These days China's currency policy figures highly among the greatest sources of uncertainty concerning the near to medium-term outlook. Premier Wen Jiabao has publicly dismissed foreign government complaints about the renminbi being pegged at an artificially low level against the dollar.
However, there have been adverse actions, such as imposition of import duties on some Chinese exports, which can't be ignored. Given that China has the largest share of U.S. container trade, all this is worrisome for ocean carriers and ports that hope the improving economic outlook also will lead to a recovery in volumes.
It is now clear that the rapid growth in the U.S.-China trade imbalance was to some extent the result of China's intervention in the foreign exchange market. From the mid-1990s until June 2005 an exchange rate of 8.3 renminbi per dollar was maintained. After significant U.S. and European pressure, China allowed the renminbi to appreciate to 6.8 per dollar. Since then it has remained close to that level.
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During this period U.S. manufacturing employment declined from 17.4 million to 13.4 million as U.S. companies outsourced their manufacturing operation, primarily to locations in Asia. During the previous 10 years manufacturing payrolls only decreased by 200,000 employees.
U.S. economic recovery hinges on companies expanding their production by hiring more people. However, it is hard to see why they would do that if, due to an artificially weak currency, Chinese producers could out-compete them or incentivize them to produce outside of the United States. This is one reason why U.S. policymakers have put pressure on China to stop intervening in currency markets.
China has thus far resisted pressure to change its currency policy. This is understandable since China's economic growth is dependent on exports and capital formation, and its National Development and Reform Commission estimates that 17 industries in China were faced with excessive capacity in 2008, rising from 11 in 2005. Nonetheless, resistance to foreign pressure to change may be futile. Last year the United States reacted by imposing duties on tires imported from China, and is likely to impose duties on Chinese steel oil pipe imports. In July the European Trade Commission imposed duties on Chinese steel oil pipe imports and Russia closed a wholesale market in which Chinese made goods, including steel pipes, were sold.
Household expenditures in China account for about 40 percent of GDP, significantly less than the 60 percent to 70 percent share of consumer expenditures in mature developed economies. The best outcome would be for China to develop a more consumer-oriented economy, which would be enhanced by allowing the renminbi to revalue since that would make foreign goods more affordable to Chinese consumers.
By pursuing policies oriented towards increasing consumer demand for both domestic and foreign goods, China's trade surplus with the United States would be reduced, as would the need for a rapid revaluation of the renminbi.
Thus far we have seen China promote consumer spending, but this has to be accompanied by allowing markets, and not policymakers, to set the exchange rate.
Walter Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or e-mail, wkemmsies@moffattnichol.com.
