Column: Chinese currency manipulation

Recently, there has been a lot of news and concern about China. The question is: Should you be concerned?

That depends where you are, and what your relationship with China is.

The reason behind the Chinese government’s move to devalue its currency is that for after years of double-digit growth, China’s economy has slowed.

To resuscitate their flailing economy, and keep employment high, the Chinese government dramatically devalued its currency, the Yuan.

After China cut its exchange rate, our markets swooned, which caused many to protest against the Chinese currency manipulation.

As a closed and managed political and economic system, communist China had for years pegged their currency at nearly a 30 percent premium to the actual value versus the U.S. dollar.

Initially, China pegged the Yuan to focus on exporting goods to the U.S. at the expense of their own domestic consumption. Consequently, U.S. manufacturing firms built in China to take advantage of this currency manipulation.

For the most part, China is in the business to export goods, and China’s best customer is the United States. Even after the devaluation of their currency, Chinese exports are still cheaper than they would be if the Yuan were to float, or become a freely traded currency.

While China is a global powerhouse, they are an export powerhouse and have little direct impact on our, or Europe’s domestic economy.

China is not an active unilateral trading partner with the United States, from the vantage point of both buying and selling goods and services, they can more easily dictate a currency peg than could an open economy such as the Europe or Japan.

The Chinese government actively controls its economic system. To achieve this control they can and do maintain strict limitations of foreign ownership, transfers of capital and strict trading bands on certain assets, and limits on others.

Even though China is a major economy, the Yuan is not a global currency, because there are too many restrictions on its use and tradability. China keeps a tight reign over all its financial dealings.

The reason the U.S. dollar is the currency of choice in both trade and investment is that our economy is open, and the dollar is readily exchangeable into other currencies and is allowed to fluctuate in response to market forces.

To avoid a recession, China has only one option, as dictated by the central government, and that would be to export their way out of a contraction.

That means the U.S. would import more Chinese goods, but the overall effect on the United States would be mainly limited to lower commodity prices, not a contraction of our GDP.

Ultimately, Chinese finance officials were forced by market conditions to bring their currency back into a more market rate exchange.

As a result those businesses which own plant, equipment and property in China have immediately incurred double-digit losses.

Since these American firms paid for those assets at a 30 percent plus manipulated price premium, once the Yuan drifted to its market level, those actually losses become realized.

With greater exchange parity, both consumers and investors will see the effects. Chinese goods will become more expensive for American consumers, while companies like Walmart will experience shrinking margins.

This should lead to more manufacturing jobs leaving China to relocate to the U.S., which enjoys the highest marginal productive workers in the world; or, if a company uses absolute comparative advantage, then they would look to countries like Vietnam.

The overall conclusion is that China’s manipulation of their currency has given rise to internal problems; a growing unbalanced growth, dramatic market inefficiencies coupled with inflation, which on balance will have little effect on our domestic economy.

For the average American, the costs of imported goods should not rise, as companies quickly shift basic manufacturing to other countries.

But for U.S. companies that do business in China, the perils of dealing with a managed, controlled economy can be costly if all the inputs of doing business in china are not clearly vetted.

Lastly, for those Chinese companies that owe money in U.S. dollars, they have now had a dramatic increase in their borrowing costs, which may trigger a new round of business failures.

E. H. Huntzinger is a former research analyst with the Chicago Federal Reserve Bank and the Chicago Board of Options. He also worked on Wall Street, owned and operated radio stations and later worked in the movie industry before settling in the Sheboygan area. He currently lives in Oostburg, where he works as a consultant. He can be reached at Ehhnycail@yahoo.com.