By Andrew Balls and Scheherazade Daneshkhu in Washington
Published: April 17 2005 19:11 | Last updated: April 17 2005 19:11
Posted on 04/18/2005 10:07:04 AM PDT by TigerLikesRooster
China put on notice over its currency
By Andrew Balls and Scheherazade Daneshkhu in Washington
Published: April 17 2005 19:11 | Last updated: April 17 2005 19:11
The Group of Seven leading industrialised countries this weekend put China on notice that it must shift to a more flexible currency regime, with finance ministers demanding it take action immediately.
Officials said there was no discussion of singling out China because in the statement the language was already clearly aimed at Beijing - and because of the difficulty of getting Japan to agree a formal declaration.
But ministers from all the countries apart from Japan backed a US demand that China should act immediately.
John Snow, US treasury secretary said after the G7 meeting that China has had long enough to prepare its financial system, and more than two years of engagement with the US and the rest of the G7 on currency reform.
"With this groundwork in place, China is ready now to adopt a more flexible exchange rate," he said.
One senior official from a G7 country said: "It's not a question of threatening China but of recognising that this is getting urgent."
Greater currency flexibility is seen by the G7 as necessary to encourage other Asian developing countries to let their currencies rise against the dollar and promote domestic-led growth.
The US call was backed up by the finance ministers from Germany, France and Canada, speaking in the sidelines of the weekend meetings.
Mr Snow said the G7 had "put a clock" on the required actions by countries to help reduce global imbalances, including reducing the US budget deficit and promoting faster growth in Japan and Europe. That progress would be reviewed in an audit at the annual meetings of the International Monetary Fund and World Bank in September, he said. The US expects action from China within that timeframe.
China's top officials were not present in Washington this weekend, but have attended special sessions at the last two G7 meetings, and are expected to attend later in the year.
Sadakazu Tanigaki, Japan's finance minister, said China should be left to decide when to change its currency regime.
Reasons for Japan's reluctance to press China include a show of regional loyalty, and concerns about anti-Japanese sentiment and protests in China, officials from other countries said.
Japan's current account surplus is also four times larger than China's in dollar terms.
The hardening of US rhetoric came before the meeting, reflecting pressure on the Bush administration from Congress and small business groups.
There is concern that the US Treasury's gentle diplomacy may have made Beijing feel there was no urgency.
http://news.ft.com/cms/s/6923adf8-af6a-11d9-bb33-00000e2511c8.html
Stick to speaking for yourself.
If analysts are right about the developing shortfall in oil supply that's going to happen whether or not the Chinese let their currency float.
Fair enough. So. What have you done?
The US isn't artificially inflating gas prices by governmental edict.
China is artificially keeping the value of it's money low.
If the currency were allowed to float presumably the dollar would drop against the yuan until trade was balanced. Meaning China's cheap labor advantage would be neutralized and the difference of lifestyles and wealth between the two countries would be maintained.
We see that as fair and natural. They don't.
Well, once named, then it would probably end up as war. World leaders are trying to finesse it.
"If analysts are right about the developing shortfall in oil supply that's going to happen whether or not the Chinese let their currency float."
While this is a true statement, it does nothing to support your suggestion that the US givernemnt should interfere in the free market through which oil is traded and cap our oil usage so that other countries can buy oil cheaper.
Reducing American demand won't likely have a huge effect long term effect on oil consumption, merely on who consumes the oil and how much they pay for it.
Oil companies are producing oil about as fast as they can, if the price drops they will produce a little less from less cost effective sources, but mainly lower demand will cause lower prices, which will boost the demand elsewhere.
The Chineese curency is a seperat issue. It's a case where the Chineese is artificailly protecting their export economy by keeping the value of their money low.
This allows them to keep their labor inexpensive. It also makes it expensive for anyone in their country to import anything, so they keep control of their domestic economy as well.
Who pays the price? The Chineese people pay a price in that their standard of living is not allowed to improve. Countries like the US pay a price in higher trade deficits.
I didn't actually make that suggestion. I was just pointing out the flaws in the G-7 communique which asks the Chinese government to act against its own perceived interests to promote "fairness" and "balance". Keep in mind also that not everyone feels the way you do about the market and market forces.
Reducing American demand won't likely have a huge effect long term effect on oil consumption, merely on who consumes the oil and how much they pay for it.
True...and that applies to the currency situation as well (although the parallel is far from exact).
The Chineese curency is a seperate issue.
