Currency War?

Yuan VS Dollar

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, 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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About the Author

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