Short term currency worries

The recent Sino-American dispute over the undervalued renminbi has caught DeTocque's wandering eye for the moment... Its domestic implications in US politics have not gone unnoticed. (See FT article here.)

The issue boils down to the fact the Senators, Congressmen, and Hank Paulson all want the Chinese currency to be worth a bit more (say about 10% more according to recently published reports) on the open market. Politicians may claim bipartisan support for a new Senate bill, but really anyone would support a bill that increases your constituents' exports...

By (admittingly) keeping the renminbi undervalued, the Chinese government has fueled a record trade surplus with the US in recent years (meaning the Chinese have exported about $233bn more to the US than they have imported from the US). So, the US is seeking to rectify that imbalance by legalizing US interference in the currency market -- the Americans would buy renminbi with dollars, thereby increasing the value of the renminbi and allowing newly, more wealthy Chinese consumers to more cheaply purchase US goods. Net result: Chinese buy more Fords, US bonds, Big Macs and iPods because their currency is worth more. Good for Joe Schmoe in Iowa, and good for his Congressman.

However, the Chinese government actually has a very good reason to keep the renminbi undervalued -- though their economy is going like gangbusters, per capita GDP is still tiny compared to the US. Now pretend for a second that all these Fords and iPods started flooding into China because Chinese purchasers opt for a relatively cheaper US car (of higher quality) over an absolutely cheaper Chinese-produced version (of still lower quality)... In other words, you average Chinese citizen could have never dreamed of a top-of-the-line US product and had always opted for the cheap-o domestic version. Suddenly, with the stronger renminbi, the US product is more within reach, so they go for it.

Two things result: 1. the Chinese inflation rate increases at a hurried pace for domestic AND imported goods, and many people are suddenly priced out of the market (read: disaster). Prices have gone up so fast and wages haven't kept pace... 2. No one but a local would ever want a Chinese company's computer. If their sales go down as consumers opt for American versions, Chinese computer company's profits shrink, and the economy slows.

With that, the Chinese just can't raise the value for practically humanitarian reasons -- the local level of the Chinese economy would be severely and catastrophically effected. The renminbi will gain value through nature market forces as the Chinese economy continues to get up to speed. American politicians should let it do so.

Market economies don't fight each other

News broke around 4pm that the Dow had lost some 400 points on the day, the worst single-day loss since September 2001. Explanations for the drop generally point to a single starting point: China. Specifically, the market in Shanghai seems to be the proverbial butterfly flapping its wings, and its crash has largely been attributable to a standard "correction." Simply put, the Shanghai market (which DeTocque knows absolutely nothing about), had been going so strong, so fast that it was just time to bring things down to earth (9 percent today). Year of the pig, indeed.

The News Hour with Jim Lehrer explains that the disasterous effect on the NYSE is because so many American companies are doing such booming business in China and are tied so heavily to its market. China has a cold, and America's starting to sneeze.

This bears a larger world-view: If a relatively minor stock market shock in China could produce such an adverse effect half-a-world-away in New York, what would happen in an American-Sino war? Would all trade just stop? How many trillions of dollars would disappear over night? How many lives would be distroyed?

Perhaps the old international relations adage needs to be revised -- instead of "democracies don't fight wars against each other," maybe it should be "market economies don't fight wars against each other"? But let's not get ahead of ourselves here. China has a long way to go before being truly considered a free market economy, but one could hardly argue that millions of Americans aren't getting rich off Mao's present incarnation.

And could this situation give China an upper hand? What if it decided to retake Tawain? Would Bill Gates, Steve Jobs, William Ford, and Donald Trump suddenly show up at the White House begging the White House to let bygones be bygones?

FT does Chinese "soft power"

In an article in today's FT (here, subscription required), Gideon Rachman argues that China's "soft power policy is working." It takes three or four paragraphs of anecdotal examples (Mandarin commentary on British football being broadcast in Beijing and the like), but the article's subtext soon becomes apparent: China, according to Rachman, is quickly catching up to the US in its use of soft power.

DeTocq is left scratching his head on this one: why the comparison? Why is Chinese and American soft power framed in this zero-sum-game mentality by which, Rachman argues, for one country to ascend, the other must decline? Here's a good quote that cuts to the meat of Rachman's point: "For a rich, free powerful country to lost a soft power contest to the US seems all but impossible... But in the global battle for hearts and minds, China does have one advantage. It hasn't started any wars lately."

True enough.

But who cares?

DeTocq is hardly a China expert, but the distinction doesn't seem necessary. Soft power is used as a diplomatic means to serve a country's political and economic ends. Assuming third party governments and companies are relatively rational actors, DeTocq can't think of any situation where China's soft power ascention has a severly negative outcome for the US:

Is the point that this battle royale will somehow effect US or Chinese investment in a third country? Perhaps it might on the margins, but most free market businesses take profit over image, and most dictator-run markets (some of which are being coddled by China without much competition. Just ask Robbie Mugabe) aren't worth the Western investment anyway.

Would China's soft power ascention cause the US to lose a vote in the UN Security Council? No, China can wave that veto flag strongly enough all by its lonesome, thank you.

Would it cause governments to chose sides in a US-China war? Nevermind the overall unlikelihood of that, but generally speaking, China's not likely to face down NATO (even with the likes of Iran or big, bad Zimbabwe in its corner).

Point being that, sure, China's soft power/image/charm offensive might be clicking right now, but DeTocq can't see too many instances where that would directly cost significant American dollars, or (any) lives. Over the last few years, the world has experienced so much black-and-white/us-vs.-them framing of international politics that perhaps it's time we stopped looking at these issues in directly competitive terms. If China gets a little bit stronger, good for them -- there's not much anyone can do to stop them now. Instead, the international community should look to accomodate their growth (economically and diplomatically) and profit it from it (again, economically and diplomatically) instead of fearing it.