Is there a Currency War between China and the United States? Lior Paritzky, Laowaiblog’s Editor in Chief, thinks there is not and that the U.S needs to get its act together
Last week a riot broke out in a school cafeteria in Guizhou province. Students were unhappy with a decision made by the cafeteria owners to raise food prices. At night, the students had broken in to the cafeteria and began throwing chairs and tables, breaking windows and smashing signs. According to some reports, approximately 1000 students participated in the riot.
Inflation is currently the biggest concern in Beijing. As quality of life rises, inflation remains a dangerous threat. The government is doing everything in its power to control inflation within reasonable levels (1%-3%). Yet, in October, inflation rate was set at 4.4%, and in September it was the highest in the past two years. The main cause: food prices, which rose by 8% this September.
Not only Chinese people feel the inflation getting out of control. As a foreigner who has been living in Beijing for over a year now and has been dealing with FXCM, I have seen real estate prices go up by more than 20% just in the past year. Food prices have been rising so steeply in the past few months, forcing me to be more picky on which vegetables to pick out when I go to the local fruit and vegetable market.
One can sympathize with Guizhou cafeteria owners, who are purchasing food in local markets. When the vendor raises food prices, the cafeteria must raise prices as well to maintain profit levels. The problem occurs when salaries do not match the inflation rate and people’s ability to purchase goods is diminished. The riots in Guizhou are a symptom of a feeling shared by many Chinese people that the standards of living are rising while salaries remain constant. The government understands the risk of instability and thus tries its best to keep inflation under control.
Currency War?
It does not seem that the United States understands just how fragile the situation in China really is. It continuously blames Beijing for manipulating its currency and pegging it to the dollar in order to keep its exports attractive for foreign markets. Moreover, it also partly blames Beijing for the global economic crisis and global current account imbalances that are caused due to artificially lower prices of Chinese goods (since products that are made in China are cheaper, and since the United States is buying these products, China currently holds a surplus in the U.S – China current account of $371.8 billion.)
The U.S is probably right. China is probably pegging the yuan to the dollar to keep its goods attractive, and China should be held partly responsible for the lack of ability by America and certain European countries to maintain steady economic growth. Nevertheless, the United States is failing to deal with this crisis because it over emphasizes the currency as a key issue for its failure to compete globally and because it lacks the understanding of how to deal with the crisis. It is not about who is right or who is wrong, it is about how to solve the crisis.
In an interview with China’s minister of commerce, Chen Deming, that was published in the Washington Post last March, Mr. Chen said that he does not understand the United States “obsession” with China’s exchange rate: “If some congressmen insist on labeling China as a currency manipulator and slap 
punitive tariffs on Chinese products, then the [Chinese] government will find it impossible not to react. If the United States uses the exchange rate to start a new trade war, China will be hurt. But the American people and U.S. companies will be hurt even more.” He went on to react on what had been previously said by president Obama: that if China lets the yuan appreciate, U.S exports will increase. “You’re not going to get 1.3 billion Chinese to change by insulting them. Could it be related to upcoming elections? I don’t know. Because economically, it makes no sense.”
There is no Currency War between the U.S and China
The United states has yet to realize that global economic powers have changed and that the way to deal with the economic crisis is not by blaming Beijing but by owning to its mistakes and by correcting them. If America wishes to maintain its position as a world economic leader it must deal with real inner problems: poor education, lack of production of goods, bad infrastructure, over consumption, etc. Mr. Chen continued to say that “if the U.S. actions were geared toward decreasing America’s trade imbalance by limiting imports, it would not work. Perhaps imports from China would decrease, but that would not mean that Americans would start producing goods again.”
I have to agree with Mr. Chen. The quicker president Obama realizes that he must first solve problems from within, the quicker the economy will recover. Until then, the United States will probably continue to blame China for its own lack of ability to perform under a new world order.
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Lior Paritzky is the Editor in Chief and Manager of Laowaiblog, an internet platform that provides opinion and views about social phenomena in modern China. Look for Lior on Twitter: Liorpari 
I absolutely agree 100% with this article as I have been saying the same thing. Sure part of the problem might be China, but America just doesn’t want to realize that the majority of problems are from within due to overconsumption and greed as well as a crumbling infrastructure. I currently am in Dalian, and at Min Zu campus they raised cafeteria prices just 1 RMB and the students through a fit and boycotted until they agreed to lower the prices on select items.
I agree with you!
America and Britain rely too much on Financial Services. It turned out that the bulk of the financial products are no more than casino chips which doesn’t correspond to the real economy. It has almost zero value-add, but the leverage, volativity and churning generates huge bonuses to greedy bankers and hedge funds. That was the root cause of the current global financial crisis.
