Now, even worst than the cheese eating surrender monkeys, here is the chineese currency plot.
================================================== ===============
STRATFOR'S GLOBAL INTELLIGENCE REPORT
http://www.stratfor.com
11 September 2003
================================================== ===============
Politics, Deficits and the Chinese Currency Debate
Summary
The White House is under serious pressure to strong-arm China into doing something about the perceived undervaluation of the yuan. Beijing is not going to budge, but this won't hamper the Bush administration from using the issue in attempts to turn down some political heat on the domestic front. For all the rhetoric that will be thrown around about China, there is another, countervailing force at work that actually might keep Asian currencies from appreciating against the dollar: the need to finance the growing U.S. budget deficit.
Analysis
In the latest U.S. salvo against China's pegged currency, a bipartisan group of U.S. senators has introduced legislation that seeks to impose an across-the-board tariff increase of 27.5 percent on Chinese imports unless Beijing drops its decade-old currency peg to the U.S. dollar.
The introduction of the bill follows Treasury Secretary John Snow's trip to Asia in early September, when he made a very public show of trying to convince Chinese leaders to drop the currency peg and reach a kind of market economy self-actualization by freely floating the yuan.
Not surprisingly, the Chinese response was a diplomatic but very firm "no thank you," with Premier Wen Jiabao telling Snow that a stable Chinese currency was in the interests of both China and the United States. The best Snow could get was a vague commitment to consider a wider currency basket for the yuan -- an idea that Beijing tends to pull out when one trading partner or another begins to complain too loudly about its fixed exchange rate.
In fact, China has absolutely no intention of dropping the currency peg in the foreseeable future, for myriad reasons. The fixed currency has paid tremendous dividends for China over a decade that has been marred by currency instability in the rest of Asia, particularly in terms of attracting and keeping foreign investment. China's new political leadership is not about to rock the boat, particularly considering the various structural weaknesses of the Chinese economy, such as its fragile banking system. Also, any decision to change the currency regime will require years of internal debate and buy-in from the country's vast political bureaucracy. Finally, China might not agree that its currency is undervalued: Imports are actually growing more quickly than exports, and Morgan Stanley predicted Sept. 5 that
at current rates, China could run a trade deficit in less than a year.
China also has a fundamental geopolitical reason for its resistance to change. Diplomatic sources tell Stratfor that Beijing is very concerned that the United States and other rich Western countries would seek to manipulate China's freely floating currency in a way that would give foreign governments substantial influence over the nation's economy and China's future in general. Maybe officials in Beijing have been listening to too many of Malaysian Prime Minister Mahathir Mohamad's fiery speeches. Nevertheless, the concern raises serious questions about national security for Beijing.
As Wen more or less told Snow, altering the currency regime is fundamentally not in China's national interest, and the fact of the matter is that the White House can do nothing to change that. One can't blame Snow and the White House for trying, however. And even though Snow came back without any real commitments from Beijing, his trip was actually a success for the Bush administration in two important ways.
First, the administration was able to demonstrate a good-faith effort at addressing the issue of American export competitiveness, which many argue is tightly linked to jobs.
Though most economic indicators show the U.S. economy now chugging along at a healthy click, the recovery has stubbornly failed to create jobs in significant numbers. Unemployment is a lagging indicator, and there are reasons to believe that job creation may well be on the horizon, such as historically low business inventories. However, the longer the employment numbers disappoint, the greater the chance that consumers -- followed by nervous corporations -- will rein in spending, which could short-circuit the recovery.
The phrase "jobless recovery" is appearing more and more in the U.S. media, and this is a major worry for the White House as it prepares for next year's election. President George W. Bush is vulnerable on the jobs issue: The U.S. manufacturing sector has shed 2.7 million jobs over the Last three years, a number that the Democrats already are citing with gusto. This figure is also a substantial concern for American industry, which has been trying for years to deflect criticism that its search for cheap foreign labor is behind the loss of American jobs. The Republicans and U.S. manufacturing interests share an interest in laying blame for the employment situation somewhere else -- preferably very far away.
This leads to the second success of Snow's visit: The White House and representatives of the U.S. manufacturing sector have succeeded in painting China as the big, mean monster that is stealing American jobs by dint of its unfair currency policies. The argument goes that the undervalued yuan has created a vastly uneven playing field that makes it impossible for U.S. manufacturers to compete with Chinese competitors in foreign markets. Moreover, the undervalued yuan also prices U.S.-made products out of the rapidly expanding Chinese market. The resulting American trade deficit with China is then linked back to joblessness in the United States.
Those objectives -- painting the White House as proactive on jobs and making China a scapegoat for unemployment in the United States -- were the more realistic goals of Snow's trip than getting an actual commitment out of China, and they were met.
This is a very defensive political strategy that seeks to appease one group (business) while deflecting criticism from another (labor) on the jobs issue.
If the scapegoating of China has its desired effect on domestic politics, the stage will be set for a lengthy period of China-bashing in the United States. The currency issue has suddenly overtaken Washington like some kind of mutant Asian virus, with lobbying Groups and business interests from a range of industries joining the chorus of criticism and demanding that something be done. Data like the record $11.3 billion U.S. trade deficit with China in July will add more fuel to the fire.
The National Association of Manufacturers praised Snow's efforts but demanded that China "move quickly to end the undervaluation of the yuan." One of the lawmakers behind the Sept. 9 legislation, Sen. Lindsey Graham (R-S.C.), noted that "the political forces behind this bill are unusual, probably will never be duplicated again, but that shows you how deep the problem is." Graham also acknowledged that the U.S. Treasury Department helped to draft the legislation.
The din will only get louder, especially as China fails to make any substantial concessions.
There is an irony in all of this that also links back to Snow's trip to China. One of the few things he got out of Beijing was a commitment to purchase more U.S. treasury bonds. Asian investors
are the largest foreign owners of U.S. treasuries; Japan, China and South Korea owned a combined $696 billion in T-bills at the end of June. Washington desperately needs them to keep buying, especially considering the sharply rising U.S. budget deficit and the expanding costs for the occupation in Iraq. Though the international appetite for U.S. debt remains healthy, the recent fall in bond prices might have the Treasury Department a little
worried about attracting more buyers.
If the Chinese government follows through on its commitment to buy U.S. bonds -- which it can, considering its enormous stash of hard currency reserves -- then Beijing will have substantial leverage of its own that that can be used to take some pressure off of the currency issue. Although this won't quiet the rhetoric in the United States, it will ease Chinese fears that Washington
might try to retaliate.
The same issue applies to floating Asian currencies such as the Japanese yen and the South Korean won. In a variation on the China theme, East Asian countries have been criticized in the United States for keeping their currencies artificially low to improve their own export competitiveness.
One way they can drive the value of their currencies down is by purchasing U.S. treasuries, since this increases the overall supply of their currencies in the global market. So, as the United States issues more bonds to finance the war in Iraq and the expanding deficits -- and as countries like Japan and South Korea purchase more U.S. debt -- Asian currencies actually might travel in the opposite direction than the White House needs them to politically.
On the other hand, if Asian currencies appreciate against the dollar, these countries would have less need and desire to hold dollar-denominated U.S. assets. In a high-deficit situation, this actually provides a disincentive for the United States to support the sharp appreciation of certain Asian currencies.
Nevertheless, the White House will do what it can to keep the economic debate focused not on jobs or the impact of deficits, but rather on a selfish and recalcitrant China.
Re: [OT] Another heated discussion about the Iraq siutation, war and politics.
Linear Mode
