On Saturday, Wen Jiabao said China will try to export its way out of its current economic troubles. The country’s premier suggested technical fixes, such as faster payment of tax rebates, but he did not refer to depreciation of the national currency, the renminbi.
That’s a rather large omission considering the circumstances. Why? Because his primary plan, evident over the course of the last several months, has been to force down the value of the currency to make Chinese products cheaper on global markets.
Some analysts believe the yuan, as the renminbi is informally known, is undervalued by as much as 40 percent against the dollar. That’s possible, but we do not know the market value of the Chinese currency. The People’s Bank of China, the country’s central bank, essentially fixes the value of the yuan by buying and selling currencies so that it stays within a predetermined band. The renminbi has depreciated against the dollar by about 1 percent this year after it climbed—due to Washington’s pressure—4.7 percent in 2011.
In short, Beijing is doubling down on its mercantilist approach to global commerce. And it’s not hard to see why.
The Chinese economy is slumping. Official statistics tell us the country is expanding in the high single digits—7.8 percent growth in the first half of this year—but in reality the economy has flatlined. The most reliable indicator of Chinese economic activity, the production of electricity, has increased an average of less than 1.2 percent in the April–July period. Because the growth of electricity historically outpaces the growth of the economy, it’s evident China cannot be growing faster than zero.
Zero growth? That startling assessment is not only possible; it may even be on the high side. On Thursday, HSBC released its closely watched Flash Purchasing Managers’ Index for this month. The index plummeted, making it clear that August will be the tenth straight month when the critical manufacturing sector in China contracted.
Manufacturing is contracting and bringing the rest of the economy down with it. Perhaps Wen Jiabao is now focused on exports because exports cured China’s last downturn, which was triggered by the Asian Financial Crisis at the end of the 1990s. Then, robust economies in Western Europe and North America dragged China out of its troubles by buying just about everything Chinese factories were making for export.
This time, the rest of the world is not riding to the rescue. Exports increased only 1.0 percent in July over the same month last year. The HSBC Flash Index had gloomy news on this front as well: the new export sub-index revealed a quickly deteriorating environment for Chinese goods. In fact, exports increased 7.8 percent in the first seven months of the year, and this means China could miss its target of 10 percent export growth.
By focusing on boosting exports, Wen is again resorting to mercantilism—the effect of which will be to take away even more American jobs and manufacturing. Beijing, therefore, is throwing down a challenge Washington cannot ignore.
Wen is doing this in the midst of the American election season. We should thank him. We can’t talk about the presidential campaign without talking about the economy. We can’t talk about the economy without talking about jobs. And we can’t talk about jobs without saying the word “China.”
Peter Navarro, co-author of Death by China and maker of a documentary of the same name, points out that Beijing’s currency manipulation has directly contributed to the closure of tens of thousands of American factories and the loss of millions of jobs here. The best American jobs program, he tells us, is the reform of Washington’s China trade policies. Wen, with his new export promotion program and his emphasis on depreciating his currency, is just daring the two presidential candidates to make Beijing’s currency manipulation a campaign issue.
It should be. We need a national conversation on this complex and crucial matter, and there is no better time to do that than now, when it will affect the direction of the next four years.