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Why China’s currency announcement is hokum

Robert Reich, professor of public policy | June 22, 2010

The stock market is euphoric over China’s apparent decision to allow its currency to rise against the dollar.

Watch your wallets.

China isn’t really changing anything. It’s only doing the minimum to prevent Congress from listing China as a currency manipulator, leading to a squeeze on Chinese imports.

Over time – and I’m talking about months if not years – China will raise its currency to where it was before the global meltdown in 2008. Big deal.

Even then, a stronger yuan won’t generate lots of new jobs in the United States

That’s because most of the gains of China’s meteoric growth are still not finding their way into the hands of Chinese consumers, whose spending is growing far more slowly than China’s overall economy. In 2009, total personal consumption in China amounted to only 35 percent of the economy; ten years ago it was almost 50 percent.

Why are Chinese consumers so reluctant to spend? First, social safety nets are still inadequate there, so Chinese families have to cover the costs of health care, education, and retirement. (China recently doubled its spending on these services but the total is still low by international standards – around 6 percent of the Chinese economy, compared with an average of around 25 percent in most developed nations.)

Second, young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to save and accumulate enough assets to compete successfully in the marriage market.

Third, Chinese society is aging quickly because the government has kept a tight lid on population growth for three decades. That means households are supporting lots of elderly dependents and must save in anticipation of supporting even more.

But most fundamentally, China is oriented to production, not consumption. It wants to become the world’s preeminent producer nation. While keeping the yuan artificially low is costly to China — it pushes up the prices of everything China imports — China is willing to bear these costs because its currency policy is really an industrial policy.

We think the basic purpose of an economy is to consume, not to produce. So we only grudgingly support industrial policy. We think of government efforts to rebuild our infrastructure as a “stimulus.” We approve of government investments in basic research and development mainly to make America more secure through advanced military technologies. And we give American companies tax credits for R&D wherever they do it around the world.

Don’t be fooled into thinking that US companies will continue to make big profits from sales in China. China allows big U.S. and foreign companies to sell in China on condition that production takes place in China – often in joint ventures with Chinese companies. It wasn’t American know-how, so it can eventually replace the US firms with China firms.

GM’s China sales are soaring but it’s making those cars there. It’s even designing and developing a new subcompact for China, in China. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are local brands. They might as well be. P&G makes most of them there.

Other American are helping China build a “smart” infrastructure, tackle pollution with clean technologies, develop a new generation of photovoltaics that convert solar radiation into electricity and wind turbines, find new applications for “nanotechologies,” and build commercial jets and jet engines. GE was producing wind turbine components in China.

Even if some of this enhances the profits of American-based companies, it doesn’t translate into more jobs in the United States. And it doesn’t build know-how here. It builds it there.

China’s currency policy also doubles as a social policy designed to maintain order. Each year, tens of millions of poor Chinese pour into China’s large cities from the countryside in pursuit of better-paying work. If they don’t find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China’s governing elite. That elite would much rather create export jobs, even at the high cost of subsidizing foreign buyers, than allow the yuan to rise much against the dollar and thereby risk job shortages at home.

Here’s the awkward truth that’s not openly discussed on either side of the Pacific: Both the United States and China are capable of producing far more than their own consumers are capable of buying. In the United States, the root of the problem is a growing share of total income going to the richest Americans.

Inequality is also widening in China, but the root of the problem there is a declining share of fruits of economy growth going to average Chinese and increasing share going to capital investment.

Both our societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the United States, it is a prolonged jobs and earnings recession which, when combined with widening inequality, could create a political backlash.

This article was originally published in Robert Reich’s blog.

Comments to “Why China’s currency announcement is hokum

  1. China is manipulating things like crazy. China’s workers protest all the time for low wages and manipulation. I’m a strong believer that innovation is the #1 thing that drives an economy and China isn’t innovating at all.

    Best wishes,

    • It’s only a matter of time before we complete our decline and fall spiral at the rate American corporations and politicians are selling out our competitive advantages versus the escalating resources that China, and India are challenging us with.

      Without major turnarounds in our failing creativity, willpower and cultural values, turnarounds that return us to the post-WWII culture that rebuilt America into the greatest nation in history until now, turnarounds by our intellectual and political leaders who have failed to support increasing, new and better American production today, America will crash and burn in decades.

  2. The much more important question that really should be addressed here is Why Can’t We Save Ourselves?

    Why can’t America become a producer nation again instead of surrendering our former “Land of Opportunity” to China and India like we are doing today? We have $Trillions hiding in “safe” deposits on the sidelines instead of being invested in new production that can save America once again like we saved ourselves during and after WWII?

    So here we are just a mere few hundred year into the new Anthropocene Epoch and we are already failing as a civilization because we simply have no leadership and willpower to cooperate with each other enough to protect our long term future and prevent our decline and fall due to our myopic brain defect.

    Why can’t Berkeley’s brightest minds focus all of our preeminent brainpower to make the right things happen in California, then America, then throughout the world with the required sense of urgency starting today? Right now, as E.O. Wilson said, we are working “like some great all-devouring juggernaut, and it takes a considerable stretch of the intellect to start thinking (and acting) in terms of a centuries-long future.”

    For instance, we desperately need water in California, so why are we doing nothing to stop another Dust Bowl in our Central Valley, why can’t we even save our California agricultural economy by building desalination plants today so we can produce enough water for all of California at least?

    Why can’t we create opportunities to overwhelm our failures instead of the reverse that we are allowing to happen to us today, or are Ornstein and Ehrlich still correct in their conclusion that “our mental machinery will not change biologically in time to help us solve our problems” and we are just giving up instead of fighting like hell for the living and even more importantly for far future generations?

  3. well… as a ucb student now in China

    I am pretty sure what you wrote is simply a JOKE….

    please….research well before you write something….

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