Putting the Dollar on Steroids: Chinese Currency Intervention

Composite of Images by RightIndex from flckr CC

When China passed Japan to become the world’s second largest economy this summer,[i] the United States seemed resigned to its fate as a global also-ran.  While China has only one-tenth of the U.S. GDP per capita, the U.S. unemployment rate (9.6%) hovers just below China’s GDP growth rate (10.3%), making the future of U.S. global leadership seem bleak.  Not surprisingly, a plurality of U.S. respondents to a 2009 Pew Research poll named China the top economic power in the world.[ii]  In reality, China’s rise is far from accomplished; the U.S. has more to gain, than fear, from a wealthy China.  While Americans hold many misconceptions about Chinese policy – from debt to trade – the economic reality is more complex than it appears.

That China holds a massive amount of U.S. government debt has become a source of popular outrage for American politicians of every stripe.  What is less well understood, is exactly why  China keeps buying so much U.S. Debt.  In fact, China must purchase U.S. Treasury bonds, even though it often takes a loss in the process.  A complicated cycle has developed due to tight Chinese controls on currency outflows.  Chinese exporters must convert the dollars they earn into Chinese renminbi, leaving the central government with dollars and the Chinese economy with freshly printed currency.  To prevent inflation as the economy absorbs hundreds of billions of dollars worth of the new currency, the Chinese government sells domestic bonds to remove money from circulation, a process known as “sterilization”[iii].  Meanwhile, the dollars confiscated at the border are spent on the only good capable of absorbing that much money: U.S. Treasury bonds.  The gap between the low rate of return on Treasury bonds, and the bond rate, in a fast growing and poor country like China often entails negative arbitrage, the difference between the rate of return on two investments, for the People’s Bank of China.  To minimize their losses, China makes low rates on domestic bonds palatable by instituting price controls on necessities and banning certain types of speculative lending.  This process has led China to accumulate foreign reserves amounting to almost 50% of GDP[iv] which is a staggering 4% of global GDP.   This Rube Goldberg-style economic policy is not sustainable, but breaking it will involve a period of difficult transition to increased economic openness and increased Chinese domestic consumption as a component of GDP[v]. 

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Brookings: How We're Doing in the World

Brookings recently released its annual survey of how the U.S. is doing in the world, a series of indices for the last four years concerning foreign policy and diplomacy as well as global economics and development.  According to the survey, the United States has made considerable diplomatic progress under the Obama Administration in nearly all spheres, while global economic indicators have gotten decidedly worse across the board.  And while this shouldn't surprise anyone, the progress made over the last two years goes to show the enduring power of a cooperative and cordial international stance and good PR, and the statistics highlight several neglected issues.

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China Diplomacy: Dalai Lama, Google, Taiwan, Trade

Everywhere you turn, the media is pouncing on the President's apparent rough start with China Diplomacy.  Having today met with the Dalai Lama fresh on the heels of a widely publicized Taiwan weapons deal, a feud over Google censorship, and an escalating trade war, President Obama has done nothing radical or out of the ordinary as far as U.S.-China diplomacy goes.  Rather, the current political and economic climates are stacked against the administration, and much of the rhetoric amounts to nothing more than muscle-flexing.  The Administration's dealings with China have been rooted in measured, compromised positions

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ESL Economics

symbol of the Chinese economic menaceI teach English to Japanese students in my spare time.  I had a student today who wanted to talk about the Lehmann shock, the sub-prime loan crisis, and China.  The student was of the high-intermediate variety and ignorant of economic terms, so the resulting explanation was in simple (oversimplified?) language.

The student asked me what the difference was between savings and investment.  I told her savings basically means doing nothing with your money.  Investing is buying something that will make you money in the future: a car can be considered an investment, and even a "savings" account is actually an investment.  Saving is basically a waste, but it's necessary to save a little in case investments turn sour. 

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Black Gold and the Law of Large Numbers

This afternoon I watched the 2006 coffee trade documentary "Black Gold" for the first time and learned some things, like, for instance, in terms of trade volume among commodities, coffee is exceeded by only oil, and that the eco-friendly fair-trade image cast by Starbucks and other chain coffee shops is only a veneer.  The film follows a group of Ethiopian coffee growers and is harshly critical of the World Trade Organization, which it claims keeps the world price of coffee artificially low to benefit the four major middlemen (Sara Lee, Proctor and Gamble, Kraft, and Nestle) as well as consumers in rich countries.  "Black Gold" criticizes foreign aid for Africa as a poor substitute for extending an appropriate share of the profits generated by coffee sales and those of other commodities to the poor Africans that produce them. 

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North Korea: Time-Out or a Spanking?

First, a brief North Korean history lesson: with its patron state collapsing in 1991, China engaging in heavy trade with the United States, and Eternal President Kim Il-Sung on the verge of death, North Korea found itself exposed and began progressively developing its own nuclear deterrent.  The US and North Korea signed the Agreed Framework in 1994, with the assistance of former President Jimmy Carter, wherein North Korea promised to end enrichment in exchange for US assistance in modernizing power plants, within no specific timeframe.

However, when the Republicans won a Congressional majority that same year, funding for US obligations was cut off and progress was considerably slowed, which made the DPRK drag its feet in nuclear disarmament. The highest level official state visit occurred when Secretary of State Madeleine Albright visited Pyongyang in 2000 to confirm that North Korea was ending its nuclear program and offer concessions in exchange for more progress.

When the Bush Administration took power in 2001, the US had not met its obligation to deliver a light water reactor under the Agreed Framework, and North Korea had continued to enrich uranium for nuclear weapons use. The Bush Administration declared North Korea to be part of the “Axis of Evil” and adopted a more hard-line approach to Pyongyang. During this time, North Korea increased weapons exchanges with other rogue states (including most prominently US “ally” in the War on Terror, Pakistan) and began to conduct ever-more-provocative nuclear weapons and missile tests.

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