US-CHINA: Trade War Heats Up

Wed, 17 Mar 2010 11:07 EDT

Relations between Beijing and Washington have been far from smooth since the beginning of the year.

But a new bill introduced in the U.S. Senate is adding to existing tensions by attacking China's trade practices and proposing legislation which would push the Barack Obama administration to charge China with currency manipulation and could lead to unilateral retaliatory action against Chinese imports.

The bipartisan group of senators emphasised what they consider to be unfair trade practices by China, but also the domestic economic conditions which create incentives for protectionist trade policies by the U.S.

"We are sending a message to the Chinese government: if you refuse to play by the same rules as everyone else, we will force you to. China's currency manipulation would be unacceptable even in good economic times,'' said Sen. Charles E. Schumer, when announcing the legislation on Tuesday.

"At a time of 10 percent unemployment, we simply will not stand for it. There is no bigger step we can take to promote U.S. job creation, particularly in the manufacturing sector, than to confront China's currency manipulation," Schumer continued.

On Monday, over 100 members of congress signed a letter calling on the Obama administration to label China a currency manipulator.

Twice a year the Treasury Department issues a report listing countries which "manipulate the rate of exchange between their currency and the United States dollar (USD) for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade," but China has historically been left off the list of countries highlighted in the report.

Nobel Prize-winning economist Paul Krugman argued in an op-ed in the New York Times on Sunday that now is the time for the U.S. to deal with China's undervalued currency -reports place it as undervalued by 20 to 40 percent - by imposing a 25-percent tariff on Chinese imports.

The calls for action against China's currency peg have not gone unnoticed by Beijing but the increasing urgency and volume of the demands from Washington appear to be prompting equally belligerent responses from Beijing.

Chinese Premier Wen Jiabao had sharp words for Washington on Sunday during his once yearly news conference, in which he blamed the downturn on Sino-U.S. relations on the fact that the Obama administration had "violated Chinese territorial sovereignty" by moving forward with arms sales to Taiwan and Obama's meeting with the Dalai Lama.

"First of all, I do not think the renminbi is undervalued," Mr. Wen said, according to the Wall Street Journal. "We are opposed to countries pointing fingers at each other or taking strong measures to force other countries to appreciate their currencies. To do this is not beneficial to reform of the renminbi exchange-rate regime."

Many in Washington took issue with Wen's assertion that the remninbi (RMB) wasn't undervalued but the rest of his answer did not preclude the possibility of an adjustment.

Earlier this month, China's central bank governor Zhou Xiaochuan stated that the RMB's unofficial peg to the U.S. dollar is a "special" measure that will eventually end.

The problem, unfortunately, is that as [U.S.] senior officials speak out on this issue and demand that China appreciate their currency, the less likely it makes it that an adjustment will take place in the near term,'' Bonnie Glaser, senior fellow in China studies at the Center for Strategic and International Studies in Washington, told IPS.

The Chinese leadership is very leery of doing anything under pressure from abroad and doesn't want to be seen in the face of its public as weak or succumbing to outside pressure. "Even if there is recognition that they should adjust their currency, timing is in part going to be determined by what serves their interests. They will factor in the rhetoric from abroad,'' Glaser continued.

China ramped up a full-court-press this week, enlisting U.S. multinational to help battle the rising calls of, what Beijing terms, "protectionism" emerging from Washington.

On Mar. 16, a spokesman at the Chinese commerce ministry told reporters, "We hope that U.S. companies in China will express their demands and points of view in the U.S., in order to promote the development of global trade and jointly oppose trade protectionism."

In 2005, the RMB was adjusted from 8.27 to 8.11 RMB per USD and the USD peg was lifted. The RMB now moves in relation to a basked of currencies which is dominated by the USD, euro, the Japanese yen, and the South Korean won.

The RMB has appreciated by 20-percent from 2005 to 2008 but critics of China's currency policy, such as Schumer and Sen. Lindsey Graham, who led the legislation announced on Tuesday, are increasingly frustrated with the lack of another major adjustment.

"I think that when we look at what Wen Jiabao said at the press conference, and read between the lines, then nothing is ruled out but at the same time the heightened rhetoric here and the letter from congress makes it exceedingly difficult for the Chinese to say, okay in the face of pressure from the U.S. we'll do [an adjustment] now,'" said Glaser.

Tensions over the RMB's valuation are only the most recent of a long list of disagreements to have shaken Washington's relationship with Beijing in recent months.

In September, Obama authorised a 35-percent emergency tariff on Chinese tyre imports in order to curb a "surge" of Chinese tyres which, according to U.S. trade unions, have cost 7,000 U.S. factory workers their jobs.