Not really. It's mostly a question of who benefits and whose ox is gored, who has to sacrifice.
Who pays the price? The Chineese people pay a price in that their standard of living is not allowed to improve. Countries like the US pay a price in higher trade deficits.
This is just bad analysis. The Chinese are doing extremely well. That's why they're resisting change.
"It all revolves around the definition of artificially."
The Yen is being kept from floating because of of the CHineese government's intervention. Without that intervention, the currency would float.
The price of oil and the demand for oil in the United States is set by the free market. You are suggesting government intervention to cap oil usage.
In neither case is it dificult to see which approach is artificial.
In the case of the Yen, China's trading partners are insisting that China trade with them on fair and equitable terms.
Your suggestion that America cap our oil consumption has less clear goals.
It would devestate our economy, and give a huge boost to the economies of other countries. Why do you suggest we do this? It's definately not in the best interest of the United States.
Trade is in the best interest of China, and we are insisting that they trade fairly if they want us to continue trading with them without sanctions.
What benefit is the US going to gain by cutting our oil usage in half?
I can understand that we should cut our oil usage where possible to save costs and increase our efficiency, but I see no justification for the government to step in and regulate our oil consumption to half of what it is now.
Yeah, they'll need to change it. If not float it, but at least peg it at a reasonable value.
One issue that China has to overcome is its fragile financial system, and the effect changing the RMB to a reasonable value would cause.
For example -- a Chinese investor buys US dollar for investment or US treasury at the current rate, 8.3 RMB per 1 USD. Let's ssay it goes to 6 RMB per USD (i.e. RMB rises to the fair value). It means the investor will lose 2 RMB per US). So if the government imposes it on say, June 1st, then investors will be thinking "if i need the money, i should get it converted back NOW", hence they'd sell before the deadline and this could cause a massive selling of USD and US treasuries in general.
My guess is that they'll change it but will change it gradually, say 7.8 in summer, 7.4 in the winter, etc.
A Chinese declaration of war would turn things around real quick. With China's economy mostly made up of foreign investment, exports and having no rich friends in the neighborhood it would be a short war. Even if somehow China could win the battle locally, it would be economically obliterated quickly.
To suggest that either the oil or currency markets are, or have ever been, free in the normal sense is ridiculous. They are, and have always been, manipulated by governments and other large interests. But the markets are so large that even these interests have only limited ability to counter the forces of supply and demand.
The Chinese pay a price for the peg they're maintaining; they have to purchase huge quantities of overvalued dollars. So far they think it worthwhile and they seem to have found a way to dispose of those dollars that also works to their advantage.
You (and G-7) are telling the Chinese you have a better conception of what is fair and equitable and in their interests than they themselves do. Not surprisingly, they're not buying.
What is true in all this is that the present situation cannot continue. Either we or the Chinese or both of us must make concessions or see the whole system fail as it did in '29...and I'm afraid it's the American worker and the American middle class which are going to be sacrificed.
Exactly.
This kind of crap is what happens when you allow children to play adult games.
i.e. Most favored nation status for China. What a Joke, these pukes (the govt not the people) should be forced back into the stone age where they belong until the People in China get fed up and overthrow their government.
oops... where is my head... then the all important all knowing business lobby won't get to make all of that money by selling into that region.
"I was just pointing out the flaws in the G-7 communique which asks the Chinese government to act against its own perceived interests to promote "fairness" and "balance". Keep in mind also that not everyone feels the way you do about the market and market forces."
Continued trade without sanctions is in the best interest of China. If they continue to limit free trade by not letting their currency float, we should place sanctions to make the playing field more even.
"Keep in mind also that not everyone feels the way you do about the market and market forces."
Believe what you want, but be prepared to back it up with facts.
You can argue that countries have the right to interfere in the free market, and I won't disagree with you, they definately have that right. However, trade is between two or more parties, and there's no reason we need to let the Chineese dictate the terms of that trade to us.
If they want to protect their markets, we are welcome to do the same. Actually they are encouraging us to do so. THere's no flaw in the G-7 communique. It's a warning to the Chineese that our patience with their actions is running thin. We have given them time to prepare to allow their currency to float so that they can ease into that transition, but they need to trasition if they want to avoid repercussions.
How is that unfair?
"True...and that applies to the currency situation as well (although the parallel is far from exact)."
Huh? People buy most Chineese products based on price. If the value of the Yen increases, the cost of making those products goes up, and products from other countries become more competitive, including domestic products.
