Chinas currencymanipulation: Is it hurting the US economy

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Chinas currency-manipulation Is it hurting the
US economy?
Presented By Imtiaz Ahmed Laurin Sgroi
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• Define Chinese Currency
• What is the Problem?
• Issue Facts in U.S. Economy
• Evidence of Problem hurting U.S. Economy
• Conclusion

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• Define Chinese Currency
• Renminbi or Yaun Peoples Currency
• Fixed Exchange Rate w/ USD (approx.)
• RMB/ 8.00
• /RMB .125
• Fixed Exchange Rate Nominal Exchange Rate,
• China is accused of manipulating the Real
  Exchange Rate

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• The Problem 2 points
• Point 1 Undervaluation effect on trade
  balances
• The Yuan is undervalued by 10-25
• Undervaluation of Yuan/- perceived as an export
  subsidy.

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• The Problem 2 points
• Point 1 (Continued)
• Gives Chinese imports unfair competitive
  advantage over US-produced goods in domestic and
  international markets.
• Effect 1. China maintains a growing trade
  surplus with the US (since 1993)
• 2. US maintains a growing trade deficit with
  China(since 1983)

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• The Problem
• Point 2
• Chinas foreign-exchange reserves in USD are
  significant.
• 2000 - 165 Billion
• 2004 - 608 Billion
• Due to increased foreign direct investment into
  China.
• 1994 - 80 Billion - 90 Billion
• 2004 - 160 Billion
• 2002-Chinas the worlds largest recipient of FDI

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• The Problem Overall Effect
• Global Trade Surplus gt Current Account Surplus
• Foreign reserves FDI gt Capital Account Surplus
• Balance of Payment Surplus in China
• Imbalance of Payments for all members of
  international trading community, A multilateral
  issue.
• Lack of exchange rate adjustments

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• Issues Facts in U.S. Economy
• U.S. trade deficit Chinas portion
• 1996 1998 lt 25
• 1999 2001 18
• 2002 2004 22
• 2005 26
• Types of products where U.S. has trade deficits
  w/ China Low-cost, labor-intensive
• Other countries part of U.S. trade deficit
• Japan, ASEAN, East Asian NIC, and EU

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• Issues Facts in U.S. Economy
• Largest sources of imports into U.S. markets Not
  China
• Canada 287 Billion in 2005
• China 243 Billion in 2005
• Imports from China shift of US trade
  investment from Japan, ASEAN, Eastern Asian
  NIC

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• Issues Facts in U.S. Economy
• U.S. Exports
• China the fastest, most significant growing
  market for U.S. exports.
• Next largest markets Japan and EU.
• Types of Products U.S. exports to China (at a
  trade surplus) aircraft, high-tech machinery,
  agricultural.

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• Issues Facts in U.S. Economy
• Foreign Direct Investment
• U.S. is one of the top five foreign investors in
  China.

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• Issues Facts in U.S. Economy
• Foreign Direct Investment Consequences in U.S.
• U.S. Investors gain controlling shares of Chinese
  firms
• FDI Inflows to China U.S. Outflows (unilateral
  transfers)
• Unilateral Transfers Trade Deficit Balance of
  Payment Deficit.

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• The Evidence Does it Support China
  targeting U.S.
  Economy?
• U.S. Finds NO conclusive Evidence.
• Omnibus Trade Competiveness Act of 1988
• China Does Not Meet Technical Requirements
  for designation of currency manipulator.
• Not able to conclude Chinas intentions are
• Prevention of balance of payment adjustments
• Obtain unfair advantage in trade
• Reported by Treasury Dept Secy, John Snow

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• The Evidence (Continued)
• Treasury Department has not found currency
  manipulation by China in the last several years
  despiteChinas bilateral trade surplus with the
  U.S., Chinas global trade surplus, and Chinas
  foreign exchange reserves have surpassed levels
  that existed in the early 1990s.
• China Currency Coalition Counsel, Skip Harquist,
  April, 2005.
• Appreciation of the RMB would only reduce U.S.
  balance of Payment deficit by about
  1050billion Not sufficient to alleviate U.S.
  500B current account deficit.

