GWEN IFILL: We turn to the first of two segments on what’s on the agenda when President Obama meets with China’s president tomorrow at the White House.
First, NewsHour economics correspondent Paul Solman updates his ongoing coverage of a key dispute between the U.S. and China over currency and trade.
It’s part of his reporting on Making Sense of financial news.
PAUL SOLMAN: One dominant issue at the U.S.-China summit, the Chinese policy of holding down the value of their currency, which continues to give Chinese products and companies a supposedly unfair competitive edge.
U.S. officials have long pressed their Chinese counterparts to let the currency, the renminbi, rise in value, sometimes making the case more forcefully than at others.
On Friday, Treasury Secretary Geithner said the renminbi had made substantial gains, a more forgiving stance than he took just two days earlier.
U.S. TREASURY SECRETARY TIMOTHY GEITHNER: And we believe it’s in China’s interest to allow the currency to appreciate more rapidly in response to market forces. And we believe China will do so, because the alternative would be too costly, both for China and for China’s relations with the rest of the world.
PAUL SOLMAN: And Secretary of State Clinton:
U.S. SECRETARY OF STATE HILLARY RODHAM CLINTON: We need to open up more opportunities for American manufactured goods, farm and ranch products, and services, as well as allowing currency to appreciate more rapidly.
These reforms, we believe, wouldn’t only benefit both our countries, but contribute to global economic balance, predictability and broader prosperity.
DAVID STECK, Nomura Securities: Net-net, you have seen a small move lower in the dollar, but not appreciably so.
PAUL SOLMAN: Back in November, David Steck, who runs the foreign-exchange desk of Nomura Securities in New York, showed us how the dollar had been faring against the Chinese renminbi.
DAVID STECK: So, here, you’re looking at a long-term chart.
PAUL SOLMAN: For many years, China glued its currency to the U.S. dollar. But, starting in 2005, China loosened its grip, letting the value of the dollar fall against the renminbi, some 20 percent over three years.
But, in 2008, the world financial crisis hit, and China reglued the renminbi to the dollar. In the aftermath, China has recovered, while the U.S. economy limps along, our unemployment rate distressingly high.
DAVID STECK: The U.S. wants this to happen, this move right here. We want to get back on this path, that the dollar go down in value against the renminbi.
PAUL SOLMAN: Because we can then sell more exports and import less.
DAVID STECK: Correct, and perhaps preserve some more manufacturing jobs.
PAUL SOLMAN: But that’s just how China looks at it, says MIT economist Yasheng Huang.
YASHENG HUANG, professor, MIT Sloan School of Management: The Chinese export sector is a large employer, and they tend to be larger in terms of employment as compared with companies that don’t sell abroad. So, when Premier Wen Jiabao said that the currency appreciation is going to have a very substantial, negative effect on unemployment, I agree with him.
PAUL SOLMAN: But how exactly does China control the value of its currency? Certainly not in markets like this.
DAVID STECK: Every day at 9:15 Beijing time, the central bank, the People’s Bank of China, in conjunction with SAFE, who’s the State Administration for Foreign Exchange, issues a circular to all the banks in China. And what that circular says is: This is going to be the reference rate of the dollar against the renminbi for today.
PAUL SOLMAN: Suppose the Ford Motor Company buys some Chinese steel, says David Steck.
DAVID STECK: Ford pays China Steel, say, $50 million. So, China Steel now has $50 million. Now, as a Chinese company, you want your own currency. The state bank will then issue renminbi to the steel company in exchange for those dollars. And then the state bank will go to the central bank to exchange those dollars.
PAUL SOLMAN: So, China’s central bank amasses the dollars paid to Chinese companies, hundreds of billions of dollars a year. If it simply spends them, the bank risks flooding the world with so many dollars, the demand for them is bound to go down. The dollar would then drop in price.
DAVID STECK: So, they have to put those dollars somewhere. Those dollars are being put in the deepest, most liquid market in the world, which is the U.S. Treasury market. That is where you have this — this very circular logic of China running big trade surpluses, the U.S. running big deficits, but they are interlinked.
PAUL SOLMAN: Because China is lending us the money to run our big deficits?
DAVID STECK: One interpretation is that China is basically lending us the money to buy stuff from them.
PAUL SOLMAN: And, to some, this is the road to ruin.
This graphic futuristic fear video went viral before the fall election. It’s about the rise of China, the decline and fall of great empires like ours, which overspent, says the Chinese professor.
No surprise that America became hopelessly in debt.
MAN (through translator): Of course, we owned most of their debt, so now they work for us.
PAUL SOLMAN: That’s one view of the Chinese. But they say they’re just being prudent, controlling their currency to keep hot money from overheating their economy.
YASHENG HUANG: Money that goes back and forth very, very quickly, they bid up prices. They buy up the real estate assets. They buy — buy up stock market assets, bid up the prices. And then they have a catastrophic fall, right? That’s the fear.
PAUL SOLMAN: But, in actively discouraging hot money, by forbidding the open trading of its currency, China opens itself to the now familiar charge.
If China keeps its currency artificially low, that means its products are artificially low, its companies get the business, and it takes jobs from the United States.
YASHENG HUANG: Having a trade deficit for the United States is a function of this country simply consuming beyond its means.
PAUL SOLMAN: So, if China’s goods were more expensive than they currently are, you think the United States would still be borrowing money?
YASHENG HUANG: From India, from Vietnam, from Brazil. I’m not saying I agree with the Chinese completely. All I’m saying is that it is very difficult to make the argument with the Chinese and say, you do something about your exchange rate, but, by the way, we can spend the way we want, right? So, that’s a — that’s not a winning argument with anybody.
PAUL SOLMAN: Meanwhile, the Chinese authorities have had other economic concerns of late, according to Chinese economist Geng Xiao.
GENG XIAO, Columbia University: China has been very much concerned about the cost increase and the inflation, wage increase, property price increase, raw material price increase. And all those means that the Chinese companies, exporting companies and other companies, are losing competitiveness.
PAUL SOLMAN: And, says Professor Geng, whom we met at the annual economics convention earlier this month, those inflationary cost increases, in wages, in raw materials, in property prices, will inevitably make Chinese products more expensive.
As it happens, this is the very argument Secretary Geithner has used to convince the Chinese to revalue their currency, because, he says:
TIMOTHY GEITHNER: If China doesn’t allow the currency to appreciate more rapidly, it will run the risk of seeing domestic inflation accelerate, as you are already seeing and will face greater risk of a damaging rise in asset prices.
PAUL SOLMAN: But Professor Geng says it doesn’t matter, because Chinese inflation or Chinese currency revaluation have, in effect, the same results.
GENG XIAO: Basically, the Chinese income is rising. Chinese price levers are rising. And the U.S. income is stagnating, right? So the two are converging. And that’s what we expect. And this is what will happen, no matter what the Chinese government wants or not. So, if we just have a little bit more patience, everything will actually fall into places.
PAUL SOLMAN: That may be more nearly China’s position on the currency issue than the administration’s, however, as Hu Jintao comes to visit America.