China's policy to keep yuan weak a sign of protectionism | The Australian: "China's policy to keep yuan weak a sign of protectionism
* Michael Sainsbury
* From: The Australian
* December 07, 2009 12:00AM
THE US and China have wildly opposing ideas of the sort of deal that should be struck at Copenhagen over the next two weeks.
But there now appears to be a genuine desire to reach a compromise that will at least allow the process to move ahead.
No such luck for the global economy on how China's currency should be valued.
In fact, the issue has become an ugly stalemate with increasingly strongly worded statements of position from both sides.
In essence, the situation is this. China does not have a free-floating exchange rate like other economies of any size. The tight central control that is the hallmark of the country's ruling Communist Party extends to its exchange rate too. As China has rapidly become richer, it has been pressured by the other leading economies to allow its currency to appreciate -- which is what should happen as a country gets richer.
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For three years during the boom it did this; the yuan appreciated by 17 per cent against the US dollar. Then mid-last year, as it sniffed the rotten breeze of the global meltdown and its exports -- a key driver of its boom -- began to fall off, it pegged the yuan to the US dollar.
In this way, its exports would not get any more expensive and it could at least hold its piece of a shrinking global pie.
This week, Chinese Premier Wen Jiabao, in an uncharacteristically colourful -- some might say near hysterical -- attack on those who would like to see China allow its currency to appreciate, took the battle to a new level.
'Some countries are asking for (the yuan's) appreciation and meanwhile impose various (acts of) protectionism on China. It's not fair and limits China's development actually,' Wen said.
China has, in effect, put its growth ahead of everyone else's. To paraphrase George Orwell's critique of communism in Animal Farm, all growth is equal but some growth is more equal than others. The US and the EU have long been insisting on the yuan's appreciation and the demand has become more pressing following the world economic crisis.
'The stability of the yuan benefits China's economic development and the recovery of world economy amid this rare financial crisis. China will continue to improve the yuan exchange rate mechanism based on an initiative, controllable and progressive development, and ensure a stable and reasonable yuan exchange rate,' said Wen at a summit with European Union leaders in China.
Typically opaque Chinese technocrat-speak for 'we will do as we like, when we like'.
China has an unhealthy obsession with growth at all costs -- it's a core political tenet that if the government keeps growth bubbling along, the punters will stay in their boxes, and this is just the latest example.
And it smacks of the worst kind of hypocrisy: the sanctimonious kind. China has spent much of the past year lecturing anyone who cares to listen about the dangers of protectionism. Correct, of course; it's what turned the 1930 financial crisis into the Great Depression. But deliberately holding down an exchange rate is itself rank protectionism.
China is making sure its goods remain cheaper than they should be, forcing others out of the market. It is protecting its market at the expense of others.
Derek Scissors, a research fellow in Asian economic policy in the Asian Studies Centre at the Heritage Foundation, Washington DC, says: 'The People's Republic of China is far more protectionist than its major partners, heavily subsidising domestic firms to compete against imports and in overseas markets.
'Perhaps most disingenuous is the accusation that China's trade partners, which have been utterly indispensable to its economic development, are plotting against the PRC. The Communist Party has been trotting out versions of this accusation -- that the US is trying to contain China -- when useful for the past 15 years. It has been cited most recently with regard to climate change.
' In fact, Chinese trade practices harm China's partners, so the PRC can be accused of interfering with India's rise, Vietnam's rise, and the ascent of other trade partners,' he says.
So much, then, for China's de facto leadership of the developing world. Sure there is little love lost with India, not to mention the troop build-up on its border, but it's even crimping the growth of its fellow People's Republic in Vietnam. Perhaps its revenge for being embarrassed in the 1979 war?
More likely it's another demonstration that for all its fine progress in so many areas, China's self-interest remains utterly paramount. The rest of the world is falling over itself to accommodate China, which has been elevated with startling alacrity into every important world forum. But with rights come responsibilities.
With its currency, China is shirking them. Worse still, its exchange rate policy is continuing and even making worse the financial imbalances that were a central cause of the global meltdown. And sensible people realise that as long as these continue to be out of whack the economic bad times, while less bad these days, will continue to linger.
