Page 4 of 5 A dialogue of the
mute By Henry C K Liu
not
being shared by all income groups. This is a
problem that also plagues China, but it cannot be
solved by China, only by US policy.
Albert
Keidel of the Carnegie Endowment for International
Peace, former deputy director for the Office of
East Asian Nations at the US Department of the
Treasury, presented testimony at a hearing on "The
Treasury Department's Report to Congress on
International Economic and Exchange Rate Policy
(IEERP) and
the
US-China Strategic Economic Dialogue" for the
Senate Banking, Housing and Urban Affairs
Committee on January 31. Dr Keidel said the
US-China SED could be a very effective way for
both sides to address trade issues and the US
should use SED wisely. He argued that the exchange
rate of the yuan is not a causality in US-China
trade imbalance and that focusing on the exchange
rate of China's currency is a risky distraction
for US economic policy.
Keidel also
commented that China's currency rate should not be
blamed for the large and growing US current
account deficit; he emphasized that the US has a
large deficit with the global supply chain as a
whole. He suggested that instead of focusing on
China's currency exchange rate, the US should
focus on economic issues at home such as
education, pension mobility and heath care to
strengthen its own global competitiveness.
He might have added that instead of
focusing on export to earn more dollars that
cannot be used at home, China should invest more
in its human asset through improved education,
health care and environmental preservation.
Bush pushes China to appease
Congress A series of recent actions by the
Bush administration in the area of bilateral trade
have apparently caused tremendously negative
impacts.
The US Commerce Department
recently imposed countervailing duties to be
applied to economies such as China's on industries
that allegedly receive government subsidies. But
Beijing's sharp response to the US decision to
file WTO complaints on intellectual-property
violations in China contrasted with its mild
response about past US complaints on the Chinese
auto-parts sector and the imposition of duties on
Chinese coated paper, suggesting that bilateral
trade disputes are entering a new, bitter phase
that may adversely affect bilateral political
relations.
Forcing Chinese imports to the
United States to rise in price through
exchange-rate manipulation would only cause US
inflation without lowering the trade deficit, as
the trade imbalance would remain unchanged while
the actual amount of goods exchanged would adjust.
Further, the share of Chinese exports to
the US has been shrinking in percentage terms,
from 37% in 2000 to about 25% in 2006, being
replaced by exports to other markets. Chinese
exports to the European Union remain stable at
about 20%, and to East Asia they declined from 25%
in 2000 to 20% in 2006. Exports to the rest of the
world, such as the Middle East, Africa, and
Central/Latin America, grew from 16% in 2000 to
30% in 2006 and are expected to grow more in
coming years to pay for increases in imports in
key commodities.
While China's foreign
reserves keep growing, most of the growth is now
increasingly coming from other countries rather
than directly from the US. The day is fast
approaching when US-China trade, while continuing
to be important, will cease to be the
all-consuming factor in determining Chinese policy
and US-China relations.
For the first time
since World War II, Japan's biggest trade partner
is no longer the United States. In the fiscal year
ended on March 31, 2007, China overtook the US as
Japan's largest trading partner, with trading
volumes reaching 25.43 trillion yen ($209.5
billion). Japan's trade with the US in the same
period was 25.16 trillion yen. Japan's trade
surplus widened to 74% from a year earlier at
1.633 trillion yen. Trade between the two Asian
giants is boosted by Japanese firms shifting their
manufacturing work to China to lower labor costs
and to tap into China's fast-growing market,
helped by a weaker yen.
Strategic
policy yields to political expediency The
US administration's unilateral decision to file
two complaints against China with the WTO caused
the Chinese government to express "deep regret and
strong dissatisfaction" with the move.
Zhang Yansheng, head of the International
Economic Research Institute at the Economic
Planning Ministry, said the tough US protectionist
stance on its uncompetitive sectors would make it
hard for China to compromise in the future. He
said the US should act as "an ordinary member of
WTO, rather than the lawmaker".
Higher-level response came a few days
later from Vice Premier Wu, warning that
complaints to the WTO over commercial piracy in
China would "badly damage" cooperation with
Washington and bruise bilateral trade ties.
In an opinion article published in The
Wall Street Journal on May 17, Wu wrote: "Mutual
benefit and win-win progress: these are what
China-US business and trade relations are all
about, and these intrinsic qualities have made our
trade ties strong and vibrant. China's exports
brings incontrovertible economic benefits to the
US."
She cited a recent report, "China:
The Balance Sheet", jointly published by the
Center for Strategic and International Studies and
the Institute for International Economics. It said
that the rapid growth of the Chinese market boosts
US exports; China's exports to the United States
and its investments in US financial assets help
restrain US inflation and interest rates, and thus
permit faster economic growth and more job
creation.
Wu pointed out that since
joining the WTO, China has become the United
States' fourth-largest export market. Over the
same period, the growth rate of US exports to
China was 3.7 times that of US exports to other
countries.
China adjusts macro monetary
measures Meanwhile, the PBoC announced last
Friday that the one-year deposit and loan interest
rates would be raised by 0.27 and 0.18 percentage
point respectively, to 3.06% and 6.57% effective
the next day. The central bank will also raise
banks' reserve requirement ratio by 0.5 percentage
point to 11.5% effective June 5. Many banks
already have even larger reserves, however, as
they have been swamped with deposits from China's
brisk economic growth and large trade surplus, and
have had trouble finding ways to lend this money
in a developing liquidity trap.
This is
the first time in 10 years that the PBoC has
simultaneously raised the benchmark interest rates
and the bank reserve ratio. The move aims to
"strengthen liquidity management in the banking
system, rationalize the growth of lending and
investment and maintain price stability", the bank
said. It also said it would continue to "keep the
exchange rate basically stable at an adaptive and
equilibrium level based on market supply and
demand with reference to a basket of currencies".
China has raised interest rates five times
since 2004 and the bank reserve ratio eight times
since 2006. The central bank announced on Friday
that it would begin allowing the yuan to fluctuate
more during each day's foreign-exchange trading,
but again rebuffed demands from the US and the EU
for a sustained rise in the currency.
The
PBoC's moves on interest rates and and bank
reserves were both aimed at reducing the risk of
overheating in an economy that is growing at more
than 11% annually and at taming speculation in
domestic stock markets that have more than tripled
since the beginning of last year.
Widening
the daily trading band is the latest and most
noticeable in a long series of steps by Chinese
officials to awaken businesses gently to the risks
that fluctuating currencies can pose. China pegged
the yuan at 8.28 to the dollar from 1997 to 2005,
lulling some businesses into ignoring currency
risk.
Chinese officials think that faster
appreciation of the yuan could threaten "social
stability". Chinese workers making such goods as
textiles that compete with exports from even
lower-wage countries would be hurt if currency
appreciation made their products uncompetitive and
cost them their jobs. Two-thirds of China's
population still lives in rural areas, and the
agricultural sector is barely competitive with
imports at current currency levels, raising the
prospect of increased rural unemployment if the
yuan were to rise sharply and the price of food
imports fell enough to threaten domestic
producers.
The PBoC also announced on
Friday that it was raising the benchmark regulated
rate for one-year bank deposits by 0.27 percentage
point, to 3.06%, and increasing the benchmark rate
for one-year bank loans by 0.18 point, to 6.57%.
By raising deposit rates more than lending
rates, the government showed confidence that the
banks had put enough of their bad-loan problems
behind them to survive on slightly narrower profit
margins. Higher deposit rates also make it a
little more attractive
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