Products also become more competitive in Chineese markets because the Chineese Yen goes farther when purchasing foreign goods than it currently does. How are the two similar other than they aren't fixed entities.
"Not really. It's mostly a question of who benefits and whose ox is gored, who has to sacrifice."
So you're comparing us purposfully hurting our economy by our own decision to the us requiring the CHineese to allow the Yen to float if they want to avoid trade sanctions...
The Chineese are being encouraged to let the Yen float because it's a requirement to enjoy the free trade with foreign countries that has been so beneficial to them.
They are being encouraged to reduce trade barriers to have more "fair" trade in the sense that there are less artificial barriers being placed on that trade. If they don't agree to do so, we can place our own trade barriers in the form of sanctions.
What exactly would be the benefit we would be gaining for cutting our oil consumption in half?
China still has their soverienty, and they have a choice to make of if it's better to maintain their currency restrictions and suffer sanctions, or if they are willing to remove them to benefit from the trade without sanctions.
Why would we want to make the decision to cut our oil consumption?
Please don't be offended if I misinterpret you, but please correct me. You seem to be of the opinion that oil is a global resource that no one has a greater right to than anyone else. I can agree with that to a great extent.
I feel that those who can most afford it deserve the ability to buy oil that countries export. The reason that I feel this way is that China, specifically China's government, has made choices that have significantly hindered their economy. They have chosen strong government control over freedom. They've chosen stability over economic growth.
Countries in Europe have done similar things, though their citizens have more input on the process than the chineese. The Europeans have chosen short work weeks, plentiful benefits, and long vacations. To gain this they sacrificed productivity, high employment rates, and individual freedoms.
In the United States, we've made due with longer work weeks, less government entitlements, and less safty nets when hard times hit us. The rewards we've gotten for doing so it greater productivity, greater wealth, and greater freedom.
Why should our government cap our oil consumption to help other countries that haven't made the tradeoffs that we have made? China has a huge population and vast resources. They have a history of innovation and education. Why were they so poor for so long? Why are they just now becoming an industralized Country?
Their government chose to limit their freedom to maintain control. They decided to prevent economic volitility at the expese of economic growth. They decided to reduce freedom and it's possitive effect on invention in order to maintain order in the manner they desired.
You can argue that different societies value different things. Just don't insist that we in the United States should share the price for the decisions they make. We pay our own price for the decisions we've made, they should accept the results of their decisions, or change to improve their situation.
China has recognized this, and has increasingly embraced free trade, though definately not fully embraced it.
Socialism and Communism have a cost. They place a heavy burden on the economy that embraces those philosophies. Each country and it's people must decide if the price is worth the benefit.
"You (and G-7) are telling the Chinese you have a better conception of what is fair and equitable and in their interests than they themselves do. Not surprisingly, they're not buying."
If China could have it's way it's in their best interest to not let the Yen float. However, it's not in our best interest, and it's harming our economy. It's also harming the economy of other countries of the G-7.
We are insisting that they change their policy if they want to trade with us. We are suggesting that theri trading with us in a manner that we feel is more fair is more benificial than them trading under the sanctions we will impose if they don't change their policy.
That's the nature of trade negotiations.
"To suggest that either the oil or currency markets are, or have ever been, free in the normal sense is ridiculous. They are, and have always been, manipulated by governments and other large interests."
The government manipulation in the US is tiny compared to the volume of Oil sales and compared to the similar manipulation of other governemnts.
Our biggest manipulation is taxes, and our taxes on oil and gasoline are but a fraction of what they are in Europe, or even Belize, which I recently visited.
As for other interests manipulating prices. What the left accuses as being market minipulation is almost always a free market at work.
If it's more profitable to reduce production and charge a higher price for a product, in general that's a regular market force at work. It's only when there is a monopoly or collusion and a significant barrier to entry into the market before there becomes a problem.
Opec can be used as an example of collusion to inflate prices, but to a large extent the various nations of Opec are in competition with each other and the real cooperation is pretty minimal.
"The Chinese pay a price for the peg they're maintaining; they have to purchase huge quantities of overvalued dollars. So far they think it worthwhile and they seem to have found a way to dispose of those dollars that also works to their advantage."
Sure, they pay that price by not passing on the benefits their economy has generated to their workers. They keep the workers poor and controlled. They keep the majority of the profits for the governemnt and us it to maintain control and build up their military.
They also provide minimal social services.
At the same time, our industry cannot compete with the Chineese, because the free market demands more for it's workers.
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