JIM LEHRER: Next tonight: the U.S./China clash over currency.
The issue dominated a meeting between President Hu Jintao and President Obama in Seoul, Korea today.NewsHour economics correspondent Paul Solman explains what’s behind the dispute.It’s part of his reporting on Making Sense of financial news.
PAUL SOLMAN: At the G20 meeting in South Korea this week, conflicts over currency, the most recent one: that the Federal Reserve’s printing of more dollars, so-called quantitative easing, could upset the world economy.
But this story is about a longer-standing issue: the U.S. and others pressing China to stop controlling its currency, stop holding down its value, which continues to give Chinese products and companies a supposedly unfair global edge.
DAVID STECK, Nomura Securities:Net-net, you have seen a small move lower in the dollar, but not appreciably so.
PAUL SOLMAN: David Steck, who runs the foreign exchange desk of Nomura Securities in New York, showed us how the dollar has been faring against the Chinese renminbi.
DAVID STECK: Yes, 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 re-glued 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 of Political Economy and International Management, 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 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: Now, at this point, we could run a montage of sound bites from politicians, and even some economists, about what a huge problem this is.
More graphic and succinct is this futuristic fear video gone viral.
MAN (through translator): Why do great nations fail?
PAUL SOLMAN: It’s about the rise of China, the decline and fall of great empires.
They overspent, says the Chinese professor, and went into debt — the most recent great debtor: America.
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: Hot money, money that goes back and forth very, very quickly.If you look at the U.S., the interest rates here are very, very low.Japanese interest rates are very, very low.This money needs to find a home, to park, to generate higher returns.
PAUL SOLMAN: OK, so, lots of hot money rushes into China.So what’s wrong with that?
YASHENG HUANG: They — well, I mean they bid up prices.They buy up the real estate assets.They 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, sand 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.It matters, the exchange rate matters, when it comes down to with which country you incur the trade deficit, with China or with India or with Brazil?That’s the issue.
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: But, look, says Nomura’s David Steck, the Chinese are now letting their currency become more valuable.The weaker dollar buys 2.5 percent less of anything priced in renminbi than at the start of the summer.
DAVID STECK: If you extrapolate the pace of the last couple months, you’re getting back on that path where, you know, 5 percent to 7 percent a year is definitely within the realm, provided that authorities stick to that policy.
PAUL SOLMAN: Just across the aisle, however, are two guys who work for David Steck, yet see a falling renminbi.
JENS NORDVIG, Nomura Securities:If you look at the same period with the euro here, we have had a dramatic move in the other direction in the region, 7 percent.
PAUL SOLMAN: Jens Nordvig runs the euro desk.
JENS NORDVIG: The Chinese currency is a little bit stronger against the dollar.But the Chinese currency is actually weaker against almost every other currency in the world.
PAUL SOLMAN: No wonder so many G20 countries are even more exercised than the United States, especially the emerging economies of Latin America, whose currencies have soared since the crisis, relative to China’s.
Liran Blum runs the Lat-Am desk.
LIRAN BLUM, Nomura Securities:If we look at Brazil compared to China, we have seen a very significant move higher, 60 percent, 70 percent appreciation, since the crisis.
PAUL SOLMAN: So, 60 percent, Brazilian currency appreciating, gaining in value against the Chinese currency, meaning that Brazilian exports are that much more expensive in the world.
LIRAN BLUM: Correct.So, if you make shoes in Brazil, it’s a lot more difficult to compete, even in the local market, against Chinese imports.And a lot of it is coming because the Chinese have tied their currency to the dollar.
PAUL SOLMAN: Which is why the rest of the world will continue to pressure China in South Korea this week.