Beijing responded quickly to condemn the U.S. tariffs and threatened to levy its own tariffs against U.S. products.

In January, Google announced that email accounts owned by diplomats, human rights activists and journalists had been infiltrated by Chinese hackers, leading Secretary of State Hillary Clinton to deliver a speech outlining the administration's position on intellectual property theft, cyber security and Chinese internet censorship.

China responded by accusing the U.S. of "information imperialism" and denied charges that the government participated in cyber attacks.

In February, the Beijing-Washington relationship hit another rough patch when China threatened to impose sanctions on U.S. companies participating in an upcoming 6.4-billion-dollar arms deal with Taiwan.

As the global economic crisis stressed both China and the U.S. economies, China has sought to shift the investments from its balance of payments surplus away from U.S. dollars and into equities and commodities while Obama has been under pressure to address the growing trade deficit with China and apply more pressure to China to revalue the RMB

http://www.sott.net/articles/show/20496 ... r-Heats-Up

China in Midst of 'Greatest Bubble in History,' Rickards Says

Bei Hu
Bloomberg
Wed, 17 Mar 2010 09:56 EDT

China is in the midst of "the greatest bubble in history," said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.

The Chinese central bank's balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

"As I see it, it is the greatest bubble in history with the most massive misallocation of wealth," Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China "is a bubble waiting to burst."

Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China's economy. The government has raised banks' reserve requirements twice this year after economic growth accelerated and property prices rallied.

China has pegged the yuan to the dollar since July 2008 to help exporters weather the global recession. The central bank buys dollars and sells its own currency to prevent the yuan strengthening, driving foreign-exchange reserves to a world- record $2.4 trillion as of December.

The Shanghai Composite Index of stocks jumped 80 percent last year and property prices rose at the fastest pace in almost two years in February, helped by a record 9.59 trillion yuan ($1.4 trillion) of new loans in 2009.

'Massive Stimulus'

The World Bank indicated today that China should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations. The nation's "massive monetary stimulus" risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, Washington-based World Bank said in a quarterly report on China released in Beijing.

"People making comments about bubbles possibly don't have all the facts," HSBC Holdings Plc Chief Executive Officer Michael Geoghegan said in Shanghai today. Regulators are in control of the banking industry, and have the ability to curb lending as needed, he said.

Rickards said leveraged speculation in the stock market, wasteful allocation of resources by state-owned enterprises, off-balance-sheet debt through regional governments and the country's human rights record are concerns.

"Take Russia and China together, neither of them is really deserving any investment" except for short-term speculation, Rickards said. India and Brazil are two of the "real economies" among the developing countries, he said.

Hard Landing

China is poised to overtake Japan as the world's second- largest economy this year, according to the International Monetary Fund, and Nomura Holdings Inc. forecasts it will contribute more than a third of global growth. The nation has surpassed the U.S. as the world's largest auto market and Germany as the No. 1 exporter.

Harvard's Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while Chanos, founder of New York-based Kynikos Associates Ltd., predicted a slump after excessive property investments.

Investors Bob Doll and Antoine van Agtmael say China's stock market isn't a bubble.

Equities will gain by the end of the year as the government takes measures to prevent the economy from overheating, Doll, BlackRock Inc.'s chief investment officer for global equities, said on March 5. China is unlikely to face "chaos" or experience a hard landing, Van Agtmael, who helps manage $13 billion as chairman and chief investment officer of Emerging Markets Management LLC, said in a Bloomberg Television interview yesterday.

Lending Slowdown

The Shanghai Composite Index is valued at 32 times reported earnings, compared with 52 times at its peak in October 2007. The U.S. benchmark Standard & Poor's 500 Index trades at 19 times earnings.

China's economic growth quickened to 10.7 percent last quarter, helped by a 4 trillion yuan, two-year stimulus plan for railways, airports and homes. Property prices in 70 cities rose 10.7 percent from a year earlier in February.

Bank loans slowed to 700 billion yuan last month after surging more in January than the previous three months combined, central bank data showed. Growth of the broadest measure of money supply, or M2, slowed for a third month to 25.5 percent.

'Very Sound'

The banking industry has "very low impairment charges compared to what you'd expect this time in the cycle," HSBC's Geoghegan said. "I wouldn't be surprised if there's a gradual increase in impairments, but long term I'm confident that the structure of the banking industry is very, very sound."

Rickards disputed an argument that China could hold U.S. policies hostage through its Treasuries holdings. The nation remained the largest overseas owner of U.S. debt after trimming its holdings by $5.8 billion in January to $889 billion.

China would suffer massive losses if the debt was dumped, reducing the funds available in the U.S. securities market and forcing the prices lower, he said. The U.S. president also has the authority, rarely used, to freeze such positions, he said.

