China’s Currency Manipulation—How It Works, Why It’s Still A Problem

For everyone pushing for free trade with China, there’s something you should know.

They fight dirty.

China applies relentless economic pressure on America using a number of sophisticated tactics.  I’ll tell you what they are, and show you why trade with China isn’t such a good idea.

What Is Currency Manipulation?  A Definition.

China has many tricks up their sleeves, but the biggest and baddest is currency manipulation.  We always hear politicians talking about it, but no one ever fixes it—probably because most of them don’t understand it.

Even popular conservative pundits, like Ben Shapiro are ignorant on the subject (confusing natural hyperinflation with managed currency manipulation).

So what is currency manipulation?

Basically, it’s a way a country artificially lowers the value of its currency, relative to another currency.  This makes their stuff cheaper, which boosts demand for exports (people like to buy cheap stuff) and increases foreign direct investment (people invest in cheap places).

In theory, it shouldn’t work.

Take China as an example.  America buys Chinese goods (which are bought in Renminbi, China’s currency), which increases demand for Renminbi, thus increasing its value.  This (theoretically) makes China’s stuff more expensive, which curbs American demand over time.  In theory, a price equilibrium is found (we’ll come back to this soon).

In practice, it works.  China knows that American investment grows its economy in the long term, because America supplies wealth, technology, labor skills, infrastructure, and industrial equipment etc.  Therefore, it’s in China’s best interests to ensure it remains relatively cheap.

To do this, China buys tons of American Dollars, which inflates the Dollar (because of increased demand), and deflates the Renminbi (because of selling pressure).  This ensures that China’s exports remain cheap, and that China remains attractive to foreign investors.  Although it’s impossible to pin down, America’s suffered enormous job loss because of this.

This is how (and why) China manipulates its currency.

abandoned_factory_in_ljubljana
Industrial decline has led to urban decay throughout the West.

Currency Manipulation Is A Big Problem

Some (like Ben Shapiro) don’t think this is a problem, because they believe the market will find an equilibrium price between demand for a country’s exports and their currency’s value.

That’s not true, because the underpinning theory is incomplete.

Currency markets measure total demand for a currency, but don’t distinguish whether this demand is caused by exports, or by the sale of assets (past production, like property) or debts (future production, like T-Bills).  Because of this, currency values can be kept artificially low (or high) by selling or buying assets and debts.  This allows a country to optimize its currency value for selling exports, which stimulates economic growth.

 

special-olympics-dream-house-front-california-design-houses-concrete-modern-house-design-in-two-storey-house-design
Foreign buyers scoop up over $100 billion worth of US property per year.

It’s a gamble.  It works if the economic growth caused by a lower currency outweighs the potential economic downsides.  It’s been great for China—they’ve been growing at nearly 10% per year for decades, they’ve created a middle class larger than the whole of America, and they’ve advanced their technology from rickshaws to rockets.

This happened because their cheap currency attracted American investment and provided them with a market for their output.  This brought trillions of dollars to the economy ($5.2 trillion since 1985), better technology etc.  The cost?

China’s been furiously buying US assets—foreign investors now own 20% of all US equities (up from 12% in 2007).  They also bought over $100 billion worth of US property in 2015.  Because these purchases are made in American dollars, this increases demand for the dollar, which inflates it while decreasing the Renminbi (see the feedback loop?).

They also buy our debt (although this has been abating slightly in recent years).  China’s bought over $1.3 trillion in US Treasury Bills and currently holds an estimated $2.6 trillion in US currency reserves (although the precise figure is a Chinese state secret).  All totaled, foreigners hold 47% of our national public debt (over $6 trillion worth) and 43% of all US corporate bonds.

Even so, it was clearly worth it for China.

Beijing’s “Bird’s Nest” Stadium.

China’s Trade War Tactics

China’s not just using currency manipulation to take advantage of America.

They also violate a multitude of WTO (World Trade Organization) agreements, by creating and maintaining entry barriers to the Chinese market.  This includes legal barriers to imports (like absurd or incomprehensible regulations), dumping goods in foreign markets (selling large quantities of a product below cost so as to drive out local competition, and then raising prices after they have a monopoly), and suppressing labor rights for Chinese workers (which lowers labor costs by an estimated 47-86%, depending upon the industry).

China also provides extensive subsidies for their exporters.

Between 2000 and 2006, roughly 33% of Chinese exporters sold over 90% of their goods abroad.  For context, only 0.7% of American exporters did the same.  Additionally, exporters are rewarded with preferential land-use policies, easier access to finance, or exemptions from various industrial or commercial taxes, in direct contravention to WTO rules.  This highlights just how dedicated the Chinese are to preying upon Western markets.

They don’t fight fair: Chinese companies are free to compete in America, but American companies cannot compete in China.

“Free trade” with China is anything but free.

At the end of the day, China has a predatory, and asymmetrical trade relationship with America.  It boils down to a battle between American companies, and Chinese companies that are backed up by their monolithic dictatorship.

This destroys America’s free market, which is subject to massive amounts of (foreign) government intervention.

This hurts our economy, and it hurts our people.

To protect our free market, we must fight fire with fire, and impose massive tariffs on Chinese products—otherwise we don’t have a chance.

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Select Sources:

Bergsten, Fred C. and Joseph E. Gagnon. “Currency Manipulation, the US Economy, and the Global Economic Order.” Peterson Institute for International Economics, Policy Brief, 2012.

Defever, Fabrice, and Alejandro Riaño. “China’s Pure Exporter Subsidies.” CEP, Discussion Paper 1182, 2012.

Frank, Robert. “Wealthy Foreigners Bought $100 Billion in US Real Estate.” CNBC, June 22, 2015. http://www.cnbc.com/2015/06/22/wealthy-foreigners-bought-100-billion-in-us-real-estate.html

Jackson, James K. “Foreign Ownership of US Financial Assets: implications of a withdrawal.” Congressional Research Service, 2008.

United States Census Bureau, “Trade in Goods, 1985-2016.” Accessed May 20, 2016. https://www.census.gov/foreign-trade/balance/c5700.html

World Bank, “GDP by PPP Statistics.” Accessed May 15. https://knoema.com/mhrzolg/gdp-statistics-from-the-world-bank?country=United%20States

—“Total Reserves (includes gold, current US$).” Accessed May 15, 2016. http://data.worldbank.org/indicator/FI.RES.TOTL.CD

 

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About Spencer P Morrison 45 Articles
JD candidate, writer, and independent intellectual with a focus on applied philosophy, empirical history, and practical economics.Author of "America Betrayed" and Editor-In-Chief of the National Economics Editorial.

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