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Diane Francis

Diane Francis

Posted: July 29, 2009 11:24 AM

China's Dollar Scam Must End


The bilateral talks, or G-2, between the U.S. and China have resulted in little substantive progress. This is because there is a continuing, inexplicable failure on the part of the U.S. with other countries to pressure China to curb its currency manipulation.

China, Japan and other exporters in Asia have played the dollar game by artificially keeping their currencies down in relationship to the U.S. dollar in order to sell more goods into the U.S. market. They have done this by keeping their surpluses in U.S. dollars, rather than converting them into their own. If they converted into their own currencies, they would rise in value, thus costing them export sales into the U.S.

Japan was the first to do this on a mass scale, and still does it, which is why China, Inc. adopted the same strategy to build its economy and put its population to work.

Where Have the Refs Been?

The U.S. Secretary of the Treasury plus the IMF are charged with the responsibility to stop such manipulations and have reneged repeatedly. The oft-cited reason why Washington -- with growing unemployment in manufacturing -- has not put the boots to the Middle Kingdom is that China's massive U.S. government bond holdings might be dumped, thus cratering the U.S. dollar.
But that won't happen because it would mean China Inc. would be shooting itself in the foot. Its currency would be higher in comparison to a sunken dollar, hurting exports, plus its U.S.-dollar denominated bonds would suffer large losses in value.

However, there is no question that China believes the U.S. dollar will drop, because of economic problems and stalled political fixes, so that it has begun to divert its trade surpluses with the U.S. into buying with its American dollars hard assets, corporations, stock market investments and possibly commodity futures. But there is no way it will dump its bonds or refuse to buy any in future.

Hey Washington, Smarten Up

So why aren't the Obamites more forceful in their requests for China to let its currency rise to proper levels? Here's Peter Morici's take. He is one of my favorite economic pundits and a U.S. professor:

U.S.-China talks won't accomplish much because the Obama Administration is reluctant to push China on its purposeful manipulation of currency markets and undervaluation of the yuan.

China holds more than US$2 trillion in foreign currency, mostly dollars, and has limited options for investing additional dollars. Essentially, it must hold or put into Treasuries and other U.S. debt instruments. If it had other options, it would already be using them.

If China does not want to buy the Treasuries, so what! It can paper the walls of the Peoples Bank with them -- it would have no effect. China could dump those dollars on currency markets, but the adjustments in values would be much more damaging to China's export economy than any consequences felt here. It would be better for China to cooperate with the U.S. and undertake an orderly revaluation of the yuan to a level that eliminates its trade surplus over a period of three years. That would be enough time to adjust. In the end, China only has the leverage President Obama gives it.

How much are America's currency politics influenced by arch-Clinton and China supporter Walmart of Arkansas?