The great irony of Beijing's exchange rate peg is that it holds most of its reserves in cash and bonds. While it may be happy to have its goods become more and more competitive with the Europeans, it is not happy that its hard-earned savings -- although increasingly easy -- are reducing in value.
'The world's second largest economic power cannot stay hidden behind the largest for long -- the yuan peg must eventually break,' Dr Scissors says.
'The question is whether it will be done by the PRC in relatively smooth fashion or whether it will occur in a crisis setting, with Beijing's hand forced by foreign action.
' It would be better for all concerned if China started the process itself, and soon.'
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Not surprisingly, the West has reacted to the security treaty skeptically at best. At worst, many in the West interpret Medvedev’s proposal as an attempt to restore its lost global influence, if not its empire.
Medvedev’s initiative was the logical continuation of the Kremlin’s foreign policy that was sharply articulated by then-President Vladimir Putin at the Munich Conference on Security Policy in February 2007. During his speech, Putin said, “Security for each is security for all,” and that the model of a unipolar world in the 21st century is not only unacceptable but impossible. In Moscow’s opinion, any unilateral action — whether in the former Yugoslavia or Iraq — only creates new problems.
Every country — especially a totalitarian one — defends its most fundamental national security concern: self-preservation. For the past 60 years, nuclear weapons have proven to be one of the most reliable guarantors of security for those countries that are part of the official and nonofficial nuclear club. But as a rule, those countries have complex and difficult relations with neighboring states and are burdened with historical, ideological, religious, territorial, ecological and other problems. The result is a nuclear domino effect. If, for example, Iran develops nuclear weapons, this will inevitably lead to the uncontrolled proliferation of nuclear arms throughout the Middle East and beyond.
Moscow is extremely concerned about attempts by the United States and some of its allies to reach decisions affecting regional as well as global security outside the framework of the United Nations. NATO, the European Union and the Group of Eight do not have the global mandate to make these decisions by themselves.
Thus, Medvedev is trying to build a much broader structure for global security. The basic idea is that “no single state and no single international organization in the Euro-Atlantic region can strengthen its security at the expense of the security of other countries and organizations.” Medvedev’s draft treaty has already been sent to NATO, the European Union, the Collective Security Treaty Organization, the Commonwealth of Independent States and the Organization for Security and Cooperation in Europe. It was also presented and discussed at the latest NATO-Russia Council meeting, held Friday in Brussels.
Of course, there is a large discrepancy in terms of resources among the members of these organizations. For example, NATO’s military potential far exceeds that of the CSTO. In addition, NATO’s zone of operations has expanded so much that every former Soviet republic now participates in its Partnership for Peace program. What’s more, Georgia, Azerbaijan, Armenia, Kazakhstan and Moldova are in the initial stages of one day joining the alliance.
But NATO’s future is uncertain, and this underscores the importance of finding alternatives to provide European-Atlantic security. The more that NATO tries to expand, the more diluted, cumbersome and ineffective the organization becomes. Moreover, NATO suffers from a lack of mission and common cause. The Russian menace is greatly exaggerated, and international terrorism is too diffuse a threat to unite alliance members. What’s more, with Washington’s security guarantees becoming more unreliable, European states have been forced to consider creating their own security structures. Recall the EU proposal to form its own security structure — a “NATO without the United States,” of sorts. Further, apart from the largely decorative NATO-Russia council, NATO has not included Russia and its closest allies in the European security structure. This not only weakens NATO, but gives it a certain anti-Russia character.
In addition to NATO’s inherent weaknesses, there are also serious problems with the OSCE. The OSCE member states have never resolved a major interstate conflict, such as Nagorno-
Karabakh. The OSCE, which lacks sufficient unity among its member states, has not worked effectively with the CIS to form a unified security structure
Therefore, there is an urgent need to redesign the old and ineffective European-Atlantic security structure to meet new threats and challenges. Medvedev’s European Security Treaty offers a new architecture for the post-Soviet era, and the West should treat it seriously. It provides an excellent opportunity for Russia, the CIS, Europe and the United States to work together toward strengthening security from Vancouver to Vladivostok.
Vladimir Yevseyev is a senior associate at the Institute for World Economy and International Relations.
