By HANS-WERNER WINN
CHINA has pegged its undervalued currency, the renminbi, to the dollar, and as a result, every weakening of the dollar in the wake of America’s financial crisis has also meant a weakening of the renminbi vis-a-vis other world currencies.
But, is China really to blame for the eruption of a global currency war?
The central banks of South Korea, Brazil, Taiwan, Japan, Switzerland and many other countries are now buying dollars in order to protect their own currencies against revaluation and thus to defend their exports.
Europe also became nervous after the euro exchange rate rose to more than US$1.40, far beyond the purchasing power parity (PPP) rate of US$1.17.
The US is now taking drastic steps against China, and is making provisions for a trade war.
Congress has authorised the president to impose import duties on Chinese products if China remains unwilling to increase the value of its currency substantially against the dollar.
The undervaluation of the renminbi, which is currently 45%, has persisted for many years. So, why is the US suddenly acting so aggressively?
Why did the US not take action much earlier?
The reason lies in capital movements.
The US accepted the lower valuation of the renminbi as long as China returned the dollars that it earned from bilateral merchandise trade by financing America’s budget deficit.
Now that the Chinese prefer to invest that money in raw materials in Africa and elsewhere, they have aroused the full ire of American policymakers.
China’s shift has been dramatic. In 2008, and much of last year, the Chinese purchased US government bonds at a rate of US$17 billion a month.
In November last year, China reversed the course.
During the first seven months of this year, China not only refrained from buying any more US government paper, but even began to sell its holdings.
Each month, China sold a net sum of about US$7 billion in US government bonds.
That nerves are now on end in America is perfectly understandable.
The city of London has jumped into the breach, increasing its purchases, which in 2008 and last year amounted to only about US$1 billion monthly, to an average of US$28 billion in the first seven months of this year.
Since Britain itself is a large capital importer, we can assume that London is not holding the paper itself but merely restructuring it and then selling it to the world under a new name and with the city’s stamp on it.
Despite its withdrawal from financing the US government, China remains the world’s largest net capital exporter, a position that it has held since 2006.
In 2007 and 2008, China exported on average about US$400 billion of capital a year.
The US, which at the time needed annual capital imports of US$800 billion in order to offset the near total cessation of private savings, received the lion’s share of this capital.
The US wanted the Chinese money, but it was not prepared to offer anything more than structured securities of questionable creditworthiness, as well as government paper that is now clearly exposed to the risk of inflation and devaluation.
It would be a service to world peace if the US stopped making cheap moral accusations against China.
The truth is much more subtle than naked political interest. – Project Syndicate
nHans-Werner Sinn is professor of economics and public finance, University of Munich, and president of the Ifo Institute.