The Chinese government, in an effort to maximize exports and minimize U.S. imports, prints their yuan to buy dollars. This prevents their currency from rising and the dollar from falling. Then it loans those same dollars back to America by buying U.S. debt.
At the same time China:
- Puts in place purchasing restrictions
- Permits piracy
- Delays legitimate items from entering the country
- Provides massive direct subsidization of export production in many key industries
- Maintains strict non-tariff barriers to imports
China was the United States' largest supplier of goods imports in 2010goods imports from China totaled $365 billion (B), a 23.1 % increase ($68.6B) from 2009, and up 841% over the last 16 years.
The U.S. goods and services trade deficit with China was $219B in 2009in 2010 just the U.S. goods trade deficit with China was $273B.
U.S. exports to China accounted for 7.2% of overall U.S. exports in 2010 while U.S. imports from China accounted for 19.1% of overall U.S. imports during the same time period.
The American Congress is facing a restless, very concerned, and increasingly vocal American public. Lawmakers in both the Senate and House are blaming China for the loss of U.S. jobs and are pushing for legislation (Currency Exchange Rate Oversight Reform Act of 2011) that would force China's currency, the yuan, to rise against the U.S. dollar. If approved by Congress, the CEROR Act would force the U.S. Treasury Department to formally tag China as a currency manipulator this would allow the U.S. Commerce Department to impose duties and tariffs on imports.
With elections in 2012 and the Obama Administration vulnerablethis author believes President Obama is deeply vulnerable to a 2012 election threat from the GOP fielding their heir apparent Mitt Romney or the incredibly charismatic Rick Perrythere exists the possibility that President Obama will try to penalize China for its large bilateral trade surplus with the U.S.
Obama has promised repeatedly to get tough on China over its currency practices. James Zhang, from the University of Newcastle in Australia, says a 20% rise in the yuan would contract the Chinese economy by 12%.
- Tuesday 6 October 2009 1 USD = 6.8312 CNY
- Wednesday 6 October 2010 1 USD = 6.6994 CNY
- Thursday 6 October 2011 1 USD = 6.3751 CNY
Capital controls and trade restrictions have been absolutely necessary for China to reach this stage in its economic development. The country's economic development is largely driven by fixed asset investments (FAI - fixed assets include items such as land and buildings, motor vehicles, and plant and machinery). China's fixed-asset investments rose 25% year-on-year to hit 18.06 trillion (T) yuan (2.83T U.S. dollars) during the first eight months of 2011.
China is able to invest so much into FAI because in addition to the inflow of foreign direct investment (FDI is a measure of foreign ownership of productive assets, such as factories, mines and land) its citizens have a very high savings rate as a percentage of income. Because of controls on how and where they can invest that money, Chinese savers have little choice but to invest at home.
If China were to lift its capital controls the resulting outward savings flow seeking higher and safer returns overseas would cause China's economic growth to stall because, the largest by far, of its two major engines of growth, FAI, would simply run out of money.
"Export industries employ so many people, and a drop in exports would mean a rise in unemployment which could cause very serious social unrest. Social stability is Chinese leaders' top priority, and the way to achieve it is fast economic growth to keep people working." -Xiang Songzuo, deputy head of the International Monetary Institute at Beijing's Renmin University
The Chinese Communist leaders have to feed, clothe and house untold millions of urban residents and hundreds of millions more rural residents moving to urban areas over the next couple of decades. Their biggest fear is social unrest leading to an overthrow of their communist regime. U.S. lawmakers on the other hand are facing elections and nothing is more important to a politician than getting reelected.
This dispute over Chinese currency reevaluation is just the harbinger, the tip of the ice-burg, of what's to come in the future U.S.-China relationship.
Potential areas of conflict include:
- Trade disputes
- Conflicts over resources
- Geopolitical disagreements
- Intellectual property rights
- Chinese acquisition of U.S. companies
The U.S. has, so far, been cautious of pushing China too hard on the revaluation issuethat might change.
"China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States. Currency manipulation is one example of it." -President Obama at a recent news conference
This is an extremely interesting drama being played out on the world stage between two of the world's most powerful nations and economies, it should be on everyone's radar screen. Is it on yours?
If not, maybe it should be.
Richard (Rick) Mills
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Richard is host of Ahead of the herd and invests in the junior resource sector. His articles have been published on over 300 websites, including: The Wall Street Journal, USAToday, National Post, Vancouver Sun, Huffington Post, The Gold/Energy Reports, Calgary Herald, Forbes, SafeHaven, Market Oracle, Stockhouse, Lewrockwell, Uranium Miner, Casey Research, 24hgold, SilverBearCafe, Infomine, Mineweb, 321gold, Kitco, Gold-Eagle, Resource Investor, Mining.com, FNArena, UraniumSeek and Financial Sense.
This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.
Richard Mills does not own shares of any companies mentioned in this report.