Rickards worked for LTCM between 1994 and 1999 and helped to negotiate its rescue by 14 Wall Street firms after the fund lost $4 billion in a few weeks in 1998. The Federal Reserve brokered the bailout on concern that LTCM's collapse would cause a meltdown in financial markets.

http://www.sott.net/articles/show/20497 ... kards-Says

i dont think people truly realize the magnitude of these stories and how it has and could directly effect each and every one of us.

thanks for helping spread the news Reinaul
good job

China Accuses U.S. of Politicizing Yuan as Trade Surplus Sinks
By Bloomberg News


March 22 (Bloomberg) -- China warned the U.S. against imposing sanctions over the value of the yuan, arguing that the exchange rate issue has been politicized and that a rise in protectionism threatens the global economic recovery.

Pressure on China to strengthen the yuan does “no good to anyone,” China’s Commerce Minister Chen Deming said at the China Development Forum in Beijing yesterday. China’s trade balance likely slipped into the red in March, although the yuan was stable, showing that exchange rate changes have a “limited” impact on trade, Chen said.

Tensions over China’s currency are mounting, with President Barack Obama facing increased calls from U.S. lawmakers to step up pressure on China for keeping its exchange rate artificially low. Chen yesterday warned that sanctions against China that amounted to protectionism would hinder growth and raise the risk of a “double dip recession.”

“No matter how tough both sides sound now, they’ll eventually come back to the negotiation table for a mutually beneficial solution” as any U.S. sanctions will be detrimental to both, Li Wei, an economist with Standard Chartered in Shanghai, said in a phone interview.

In March, China will probably record its first trade deficit since April 2004. The surplus had already narrowed to a one-year low of $7.6 billion in February after a 34 percent decline last year. The U.S. trade deficit was $37.3 billion in January, shrinking from a record $67.8 billion in August 2006 as American consumers slowed spending amidst the recession.

The decline in China’s trade surplus failed to appease U.S. lawmakers because 73 percent of the gap was with the U.S., Chen said. That was mainly because of curbs on exports to China, including technologies and parts that China wanted, he said.

Sichuan Relief

Chen said he contacted the U.S. Commerce Department on buying helicopter engines to aid rescue efforts after the Sichuan earthquake in 2008, but was told to wait for permission from the U.S. defense department. He never heard back, and China bought Russian engines instead.

He also said he scrapped plans for a few “large-scale” purchasing delegations to the U.S. this year because what companies wanted to buy wasn’t what the U.S. was willing to sell. Chen didn’t give further details on what China wanted to buy.

China’s leaders have repeatedly said that their yuan policy isn’t the cause of the U.S. trade gap.

The government has kept the yuan at 6.83 per dollar since mid-2008 to shield exporters from the global recession and a contraction in world trade. It allowed the currency to appreciate 21 percent in the three years before that.

The yuan “actually isn’t particularly undervalued anymore,” Goldman Sachs Group Inc. Chief Economist Jim O’Neill said last week. “It’s unfortunate that we have so much political angst around this. The key thing is that post-crisis, China is importing a lot.”

More Spending

Increased Chinese spending is a better way of reducing trade imbalances, Morgan Stanley Asia Chairman Stephen Roach said March 19 in a Bloomberg TV interview. “We’re lashing out at China rather than tending to our own business,” which is raising U.S. savings, Roach said.

China has accumulated a record $2.4 trillion of reserves, and $889 billion of U.S. government debt, partly a consequence of its exchange-rate policy.

Global economic growth would be about 1.5 percentage points higher if China stopped restraining the yuan and running trade surpluses, Paul Krugman, Princeton University professor and Nobel laureate in economics, said at an Economic Policy Institute event in Washington on March 12. He said the U.S. may need to get more aggressive in its talks with China, perhaps by treating the exchange-rate as a countervailing duty or other export subsidy.

‘Depressed by China’

“We have a world economy which is depressed by China artificially keeping its currency undervalued,” Krugman said in a March 19 interview.

Five senators, including Charles Schumer of New York and Lindsey Graham of South Carolina, last week introduced legislation to make it easier for the U.S. to declare currency misalignments and take corrective action. The Treasury Department is to decide next month whether to label China as a currency manipulator.

China “won’t turn a blind eye” if the Treasury Department’s April 15 report labels the Asian nation as a currency manipulator and sanctions follow, Chen said in comments broadcast on China Central Television. The government will “deal with” any escalation of the dispute, he said.

The government should be “very careful” in exiting anti- crisis measures, including the exchange rate policy, People’s Bank of China Governor Zhou Xiaochuan said March 6.

