China Economics Exchange Rate
Essay Preview: China Economics Exchange Rate
Report this essay
Why do top U.S. economic officials, such as Fed Chair Alan Greenspan and Treasury Secretary John Snow, want their Chinese counterparts to revalue the yuan (renminbi)? American officials and a wide range of American economists argue that the yuan is undervalued vis-Д -vis the U.S. dollar (to which the yuan is pegged at a rate of approximately 8.28 yuan per dollar). The basis for their argument that the renminbi (RMB) is undervalued is the very large trade surplus that China has with the United States and the concomitant buildup of dollar based asset reserves of Chinas central bank, the Peoples Bank of China (PBOC), and other financial institutions. China has accumulated about $350 billion in foreign-currency reserves and over $122 billion in U.S. government bonds. In other words, China is using its trade imbalance with the United States to become one of the biggest creditors to the U.S. government (although this is only possible because the U.S. government is currently suffering from a form of ADD — American Deficit Disorder). This mutual dependence creates unique financial risks for the United States and provides the Chinese government with a significant amount of leverage over the U.S. government.

And theres the rub. This is why the trade imbalance is a problem. Indeed, Japan and Germany have had a similar relationship with the United States, using a trade imbalance as the basis for accumulating U.S. government bonds and then using their bond holdings as a lever to “encourage” the U.S. government to take policy stands that were more to their liking. Japans central bank still holds more U.S. government bonds than any other non-U.S. institution and the total value of Japanese institutional holdings of U.S. government bonds are more than three and a half times those of China, indicating a much longer-term drain of dollars from the U.S. to Japan than anything yet experienced between the U.S. and China. If for some reason the Japanese central bank decided it didnt want U.S. government bonds anymore and dumped its holdings onto the market the impact on bond prices (and interest rates) would be quick and devastating to the U.S. economy. Theres no reason to assume that Japanese officials would do such a thing. After all, Japan is still an ally of the United States. China, on the other hand, is not. Indeed, China is perceived in Washington, D.C. as the only real potential rival to U.S. global hegemony.

This being the case, it is not difficult to understand why it might be of concern to policy makers in the United States that China is becoming such a huge creditor nation. But there are other reasons for U.S. government officials, especially Fed Chair Greenspan and Treasury Secretary Snow, to complain about Chinese government economic policies. The U.S. economy continues to grow at a sluggish pace, at best, and jobs continue to disappear. Indeed, it is only because a recession is defined by output declines, rather than employment declines, that the U.S. economy is officially in recovery. It certainly does not feel like much of a recovery to most “blue collar” workers. When was the last time an American political leader, whether elected or appointed, stood up and said, “The economy is in the dumps because I screwed up. Its my fault that millions are out of work.” Thats not the prescription for a long political career. It is much better for ones career to divert attention to other evils that are behind the economic woes. It was not that long ago that the primary target of official scapegoating was Japan. It was the Japanese who were taking good American jobs. And even more recently it was the Mexicans. But now theres a much better target. China. The Chinese are not playing fair. They are taking good American jobs by keeping their currency too cheap. Never mind that current economic ills can be traced to decisions made by U.S. state officials, in particular the Federal Reserve Open Market Committee, headed by Alan Greenspan, when they decided in the waning weeks of the Clinton presidency to trigger a recession by raising interest rates. It took a lot to slow down the Clinton economic boom, too much perhaps. The Fed raised rates far too aggressively and when the economic slowdown finally came it proved far more resistant to reversal than might have been anticipated by Fed officials who had come to believe all the rhetoric about what fantastic economic planners they were. After repeatedly lowering interest rates and jawboning the Fed has done little more than stimulate a housing boom (and perhaps mild speculative bubble in housing prices).

The fact that U.S. policy makers might want to find a scapegoat does not, however, mean that Chinese government policies have no role to play in the current economic environment in the U.S. But is it the negative role that these policy makers indicate it to be? The argument is that a cheap yuan results in lower unit costs for Chinese manufacturers (including American and European transnationals manufacturing in China), which allows for low price exports to the U.S. These low priced exports displace higher priced American goods, inventories buildup at U.S. factories, and the result is layoffs or, even worse, plant closings. Thus, it is argued that Chinese officials are responsible for the job losses in the U.S. There are two very obvious problems with this argument. One of the problems was made clear by Greenspan himself, although perhaps he was not aware of the contradiction. He pointed out the increasing importance of the information economy to future economic growth. To the extent the U.S. economy has already shifted from manufacturing to information technology, cheap imports of shirts, toys, and other labor-intensive, low-tech goods from China do not pose a serious threat to future U.S. growth. If the problem is insufficient demand for existing information technology, then this problem was exacerbated by the Feds successful attempts to slow the U.S. economy and the related bursting of the speculative bubbles in information technology and telecommunications. Second, and perhaps even more importantly, the Chinese government policy of buying heavily in the U.S. debt market has contributed to much lower interest rates than would otherwise prevail. These low interest rates have been instrumental

Get Your Essay

Cite this page

Top U.S. And U.S. Government Bonds. (June 11, 2021). Retrieved from https://www.freeessays.education/top-u-s-and-u-s-government-bonds-essay/