Chinese and Snow

The death last week of Madame Chang kai-Shek, wife of the Generalissimo who lost his battle to prevent the communist takeover of China, brings to mind the Republican accusation that communists in the Roosevelt and Truman administrations were responsible for that loss. “Who lost China?”, was the accusatory question by critics who believed they had the answer.

            Half-century later it is the Democrats who are in full cry. With America hemorrhaging factory jobs, and China running up a trade surplus with the US estimated to hit $130 billion this year, they are demanding to know, “Who loosed China?” Democrats claim to have the answer: the free traders in the Bush administration have loosed China on world markets, and refuse to protect American jobs from competition with a country  that combines a limitless supply of $1-a-day labor with a currency not allowed to appreciate against the dollar, and steals intellectual property with such abandon that Commerce secretary Don Evans used a visit to

China to buy a bootleg DVD of Quentin Tarantino’s just-released movie “Kill Bill” for a mere $1.

With a presidential election now only one year away, and the Midwest’s manufacturing states a must-win for Bush, the administration’s critics think they can force the president to take action to stem the flow of imports from China.

Pressuring the president are a number of trade unions, a large coalition of business groups, and a gaggle of congressmen  who want to impose swingeing 27.5% tariffs on Chinese goods to offset that nation’s undervalued currency. After all, although the euro has appreciated almost 12% against the dollar this year, and sterling almost 6%, the Chinese authorities have pegged their currency to the dollar, thereby preventing their exports from become dearer in America, and American goods from becoming cheaper in China.

In response to this pressure, the administration rolled out its heavy artillery. Treasury secretary John Snow flew to Beijing to urge the Chinese to float the Yuan, and repeated his pitch at the G-7 meeting in Dubai. Bush himself raised the issue with Hu Jinato, China’s president, when they met in Bangkok last month. Other administration officials added their voices to the mounting chorus. US Trade Representative Bob Zoellick went to Beijing to warn that America can keep its markets open to China’s products only “if American exporters have an opportunity to export [to China]….We need progress soon.” And Evans announced, “Our patience is wearing thin.”

Last week, congress had an opportunity to see if the administration is prepared to walk the walk as well as talk the talk. Snow faced senators eager to show their constituents they are out to stop the yellow peril to American jobs. In his mandated “Report to Congress on International Economic and Exchange Rate Policies”, the treasury secretary refused to name China (or Japan) a currency manipulator, thereby avoiding the need to impose sanctions. Instead, he argued that “financial diplomacy” would persuade the Chinese to move towards a “flexible, market-based exchange rate….A pegged exchange rate is not appropriate for a major economy like China…”.

Why he believes the Chinese are responding to his “financial diplomacy” is not clear. The only progress Snow could cite was China’s willingness to “discuss… exchange rate policies in international fora” such as the G-7, “a new technical cooperation agreement on financial issues related to exchange rates, … announced by President Bush and President Hu” after their Bangkok meeting, a promise by Vice Premier Huang Ju to “come to Washington for an in-depth high-level discussion”, and a few minor “capital market liberalization measures.”

Thin gruel. And unlikely to satisfy the trade unions, injured competitors, and their congressional allies. Expect them to become increasingly upset as the talks drag on. Zhou Xiaochuan, governor of the People’s Bank of China, has already announced that America’s trade deficit with China is due to “domestic causes”, among them the US fiscal deficit. And Chinese officials know that if they did allow their currency to float instantly, their citizens would pull their savings out of the country’s shaky banks in order to buy gold and other assets, and that most of their banks would go bust as deposits flowed out and the dollar value of the US Treasury bonds stacked in their vaults collapsed.

The Chinese foot-dragging is unlikely to upset the administration, which is trying to buy time until Bush is safely reinstalled in the White House. Administration economists know that the Chinese are using the dollars they earn in trade to purchase US Treasury bonds, and thereby keep interest rates lower than they might be, stimulating US economic growth.

Bush is gambling on three things. First, China’s policy is causing an unsustainable inflationary build-up and asset bubble within that country. Second, Chinese premier Wen Jiabao and more than 100 executives and ministers are headed to the US for a multibillion dollar spending spree on  telecoms, aviation and other equipment. That should build political support for China in important domestic constituencies.

Third, the president is betting that the current growth spurt will create lots of jobs, and deflect attention from the trade deficit. He may win that bet. Economic growth in the third quarter hit an annual rate of 7.2%, the fastest in almost 20 years. Business spending on equipment and software leaped to a15.4% rate, and discounts on automobiles and tax rebate checks drove consumer spending on big-ticket items to an annual rate of 26.9%.

No one expects the economy to continue growing at that rate. Word is that the Fed is guessing that the fourth quarter will see the economy grow at a robust 4.5%. If it does, the fuss over China may prove no longer lasting than the satisfaction from a Chinese dinner.

A version of this Update appeared in The Sunday Times (London)