Phasing out the stimulus package will be “gradual and mild” to ensure a “safe landing,” Vice Finance Minister Wang Jun said yesterday at the same Beijing forum, according to a transcript of his comments on sina.com.cn.

http://www.bloomberg.com/apps/news?pid= ... QDUM&pos=4

so hopefully this calms down ..

china just released a how to attack u,s power grid paper

China's commerce minister: U.S. has the most to lose in a trade war

John Pomfret
Washington Post
Mon, 22 Mar 2010 23:05 EDT

© Nelson Ching - Bloomberg
Commerce Minister Chen Deming
China's commerce minister warned the United States on Sunday that if it launches a "trade war" against China by levying punitive tariffs on Chinese imports, the United States will suffer the most.

Chen Deming also said the U.S. government's "obsession" with China's exchange rate could not be seriously addressed until it stopped blocking the export of high-tech products, such as supercomputers and satellites, to China. "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," Chen said in an interview with The Washington Post. "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."

Chen's comments, made during an interview Sunday, reflect the exasperation within the Chinese leadership regarding the United States' attempt to push China to allow its currency, the yuan, to rise against the dollar. In addition, Chen's remarks also underscore how China is seeking to use the current trade dispute with the United States to push its own agenda in Washington -- to eliminate, or at least ease, the 20-year-old sanctions that limit American exports to China.

President Obama has contended that if China lets the yuan appreciate, U.S. exports would increase. Sen. Charles E. Schumer (D-N.Y.) is authoring legislation that would place tariffs on Chinese goods if China does not allow its currency to float more freely. On April 15, the Treasury Department is scheduled to release a report on worldwide currencies. Chen said the Chinese government does not want to be labeled a "currency manipulator."

Chen, who has studied at Harvard University, said he didn't understand what the United States was attempting to achieve by threatening China with tariffs.

"You're not going to get 1.3 billion Chinese to change by insulting them," he said. "Could it be related to upcoming elections? I don't know. Because economically, it makes no sense."

Chen said if the U.S. actions were geared toward decreasing America's trade imbalance by limiting imports, it wouldn't work. Perhaps imports from China would decrease, but that wouldn't mean that Americans would start producing goods such as telephones and televisions again. "That production isn't going to return to America, that's just not practical," he said. "Globalization has changed all that."

Chen said the best way for the United States to increase its exports to China would be to relax restrictions on the export of high-technology and dual-use goods to China. Since 1989, when the Chinese government launched a crackdown on student-led protests around Tiananmen Square, the United States has placed limitations on some exports. Chen said those limits have amounted to billions of dollars a year in trade.

And he added that under such restrictions, talk about a more liberalized exchange system in China is a non-starter. "If you want to discuss the exchange rate, you have to do it under a free trading system," he said, "a system wherein if I want to buy something I can, and if you want to sell it you can."

Chen cited some instances of U.S. restrictions. After the massive earthquake in Sichuan province in 2008, for example, China sought to buy engines for Black Hawk helicopters that the United States sold China in the 1980s when the countries were aligned against the Soviet Union. Chen said China was trying to make the purchase so it could use the helicopters to save people injured in the quake, but that the United States rejected the request. (U.S. officials have raised doubts about China's claim, pointing out that Black Hawks have a limited carrying capacity.)

China solved its problem by borrowing helicopter engines, and subsequently buying helicopters, from Russia, Chen said. The same holds true for satellites, he added. China would rather buy them from the United States, but concerns about export controls have forced it to source satellites from Europe, Chen said. "This is the reason why our trade balance with the United States is skewed," Chen said. "The United States has strict export controls to China."

And don't expect that China will simply do without these goods, he added. "We're a nation of 1.3 billion people. We graduate 7 million university students a year. We'll either make it ourselves or buy it from somewhere else," he said.

Invoking an old Chinese proverb favored by Mao Zedong, he said, "just because the butcher is dead, doesn't mean we won't be able to eat pork."

Obama came into office saying he was going to review the limits on exports to certain countries. "But," Chen pointed out, "that was more than half a year ago and, so far, nothing has happened. He's said he wants exports to double in five years, but I don't know whom he is going to sell them to."

Chen said that China does not want the trade issue politicized. To that end, he said a deputy trade minister, Zhong Shan, would arrive in the United States in the next few days to discuss trade issues with his counterparts at the Commerce Department and the Office of the U.S. Trade Representative. "Both sides need to stay cool," he said. "We need to sit down and talk."

But if the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China's exports to the United States, would surely be hurt the most.

"In the end," Chen said, "America is the one that needs to adjust."

While some analysts have predicted that China would soon start to let the yuan appreciate, Chen's interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny -- ranging from 1.7 to two percentage points.

http://www.sott.net/articles/show/20547 ... -trade-war