WORLD ECONOMY: Why is the US putting pressure on China's currency?



Since July, Washington has launched an unprecedented campaign to blame China's currency regime for declining US manufacturing jobs and pressuring Beijing to end its nine-year peg of the yuan (renminbi in Chinese) to the US dollar.

US Federal Reserve Board chairperson Alan Greenspan fired the first salvos in mid-July, in testimony before congressional committees. Then, during a high-profile visit to Beijing in September, US treasury secretary John Snow called on China to unpegg the exchange rate of the yuan to the US dollar.

Within days of Snow's call, motions were moved in both the US House of Representatives and the Senate which threatened to impose punitive tariffs (of nearly 30%) on all Chinese imports to the US unless Beijing ends its currency peg.

The US National Association of Manufacturers and the AFL-CIO, the country's peak union body, have threatened to file a petition requiring Washington to investigate whether China's currency peg gives it an unfair trade advantage.

Then in late September, clearly spearheaded by Washington and in line with its currency offensive, the G7 group of the world's richest countries demanded all "major economies" adopt "flexible" currency regimes. It called on countries to allow their currencies to "reflect economic fundamentals".

Double standard

While the G7 didn't name any country, China was clearly the main target. But the G7 criticism could just as well apply to Japan, which routinely intervenes in currency markets to keep the yen's exchange value within Tokyo's targeted band. Tokyo has spent at least US$80 billion so far this year in such interventions to minimise pressure on the yen to rise against the US dollar.

The upward pressure on the yen, rather than being due to a strong economy, comes from a depreciating US dollar. Japan in particular has no strong "economic fundamentals" to speak of — it has been in or hovering around recession for more than a decade. A stronger yen would reduce Japan's exports thus further depressing its stagnant economy.

In his July remarks to the US Congress, Greenspan criticised countries that engaged in "suppressing the value of their currency", warning "they cannot do it indefinitely". While he specifically mentioned China, Greenspan said nothing about Japan.

Snow also put China on the firing line while going easy on Japan. But when pressed, US deputy commerce secretary Sam Budman confirmed in late September that Washington's currency criticism also applied to Japan.

Government intervention in currency markets to moderate fluctuations of its currency's exchange rate is nothing extraordinary. Most countries with the capability do so, do it from time to time, especially when their economies are under stress — for example, when the currency is attacked by speculative funds, as happened with the currencies of many east Asian countries, Brazil and Russia in 1997-98.

The US dollar's recent decline has put many countries' economies under pressure, since the US has the world's largest national market (accounting for 30% of world GDP) and many countries' economies are dependent upon exports to the US.


Because of the weight of the US market in the world economy, and the use of the US dollar as the world's main trading currency, interventions in currency markets which Washington approves of are not considered by the G7 as illegitimate, while those Washington opposes are.

For example, in September 1985, long after Japan had cut into the US's share of world trade, Washington engineered the Plaza Accord among the G7 countries to coordinate currency interventions to force the yen to drastically appreciate against the US dollar.

Japan suffered a body blow as a result. The impact was magnified by the bursting in 1989 of Japan's massively inflated stock and real estate markets, which has left the Japanese economy in a shambles ever since.

By 1995, it was becoming clear that to let the Japanese economy sink further would bring too much strain on the world capitalist system. As a result, Washington orchestrated the so-called reverse Plaza Accord — a coordinated intervention in currency markets by the G7 countries weakening the yen, the flip side of which was a strong US dollar.

Washington has officially maintained a "strong dollar" policy ever since. But the dollar has clearly been weakening since last year, dragged down by the 2001 US recession and re-emergence of a ballooning US federal deficit since US President George Bush launched his global "war on terror" after 9/11. This has added to the continuing downward pressure on the dollar caused by the country's continually rising level of external debt — now approaching a new annual record of US$500 billion, or 5% of US GDP.

The Congressional Budget Office expects the US federal budget deficit for this financial year (which ended on September 30) it to be $401 billion, while the White House's prediction is higher still — $455 billion.