Agree! My opinion for the States is that for a super power and a geographically large nation, it is important to keep the main manufacture industry alive even that means the government has to subsidize the factories/workers. Pure capitalism is killing the key supply chain and shocking the nation’s foundation, then makes the system vulnerable.
Peter in Beijing
It’s funny that you’re a foreigner who lives in Beijing, and I am a foreigner who lives in U.S.. I have to say that you opinion is probably the best I have read about on the topic on Yuan-Dollar issue so far, although my job in the financial services sector gives me a extensive exposure to commercial, journalist, and academic materials.
Most of materials I read are either completely biased, promoting U.S. foreign policies or defending China with full swings, or fall into some sort of conspiracy theory, which is just like the Matrix movie — it may make sense but we will never know.
Your opinion is balanced, mellowed, and matured. It works towards solving the problem by considering the bottom-lines of both parties, that is, U.S. and China.
This is the first article I read on this blog, and from now on I will keeping reading.
First time reading your blog via The Economist. i appreciate your balanced view towards China related issue. I find this day even The Economist is very biased towards China issues. I travel to China quite frequent and She aren’t what the Western Media portrait.
Are the western government that scare of China rising?
I think what you fail to mention is that eventually China has a self-interest in raising the value of the RMB, simply because it will make life easier for its masses. Cheaper raw materials and food imports will help combat inflation, and the restructuring of the low margin industries in China will have to be done sooner or later anyway.. so why not now in a time of relative strenght?
The fundamental propblem is China Govenment reckless money printing over last five years, in reality Chinese RMB should be devalued against Usd, recent steep inflation is the proof. Chinese goverment took wrong measure to depress work’ers salary instead of let extra money into property market resulting in super bubble,which bubble now is unstainable even as per goverment’s own criteria, finally extra money are deluged into real economy and caused the trouble. Now the solution is increasing the Chinese worker’s salary as first step.
I agree that the U.S. should try to do more to address our economy and high unemployment other than just to blame the Chinese for depressing the value of its currency. Most of the posts apparently realize that declining wages and high unemployment in the U.S. will eventually reduce demand in the U.S. for Chinese as well as U.S. products so no one benefits from a poor U.S. economy and high unemployment in the U.S.
I agree with this and have been saying many of these things to friends of mine for a while. It’s very naive to think that blaming China for the our poor production and exports will accomplish anything, or that even congress is serious about it other than agitating more votes for election time. In reality we have been coasting on our infrastructure for 50 years and we are in desperate need of upgrading. Additionally even if we were to put massive tariffs on China, reduce our imports from China, or finally get China to increase the Yuan, corporations would just move on to the next source of cheap labor (Vietnam, Mexico, Brazil, etc.). Factory jobs would not just sprout up over night here in the US. Also, to add to that, it’s a cultural thing as well. To quote fight club “TV and advertising has us believing we would grow up to be movie gods and rock stars”. What American teen in High School would even consider the possibility of making T-shirts for $7.50 an hour as a factory worker? Many years ago Americans said we don’t want these jobs and moved to a consumer and services based society. Ultimately, it may be our downfall.
Lior, you understand China much much better than the New York Times and the Economist!
If prices of goods made by China increase significantly, American will probably import goods from other countries for cheaper prices. I feel China being bullied by politicians in America.
Good informative article. Just one small correction. I think you mean ‘Cost of living’ when you say that standards of living are rising while salaries remain constant.
Big fan of your articles, but I’m afraid I must disagree with this one. Until recently, China required all chinese exporters to surrender any dollars they received for goods, to the Chinese government in exchange for Yuan. Currently the Chinese government has $2.6 trillion in currency reserves. A dollar bill is simply a note that says you are owed equal value of US goods. Since the Chinese government is sitting on $2.6 trillion of these, China is failing to take advantage of $2.6 trillion of American goods. If the Chinese government were to allow the Yuan to trade freely, the yuan would appreciate and the dollar depreciate. US goods would become cheaper to the Chinese and Chinese goods would become more expensive. Literally, China would be exporting it’s inflation problem to the US, but would import slower growth and unemployment.
Milton Friedman, although I do not agree with most of his economic beliefs, does an excellent analysis and explanation of this. Check it out or email me if you disagree or have any questions.
“America is probably right. China is probably pegging the yuan to the dollar to keep its goods attractive, and China should be held partly responsible for the lack of ability by America and certain European countries to maintain steady economic growth. ”
Since 1994, RMB started to peg to USD on a mutual agreed exchange rate which was around 8.2yuan per dollar. 16 years later, this figure has changed to 6.65yuan per dollar. So if one do a simple math, RMB has appreciated by roughly 22.7%.
Ironically, Chinese inflation has been kept similar to (and even below) U.S. inflation rate in this period. If what IMF commented were right, shouldn’t Chinese inflation be ‘substantially higher’ than U.S. inflation rate because RMB has been appreciated by 22.7%?!