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• The Evidence (Continued)
• Alan Greenspan, 79, Ex-Chairman, U.S. Federal
  Reserve informed the Congress on Feb 11 2005 and
  the Senate Finance Committee on June 23 2005
• RMB Revaluation
• Rise in China's currency won't cut huge U.S.
  trade gap Greenspan
• ''The effect will be a rise in domestic prices in
  the United States'' Greenspan
• By Definition
• 10 rise in the valuation of the Chinese Currency
  would cause 1 decline in trade-weighted value of
  U.S. Dollar.

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• In Theory
• Fall in dollars value would lead higher domestic
  inflation. Because of imported good and service
  will be more expensive.
• Exchange Rate fluctuation has a Pass-through
  effect through import prices, then to producers
  prices and ultimately Consumer-price Inflation.
• RMB revaluation unhelpful to US unemployment
  Greenspan
• ''So essentially what we will find is we are
  importing from a different area but we will be
  importing the same goods'' Greenspan

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• In Theory (Continued)
• Greenspan's viewpoint is clear-cut-it is not
  China that caused the reduction of job
  opportunities, but the invisible hand of global
  competition.
• In fact, in the competition of economic
  globalization, the rise in productivity has
  become an important factor deciding whether an
  economy can achieve sustainable development.

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• In Theory (Continued)
• Final words from Greenspan
• The presumption that a revaluation of the RMB
  will notably increase jobs or manufacturing
  activities in the United States by constraining
  the imports or expanding exports is without
  statistical or analytical support. The sooner the
  Chinese, in their OWN self-interest, move to a
  more flexible currency regime the better for ALL
  participants in global trading system.

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• In Theory (Continued)
• Ben S. Bernanke, 52, Chirman, U.S. Federal
  Reserve informed the House Financial services
  Committee in Washington on Feb 15, 2006
• China ought to move toward a more flexible
  exchange rate.
• But he emphasized on It is important to make
  sure that trade that take place in done on a fair
  and open basis. China should respect our
  intellectual property so that we receive the
  appropriate compensation.

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• In Theory (Continued)
• Finally Within the United States, the issue of
  appreciating the RMB is also controversial.
  Manufacturers and textile producers are in favor
  of appreciating the RMB. However, many American
  companies that depend on mainland Chinese
  factories to supply inexpensive products and
  components, such as aerospace companies, computer
  manufacturers, discount retailers, and other
  companies are against appreciating the RMB.

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• Conclusion
• Chinas currency manipulation-based on changes to
  the Real Exchange Rate
• Maintaining trade surpluses
• Accumulation of significant foreign reserves
• Significant inflows of FDI
• China has emerged quickly as one of the largest
  markets in the international trading market
• Solutions Need to be addressed in a
  multi-lateral manner, Not strictly a U.S.
  issue
• U.S. growing deficit issues-Internal focus
• U.S. Manufacturing increase competitiveness
• Increase domestic investment savings

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• Sources
• Chinas Trade with the United the World CRS
  Report for Congress, Thomas Lum Dick Nanto,
  March 14, 2006.
• China Currency Coalition Chinese Currency
  Manipulation Fact Sheet, April, 2005,
  www.chinacurrencycoalition.com
• U.S. Finds No Conclusive Evidence of China
  Currency Manipulation, Susan Krause, May, 2006,
  usinfo.state.gov
• Legislation Clarifying US Trade Laws Targets
  Injury Cause by Chinas Exchange Rate
  Manipulaion, Department of Treasury Statistics,
  April 7, 2005, www.prnewswire.com
• Currency Manipulation, Morris Goldstein,
  Institute for International Economics, Dec 11,
  2003, www.iie.com/publications/opeds
• Chinas Exchange Rate Regime, Morris Goldstein,
  Institute for International Economics, Oct 1,
  2003, www.iie.com/publications/papers

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• Sources (Continued)
• Investment Implications of a future Chinese
  currency Revaluation. Joseph H. Davis, Ph.D.
  Investment Counseling and Research, Oct 2004, The
  Vanguard Group, Valley Forge, PA, U.S.A.
• Comments of A. Greenspan www.info.state.gov,
  www.findarticles.com, www.voanews.com
• China Currency Trade, Revaluation, Exchange
  Rate www.danwei.org
• RMB Revaluation unhelpful to US Unemployment
  Greenspan www.english.people.com.cn (Peoples
  daily online)
• Chinese Yuan revaluation applauded worldwide
  (07-22-05) www.china-embassy.org
• Bernanke breaks with Greenspan, Sympathizes with
  China critics www.bloomberg.com