The greenback has also fallen against the euro, hurting exports to the US from most of the 15 member countries of the European Union. The currency interventions by Japan, China and other Asian countries to keep their exchange rates in line with the dollar have added pressure on EU exports to Asia.

This has clearly displeased EU leaders. French finance minister Francis Mer protested at a high-level EU meeting in Italy in early September: "We shouldn't be the only ones to suffer the US dollar's adjustment higher or lower."

The September 6-7 Australian Financial Review reported: "Political tensions in Europe were running high two months ago when the depreciating dollar pushed the euro close to US$1.2, hampering exporters in the already struggling euro zone." The AFR article reported Citibank analyst Jose Alzola's observation that "the depreciation of the dollar against the euro was the real reason the European economy stopped growing in the first half of the year".

Instead of holding Washington responsible, the EU has chosen to support Washington's campaign against China, while going easy on Japan.

In a rare moment of truth, however, Juergen Stark, the number two at Bundesbank, the German central bank, told Reuters on September 19: "We should not let the discussion about the yuan distract from the main problem of the US's twin deficits."

Japan also joined Washington's campaign to target the Chinese yuan, no doubt hoping Washington will also ease up its pressure on Tokyo to allow the yen to fall. However, if the Japanese economy begins to show signs of a sustained upturn, it is highly likely that Tokyo will be more prominently targeted by both the US and the EU.

US economy

Whether Washington will drive its current offensive harder hinges on the state of the US economy. Although the US has been officially out of recession since November 2001, the recovery hasn't resulted in any job gains. In fact, there has been a net loss of 2.7 million jobs since early 2001, bringing the official US unemployment rate in August to a high of 6.2%, or more than 9 million people out of work.

The continuing loss of manufacturing jobs stands out. Such jobs now account for only 13% of total US jobs, down from more than 30% five decades ago.

To increase profit rates, capitalists seek to cut costs by replacing human labour with machines. Where production does not require relatively large amounts of skilled labour to operated highly advanced machinery, the incentive for corporations is to relocate production operations to countries with large pools of cheap labour, exporting the products for sale back in their home countries.

China's huge reserves of cheap labour and its opening up to foreign capitalist investment over the last two decades have resulted in it becoming a prime destination for the relocation of US-owned manufacturing operations.

As the east Asian "Tiger" economies have become more urbanised and the flood of impoverished peasants from the countryside has dried up, the competition for jobs in the cities has decreased, enabling workers to become better organised and win higher wages and better working conditions. As a result, both local capitalist and foreign firms have begun to relocate their less sophisticated manufacturing operations or assembly work to China.

These parallel developments contributed to a surge of foreign direct investment (FDI) to China, which reached a record $53 billion in 2002, making it one of the top FDI destinations in the world.

FDI-induced export production has greatly inflated China's "nominal" exports in recent years, including to the US. A 2000 study by the Washington-based Economic Policy Institute observed that the rapidly growing US trade deficit with China is "directly linked to the growth of multinational firms operating in China", adding: "Of China's more than $200 billion in exports in 1998, over 40% had their source in multinational firms operating in China". Thus US corporations "had a significant role in increasing the US trade deficit with China", the study noted.

A September 5, report by the Morgan Stanley stockbroking firm noted that many of China's exports to the US originated from FDI "from Japan, South Korea and Taiwan". It added: "Even though China runs a large trade surplus against the US [$103 billion in 2002], it runs a deficit against every other East Asian economy."

A Morgan Stanley report issued on September 25 summed up the crux of the issue: "A persistently weak global economy is now moving into a very dangerous place — the slippery slope of trade frictions and protectionism. As political cycles enter the macro equation, the blame game has begun. Such sentiment is nearly unanimous in singling out a new scapegoat — a rapidly growing Chinese economy...

"Suddenly, China has been transformed from a land of opportunity into a serious threat to the United States and the broader global economy...

"[But] China's increasing powerful export machine has America, Europe and Japan stamped all over it."

From Green Left Weekly, October 22, 2003.
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