This article from Agence France Presse appeared in the Daily Media Report. 

January 13, 2010

Agence France Presse

WASHINGTON — China, which has emerged as the world's biggest exporter, is coming under fresh criticism in the US and Europe for using an "undervalued" currency to shore up its economic and trade competitiveness.

Beijing's policy of keeping the yuan weak has helped China become the first key economy to recover strongly from the world financial crisis but at the expense of its key trading partners still nursing the wounds of recession, some analysts contend.

Such a policy that makes Chinese exports more competitive and allows Beijing to further amass foreign exchange reserves, now more than two trillion dollars, could result in protectionism and even spark a trade war, they warn.

"I think China is more vulnerable to criticism on its exchange-rate policy now than it has been in the recent past," said Nicholas Lardy, a China expert in the Washington-based Peterson Institute for International Economics.

He said concerns over China's currency policy "are real" and that "one can now make a stronger case that its recovery has been based, at least in part, on imposing cost on others through allowing its exchange rate to depreciate."

Beijing was "allowing its currency to depreciate very dramatically on a trade-weighted basis that is looking against all the currencies of its major trading partners," Lardy said.

After having allowed the yuan to appreciate gradually against the dollar since mid-2005, China re-established a hard peg against the greenback in 2008, ensuring that the yuan followed the dollar as the American currency fell against the euro and the yen.

China overtook Germany as the world's top exporter, trade figures from the German national statistics office showed last week. It also surged past the United States as the world's biggest car market, industry data showed Monday.

"(The US) Congress has been uncharacteristically quiet, but patience is wearing thin in Washington and everywhere," The New York Times said in a scathing editorial Tuesday.

If China sticks to its "cheap-renminbi guns," it was bound to draw a protectionist response, the newspaper warned, noting that President Barack Obama's administration already has caved in to political demands and slapped exceptional tariffs on Chinese tires and antidumping duties on Chinese steel pipes.

Some Democratic and Republican lawmakers have sent a letter to the government calling for an investigation into "China?s currency manipulation," viewed as a potential first step to US-imposed tariffs on imports from China.

The Times raised the prospect of a "trade war" with China, saying it would be "disastrous and bound to escalate around the world.

"Restraint is needed. But we fear no one is going to feel restrained if China doesn?t change its strategy."

Europe also is increasingly concerned about the yuan devaluation.

The European Union's incoming trade commissioner lashed out Tuesday at what he said was China's "deliberate" policy of keeping its currency undervalued.

Warning that China's foreign-exchange stance posed a "major problem" for global economic recovery, Belgium's Karel De Gucht highlighted growing EU unease on the issue.

"It is clear to me that this is a deliberate policy and we should address this on all possible occasions, bilaterally and also multilaterally."

No immediate changes to China's currency policy are expected.

Chinese Prime Minister Wen Jiabao has vowed not to yield to international pressure to allow the Chinese yuan to appreciate.

"The pressure on the yuan to appreciate is bigger and bigger... we have been getting this and that kind of pressure to appreciate, but we refuse to yield," Wen said in an interview with Xinhua news agency on December 27.

"I told foreign friends, I said, 'you are asking for us to allow the yuan to appreciate, while at the same time adopting all kinds of trade protectionism, actually you are trying to restrain China's development.'"

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Outsourcing is a bubble that depends on continued inflation
written by Mo , January 16, 2010

The idea of comparative advantage has been so abused with trade. The idea of comparative advantage was theorized at a time when money was sound backed by gold. Nowadays you can't tell why a product is cheaper. Is it cheaper due to better quality and by use of highly automative technology, is it poorer quality or is it because other countries have a weak currency due to faster money printing out of thin air that makes the good cheaper. Outsourcing is a bubble which means that other nations that currently produce cheaper have to keep depreciating their currency relative to other competing nations. The problem is that the nations that engage in currency manipulation like China use high reserve requirements, high taxes, price controls, sterilization measures by issuing new bonds from the central bank, credit rationing and so forth that can temporary postpone the domestic price inflation resulting from the currency peg. In that time period, many jobs and industries can be lost before the adjustment eventually takes place.

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