The Heart of the Recession: China's Currency

You can have a political debate from now to the cows come home on some sort of domestic policy that will solve the current economic malaise. The fact of the matter, the source of the problems lies overseas in two places: China (manufacturing) and Saudi Arabia (energy). This essay is about the problem with China.

We have lost hundreds of thousands of manufacturing jobs to China. Some of the blame lies right here in the United States in the form of draconian environmental rules, high corporate taxes, minimum wage requirements, and unions. The other part of the equation is the deliberate attempt by China to bankrupt the world. I have been writing this blog for five years now, and I have been saying, over and over and over again, unless China lets its currency float like the other currencies in the world, things will only get worse, not better.

While most major currencies float allowing adjustments to imports and exports if an imbalance develops, the Chinese currency does not. It is tagged to the dollar at a 30% discount. No matter how far the dollar may fall in value to the Euro, for example, boosting US exports to Europe, the Chinese currency will always be 30% cheaper than the dollar, keeping its exported goods at a strong competitive advantage to anything made in the United States. Couple that with an artificially low Chinese wage structure, of course companies will move entire factories to China.

China has done this deliberately. It is a predatory exporter. The result is the massive buildup of currency reserves…the largest in the world. The United States has paid lip service to resolving the problem. Every six months or so a trade delegation heads of to Beijing and does the dog and pony show thing. The Chinese have said for years they will take care of the problem. The make a few cosmetic adjustments, and six months later the cycle is repeated.

Why does the United States allow this to happen? Because major US corporations have historically dreamed of a billion Chinese consumers market, which is ignored by China in favor of exports! Corporations like IBM, GM, GE all have major markets in China for goods they produce here, but mostly make in China. That does nothing for the American worker. Add in Walmart, which has built its business around Chinese imports, you have the perfect storm.

The reality is that China guards its markets carefully. American business will never realize its dream of open and free Chinese markets. China is slowly but steadily developing the technology to rival what we have here. What it can’t develop it steals. China has decided not to conquer the world, but to buy it.

China is buying up Australia wholesale. It is THE major political issue down under. Now it has its eye on the United States, and has put out feelers to become a major stockholder in General Motors when the new GM does its initial IPO. The Chinese partner would be GM’s current partner in its China operations, the state backed SAIC. Because SAIC is state controlled, it has unlimited access to Chinese government capital.

State capitalism is a new concept to the United States, part of Barack Obama’s fundamental change to America. Up until his election, we were probably the only country in the world that didn’t have some form of state capitalism in which the country has only a quasi-free market with government hybrid corporations calling the shots. These corporations are driven only partially by market forces. In exchange for government financing and capital, these companies are also directed by government policy, both domestic and foreign.

The issue we currently face is way beyond tweak fixes to our economy. The United States has moved headlong towards state capitalism in its financial markets and in the automotive industry. Some people say a purely capitalistic society can’t compete in a world where the other major competitors practice State Capitalism. That is the debate. I believe free markets can win out, but only if the playing field is leveled. If a country wants to do business in the United States, it must play by the same rules as everyone else.

Until the Chinese currency issue is resolved, we are just spinning our wheels.