Currency Affairs

I was delighted to hear a discussion on the radio today of an issue I tried explaining to a colleague recently: why China, a developing country, has so much money and currency reserves. I got pretty fumbled up trying to explain it. Such monetary and economic concepts can be difficult for me to thoroughly understand.

Here's the "Planet Money" report from NPR's Morning Edition that touched on the basics of US/China monetary policy this morning:

The United States government is also thinking about its financial relationship with China. Lawmakers from both sides of the aisle are calling for Treasury secretary Timothy Geithner to declare that China is manipulating its currency. Geithner will deliver a report to Congress about two weeks from now.

In the meantime, lawmakers like Ohio Democrat Tim Ryan are saying things like Chinese currency distortion is putting a lot of Americans out of work. And if you're wondering what a decision by the Central Bank of China has to do with workers in Ohio, we have an explanation from Alex Blumberg of our Planet Money team.

ALEX BLUMBERG: To understand why American lawmakers are so upset about Chinese currency policy, it helps to follow the money. So let's start with someone pretty typical - an American businessman who gets stuff made in Chinese factories.

Listen to the Report or Read the Rest of the Report

The rest of this story is a discussion of how and why Chinese factory owners turn the US dollars they earn into Chinese RMB. This part of China's "high savings rate" isn't discussed too often.

I read a very thorough overview of this same process a couple days ago in James Fallows' book - Postcards From Tomorrow Square: Reports From China. The chapter - The $1.4 Trillion Question - has a very detailed explanation of how dollars wired to factory owners in China end up being converted to dollars and, often, treasury bills. Very well-presented information. The book is a collection of Fallows' Atlantic Monthly China articles over the past few years. I'm enjoying it a lot.

Another one of the chapters in the book also dealing with economics and finance - China Makes, the World Takes - has an insightful take on the US' view towards China and the "currency manipulation" that was discussed in the NPR article above.

From pages 104 and 105 of the book:

American complaints about the RMB, about subsidies, and about other Chinese practices have this in common: They assume that the solution to long-term tensions in the trading relationship lies in changes on China's side. I think that assumption is naive. If the United States is unhappy with the effects of its interaction with China, that's America's problem, not China's. To imagine that the United States can stop China from pursuing its own economic ambitions through nagging, threats, or enticement is to fool ourselves. If a country does not like the terms of its business dealings with the world, it needs to change its own policies, not expect the world to change. China has done just that, to its own benefit - and, up until now, to America's.

Fallows is right on in this passage.

China is a sovereign nation. I don't understand why US politicians feel as though their opinion has any sway on Chinese currency policy. It shouldn't and, it appears, doesn't matter what the US says. Even if the rest of the world and China would benefit from a shift in policy, it's only the Chinese government's decision to revalue its currency. It's not as if the US thinks about other countries before it acts.

I understand that US politicians huffing and puffing about China are may very well just be politicking. But even if they know that their words aren't going to affect China and are simply dissing China's "manipulation" for votes, I still don't like it. Such China-bashing is allowing Americans to feel as though we don't have to change and that our problems are being caused by others. That is just not true.

Whether I approve of what US politicians are or aren't saying, there's no doubt that the US/China political rhetoric on this topic is important. And speaking of the US/China relationship, just preceding this discussion on NPR this morning was an interview with Zachary Karabell, the author of Superfusion who I interviewed this past fall. I felt pretty cool having interviewed the same guy who was being interviewed on Morning Edition! (I am still grateful that Karabell gave me the time to have such an in depth interview with him a few months ago).