Sinophobia

I think I could devote an entire blog rather than just an occasional post to the Sinophobia that I see in the news media. For example, this morning there’s this sideswipe from Carnegie Mellon professor Allan Meltzer in the Wall Street Journal:

As long ago as the 1960s, then French President Charles de Gaulle complained that the U.S. had the “exorbitant privilege” of financing its budget deficit by issuing more dollars. Massive purchases of dollar debt by foreigners can of course delay the crisis, but today most countries have their own deficits to finance. It is unwise to expect them, mainly China, to continue financing up to half of ours for the next 10 or more years. Our current and projected deficits are too large relative to current and prospective world saving to rely on that outcome.

In his column today Paul Krugman has grasped the opposite end of the same stick with, I believe, better justification:

Some background: The value of China’s currency, unlike, say, the value of the British pound, isn’t determined by supply and demand. Instead, Chinese authorities enforced that target by buying or selling their currency in the foreign exchange market — a policy made possible by restrictions on the ability of private investors to move their money either into or out of the country.

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.

Until around 2001, you could argue that it was: China’s overall trade position wasn’t too far out of balance. From then onward, however, the policy of keeping the yuan-dollar rate fixed came to look increasingly bizarre. First of all, the dollar slid in value, especially against the euro, so that by keeping the yuan/dollar rate fixed, Chinese officials were, in effect, devaluing their currency against everyone else’s. Meanwhile, productivity in China’s export industries soared; combined with the de facto devaluation, this made Chinese goods extremely cheap on world markets.

I’m tempted to agree with Dr. Krugman that something needs to be done. That’s why, for example, I opposed the the change in China’s trade status with United States, finalized in 2000, as long as they maintained their de facto peg on the dollar. Something we should remember is that China is no longer a poor country. It’s a middle class country with a lot of poor people in it, kept poor while the 10,000 connected people control nearly all of China’s wealth.

In my view that’s what should be done. We should stop letting China get away with its Little Nell act and re-assert the importance of human rights in China, including political rights. A more liberal and democratic China wouldn’t have the “beggar thy neighbor” economic policy that the authoritarian one has.

Meanwhile, I’m little more concerned about China than I was about Japan in the 1980’s. Back then Japan was making out like a tall dog, using its trade surplus to buy all sorts of U. S. assets, mostly productive assets, at inflated prices.

China has learned from Japan’s example and appears to be using its newly acquired foreign reserves to buy resources, raw materials. However, IMO they’ll have the same experience as Japan did: their very behavior ensures that they’re buying these resources at inflated prices.

From our point of view the biggest problem induced by tolerating China’s currency manipulation scheme is the dislocation it’s done and continues to do to the American economy. But look around. What’s happening here as a consequence of China’s artificially cheap exported goods is minor by comparison to what it’s done and continues to do in Mexico and much of the developing world.