William J. Holstein

Quaking in Their Boots in Beijing
APRIL 5--The Communist Party leadership must be terrified that the U.S. Treasury is going to issue a report to Congress labeling China as a currency manipulator. The Treasury, in its infinite wisdom, has delayed making this determination for a while, but the sword still hangs over Beijing's head.

This is such nonsense for several reasons:

--What good would it do to "label" the Chinese as manipulators? There's something in the American psyche that believes if we call someone a bad name, they'll feel sorry and change their behavior. But the Chinese don't believe they are manipulating their currency--they have pegged it to the U.S. dollar to create a measure of stability for their currency. It does not trade freely so how can anyone know how much it is worth. The Chinese probably will never allow the yuan to float freely because that would mean they lose control. And their ultimate goal is to retain control in economic, social and political terms.

--The Chinese are the largest buyers of U.S. government debt. Let's get real. Washington isn't going to do anything that destabilizes that relationship. Every time someone in Washington makes a threat to "punish" China, they only reveal themselves as fools.

--The currency issue isn't the central piece of the U.S.-China relationship. For 30 years, we have consciously created a system in which our companies go there to source and manufacture cheap stuff, mostly, that comes back via Wal-Mart, Home Depot and Target. Throughout this period, the Chinese have been evolving from a Maoist-era barefoot kind of economy into a world industrial powerhouse. Just tweaking the currency can't change these fundamentals. And as we saw in the Japan debate of the late 1980s and 1990s, just increasing the value of a trading partner's currency doesn't automatically fix deep structural imbalances. China's currency already has risen 18 percent in recent years and the result was an expansion of their surplus. Recent experience already has discredited the notion that revaluing their currency is the ultimate fix.

--Threatening protectionism against China would boomerang against millions of American consumers who are just hanging on to their living standards. Duh.

The way to engage with China is from a position of strength. Which means we clean up our fiscal house so that we don't depend on them for capital, at least not as much. And we continue to invest in new technologies and new industries so that we maintain a clear leadership position. Just blathering about the currency doesn't even begin to address the real issues.