Sino-US contention surfaces amid currency disputes
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"Will China Listen?" asked a March 16 New York Times editorial that listed recent instances in which China has rejected letting its currency appreciate.
President Barack Obama vowed last month to "get much tougher" about China's currency. This shows that the core contention between the two countries is surfacing, whereas previous frictions – such as arms sales to Taiwan, Google quitting China, Internet freedom, and Obama meeting the Dalai Lama – were merely tips of the iceberg.
Currency exchange rate is at the core of this contention, and regarding China, it is the pressure to appreciate its renminbi.
The U.S. has interfered with other countries' currencies more than once. In 1985, Japan replaced the U.S. to become the world's largest creditor and the world was replete with Japanese products. In September of the same year, the U.S. rounded up the financial chiefs of Japan, the UK, Germany and France, demanding major currencies gradually appreciate against the dollar. This is historically known as the famous Plaza Accord.
The five countries then united to interfere with the world currencies, forcing them to appreciate. As of the end of 1988, the Deutsch mark increased 70.5 percent, the French franc 50.8 percent, the Italian lira 46.7 percent, and the Canadian dollar 11 percent. The largest appreciation was seen in the Japanese yen, which appreciated a remarkable 86.1 percent against the US dollar, after which Japan sustained a decade-long depression.
China is aware of these historical events and the grave consequences should the renminbi appreciate. While internal demand hasn't fully stimulated the economy, China still substantially relies on exports to achieve growth.
The exports-oriented industry in China will be first affected by the yuan's appreciation. The direct impact is the drastic rise in cost of Chinese products.
Amid slowed exports, foreign goods will rush in, causing extensive damage to China's labor-intensive industries – the sector that's been fuelling China's economic growth over the last three decades.
Hot money as well as speculative capital will also storm in, which will further disrupt the Chinese market with inevitable economic bubbles.
The New York Times editorial also advises seeking coalition with the IMF, wishing the international agency to pronounce that China is breaking rules and manipulating its exchange rate.
The recent acts of the US government reflect its helplessness and desperation. On the contrary, China in a calm stance strikes back on key issues, such as reducing the holding of US Treasury bonds. China is also trying to make more of its voice heard.
China's next move should be to assume an active role in this contention, rather than passively fend off attacks from the U.S. China should also work on establishing the renminbi as an international reserve currency, starting from international settlement in yuan.
Anyway, China still has a lot to do.
Zhao Kang is a researcher with the Institute of Journalism and Communication, Chinese Academy of Social Sciences.
(The article was translated by Maverick Chen.)
