijing will set the pace of exchange rate reforms.
Currency has re-emerged as an irritant in U.S.-Chinese relations as American leaders face pressure to create jobs ahead of November elections. Lawmakers who want possible trade sanctions on China set aside complaints as the two governments worked together to end the global crisis but are renewing their demands.
“Exchange rate reform can’t be pressed ahead under external pressure,” said Jiang Yu, a foreign ministry spokesman.
The Chinese don’t want to ;look like they are bowing to pressure, so we all need to go through this diplomatic song and dance. Eventually, a change has to be made.
BP is the largest partner in the venture, but only by a dipstick: It has a 38% stake, while the Chinese hold 37% (the rest is owned by an Iraqi company). The media focus has been on BP’s decision to take up the Rumaila challenge for a low fee of only $2 for every barrel the venture produces. But the more important story could be China’s role. “CNPC’s involvement brings together the country with the most rapid growth in energy demand in history with the country that plans the greatest buildup of production capacity ever,” says Alex Munton, an Iraq specialist at Edinburgh-based oil consultants Wood Mackenzie.
There’s also some interesting information about China’s commitment to training workers who can work in the oil industry.
China is the low-cost provider in the industry. “As a general rule of thumb, Chinese management and labor costs are about one-third if not one-fourth of Western costs,” says Gao, the ex-CNOOC executive. Nine colleges and universities focus exclusively on oil studies in China: “The Chinese treat the industry as a life-and-death issue,” says Gao. The Western oil industry’s workforce is aging rapidly. “Analysts always mention that the oil majors face personnel shortages,” says Xu Xiaojie, an independent oil and gas adviser in Beijing. “In China we have a surplus.”
The Iraq ventures still face formidable obstacles—sectarian strife, corruption, and government instability, among them. The Iraqis also may not welcome large numbers of Chinese to their fields. “Yes, bringing in low-cost engineers is China’s advantage,” says Trevor Houser, a partner at the Rhodium Group, a New York-based research firm that studies India and China. “But that has created tensions [elsewhere]. Look at Zambia, where an election was pretty much fought over China.”