US and China summit: The clash of currencies
China's currency is making inroads in markets dominated by the US dollar --- even as Beijing manipulates the yuan's value. The US can't buy into Beijing's zero-sum view of the currency markets.
Too much of what divides China and the US these days, even during their cozy summit this week, relies on a false assumption: That one country must lose at the expense of the other.
A loss of jobs in the US, for example, is seen as a gain of jobs in China. Or the US Navy’s protecting presence in Asia must give way to a rising Chinese Navy.
Nowhere is that zero-sum way of thinking more prevalent than in China’s attempt to replace the greenback with the redback – or the US dollar with the yuan – in world currency markets.
President Hu Jintao went so far as to tell journalists before his meetings this week with President Obama that the dollar’s dominance in global markets is a “product of the past.”
And Chinese officials, especially after the recent US-led global recession, have touted China’s state-run economy as the new model for other nations.
And yet most international trade is still conducted in dollars. The dollar’s value even rose during the recession despite US troubles; investors (including China) have faith in America as a haven for their money.
But over the past year, China has begun to make sure that the yuan (also known as the renminbi) is used in more and more foreign transactions, such as bond sales and trade credits.
Chinese firms can now use the yuan to buy foreign companies. The Bank of China has offered yuan accounts at its branches in New York and Los Angeles. Even McDonalds and the World Bank have recently sold yuan-denominated bonds.
As a major importer and exporter, China can easily use its clout to demand more use of its currency (something the US does not have to do). It has also demanded changes in international finance organizations to reflect its economic ways.
And yet, despite this desire to globalize the yuan, China still insists on controlling its value. It pegs the yuan’s value to the dollar, only letting it rise slowly so as not to lose the advantage of making Chinese exports seem less expensive.
In other words, China sees currency manipulation in a zero-sum way: Its exports can only grow by diminishing the exports of other countries.
The World Bank and many others, however, have advised China that it stands to gain by letting the yuan “float” on currency markets. Such a move would boost the incomes of its poor.
(A similar mercantile mentality can be seen in China’s recent attempt to restrict the export market for “rare-earth metals” mined in China. Such minerals are essential in many high-tech products.)
Unfortunately, the Obama administration has bought into this zero-sum approach. Last week, Treasury Secretary Timothy Geithner announced a new negotiating stance in which the US would give up a number of things in return for China ending controls on its currency as well as on the flow of capital in and out the country.
The US dangled carrots such as more Chinese access to American investments and advanced technology. But, said Mr. Geithner, “our ability to move on these issues will depend on how much progress we see from China,” Geithner said.
Why now? The US has grown impatient in its ability to create jobs, and one quick fix is to engage in a trade of policies with Beijing that might allow more US exports to be sold in China. This is a different approach from trying to persuade China that a free-floating yuan is in its own interest or, as many in Congress would do, threaten to punish Chinese exporters.
Mr. Hu admits that China’s goal of the yuan being an international currency “will be a fairly long process.” Both the European Union and Japan tried to topple the dollar from its high perch as the world’s reserve currency by pushing the euro and yen, respectively. To a large degree they failed because they saw the world economy as a closed system, with one currency simply replacing the other.
The dollar may indeed lose some of its dominance in trade as giant economies like China emerge. But that shift can also happen even as world trade expands, helping all nations. Other currencies can be easily accommodated if leaders let markets grow freely and don’t try to restrain them for short-term – and often illusory – advantage.
The world economy isn’t like a single pie to be carved up. It grows as more countries add their goods, capital, and ideas – freely.