And yet IMF and Mr.Bernanke still say that RMB is a substantially ‘undervalued’ currency. No offense but i do resent part of your articles. What lies in the heart of currency dispute is, to a large extent, politically grounded rather than economically, in a way for US to justify their trade deficit and blame the global trade imbalances to China’s HUGE multilateral trade surplus.
US is avoiding their responsibility, its not even remotely close to China’s monetary policy. It’s just something that could solved by monetary policy.
I see fed as a joke also, because last year they don’t even believe their own economic projection, Mr Bernanke changed the stories several times.
And I am just a undergraduate guy in nottingham, not a professional economists. Correct me if i am wrong.
Your argument is still too simplistic. Neither side of this equation (China & USA) considered the impact of their decisions on the other side. This is typical of modern behaviour where we refuse to accept responsibility for our actions: “I look after myself – they can look after themselves.” China deploys its low-wage workforce to steal manufacturing jobs from the west (and technologies) in order to rapidly grow their economy. China believes this is fair: “Why should West have all the wealth?” The US business elite exports jobs to China in order to maximise their wealth. They think this is fair: “Pure Capitalism – The American Way.” The American business leaders do not accept responsibility for unemployment and poverty in the USA. The Chinese do not accept responsibility for the impact of their low-yen, low-labour-rate, strategy on the rest of the world.
In any situation where one party exploits the other party the system as a whole comes under pressure.
The solution? There is no solution that will not require major adjustment (civil strife, starvation, loss of life) by all parties. Many leaders now realise this has become merely a race to maximise advantage before the system collapses.
Money is not a good measure of quality of life. Nor is it a good measure of the reason of human existence. The extreme focus on money distorts the world – the consequences of this distortion are reflected in quality of life everywhere.
The West has, for centuries, exploited underdeveloped countries without considering what they were creating. Inevitably countries like India and China would throw off the West’s dominance and seek to emulate the West. But the West only managed to retain wealth by exploitation of others. Who will the West exploit now? And who will China, India and other rising nations exploit?
Wrong path. Only one outcome. And soon….
Great blog, I just started subscribing to this feed.
And I absolutely agree with most of what this article said. I think *some* elite Americans do realize it is not the Yuan to be blamed for American’s woe. But the thought that “American’s woe is an inner problem”, that Americans are not competitive any more, don’t sell politically. Obama certainly knows all these when he tried to wake up the people with “Sputnik” speech. But sadly, it is hard to tell the Americans not to eat their usual 3 Lb lunch and start building real stuff.
I worked in a global bank that operates in 80+ countries (you might have guessed which one). I can tell you that compared to 10 years ago, Americans can’t do any things useful any more. They used to write our core credit card systems. Now most of the design work is by our Europeans/Hongkong designers, and programming done by our Indian / Chinese programmers. The Americans? They just talk, as if they still run the company. Sorry bunch.
Another major issue is that the US wants to sell what she wants instead of what the customer needs. With cold war mindset, many high tech products are not allowed to be exported to China. How can you blame China for trade surpluses if you don’t trade what you HAVE for what you need? What choice does China have if she can’t purchase what she needs? How can exchange rate fix this?
your article is easy for me to read ,at the same time gain many information which is the thoughts that foreigner who live in china for a long time . Lets review ourselve though the third eye.thanks!
Sure, there are internal issues in the US, but the issue of the Yuan is one of them. You need to truly understand the history of the Yuan issue and how it effects more than simply “cheaper goods from China”.
The Yuan was devalued (literally overnight) in 1980, from 1.2元:$1 to 8.25元:$1 and was locked there for nearly over 15 years. In the span of 30 years, the Yuan has only appreciated $0.01 every year.
Currently, foreign trade makes up half of China’s economic growth, and for the past 25 years, foreign trade has increased faster than China’s GDP.
Sure, there are internal issues in the US, but you cannot deny that an ongoing issue like this is not part of the problem.
Take a look at the top ten US exports, and they have moved from finished goods to raw materials and agricultural products.
The manipulated Yuan has removed any type of production competition, and has is chopping away at the production base in the US drastically.
Saying that the US should be focusing on internal issues, instead of looking at the Yuan, is sort of like saying “I should balance my check book, and pay no attention to the guy stealing my wallet” – It just does not make sense.
China has become dependent on foreign trade. They have lost the ideas of Deng, and pretty much become money hungry overnight. Instead of using the influx of money for development of the infrastructure, they have used it to become the second largest importer of luxury goods.
When I see the type of development going on in China, and I compare it to what is going on in the US, then I realize that HALF of that development is coming straight out of the pockets of the US and other western nations… yep, I expect my government to start doing something about it.
Basically, when I hear people saying “The US should be concerned with internal economic matters”, I say… well… so should China. The devaluation of the Yuan is SPECIFICALLY an external economic force.