Quality Products International

Are the Chinese to blame for the U.S. recession?

by on Oct.18, 2010, under China, General News

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In a word NO.

Much has been said in the media lately about how the Chinese have undervalued their currency and that it is causing the extended recession in the U.S. and to a lesser extent in Europe. This is untrue. Yes the low value of the Chinese currency does not help the balance of trade and it stops the U.S. and Europe from exporting to China as their products are too expensive. However up until recently both trade block were only giving this imbalance lip service as the low Yuan allowed large companies in these trade blocs to manufacture products cheaply and sell them for good profits in the U.S. and Europe. It is only when the economies in both areas almost collapsed that the hue and cry about the exchange rate reached the level it has now. One must also realize that the U.S. is going through an election cycle so anything that can be blamed for the unemployment and bad economy is going to be front page news especially if it is something external and not the politicians’ fault.

So let us examine why this imbalance has occurred. China wanted to fast track its economy and traditionally the way to do this for countries outside of Europe and North America was to create an export economy. The best way to do this is to provide a cheap place to manufacture goods. One component of this is a cheap currency. To keep its competitive advantage against its rivals in the area China pegged its currency to the US, its major export market. Thus the exchange rate would be stable and companies could move manufacturing costs to China with confidence in the stability of the exchange rate. This worked fine until the China economy grew to that of a second tier nation and above. At this point the trade imbalances started to bite but were not a huge problem. China then would allow the currency to move in small increments and over time to smooth some of these imbalances out while maintaining a competitive advantage.

When the economic crash hit in 2007 the U.S. and Europe (mainly caused by the financial institutions in those countries anyway) found it difficult to trade out of the recession. Why? Well because the single largest market that was not severely affected was that of China. Since the Yuan was pegged to the dollar, when the dollar dropped in value so did the Yuan making it hard for U.S. businesses to export to China; and also, it did not create a climate where jobs could be brought back to the U.S. as it was still cheaper to use Chinese manufacturing. Thereby the hue and cry about the exchange rate. However one must look at would have happened had the exchange rate been free to float as most U.S. and European politicians have been screaming for.

China rode out the recession by ramping up internal spending on infrastructure. It did not shift its economy to internal markets. China is still primarily and exporter. So if the exchange rate suddenly ballooned to where other wanted it what would have been the result? Well the exports would no longer be cheap and exporters would find it difficult to sell their products. Manufacturing would move to other cheaper countries. The industry would shrink probably alarmingly and the associated unemployment problem would have no real alternative industries to go to. In effect the recession would have been brought to China in a big way. Suddenly ALL major markets would be in recession. There would not be a market for U.S. or European goods as most of these entail some sort of consumer requirement. The Chinese spend less than most industrialized people on themselves, they are superior savers. If suddenly the wealth of jobs and opportunities dries up then they would most likely stop spending and save even more. Thus, no more internal market either.  The Chinese, by allowing their currency to appreciate in a slow and controlled manner, are trying to slowly move their economy off a pure export footing and to a more balance one without destroying the export business first.  It is not something that can be done quickly as it requires a change in mentality from its people as well as its business leaders. They have to want to spend.

So the Chinese are being responsible in their economic policies. Of course mainly to themselves but that is normal for all countries. Still, they do recognize the need to allow the Yuan to appreciate but, they will not be bullied into letting it skyrocket to the detriment of their own people and eventually the global marketplace. The histrionics about them being the boogey men are just that, the wild ramblings of people who do not know better or politicians wanting to blame anyone and anything rather than themselves.

 Author: M. Charlin

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