Currency Contretemps

Oct 31, 2010 Editorial

The average Guyanese would be hard pressed to understand the brouhaha that has erupted mainly between the US and China (but involving most of the movers and shakers in the modern world) over the value of the Chinese currency – the yuan. When it comes to money, we are pretty sheepish over the fall of our dollar from a high of G$2 to US$1 in the colonial days to the present G$200 to US$1.
Most of us would love to have our money’s value rise as we salivate over how much more goodies we could purchase from abroad. Imagine how we could shop if our monthly $40,000 were worth US$40,000!
Unfortunately, that’s not how the modern globalised world works. As countries trade, they typically either run a deficit (import more than they export) or a surplus (the converse) – dividing the world into “deficit” countries and “surplus” countries. Deficit countries – with the US and the UK being mammoth ones – have to borrow, typically from surplus countries like China and Japan, to pay for their imports. As the former borrows more and more from the latter, the currencies of the latter are expected to rise – reflecting the increased demand for them.
If, let us say, China’s currency rises (and by now it has lent the US trillions of dollars) the goods would increase in price – and (the theory goes) the US demand for them would fall –lessening the deficit. But if the Chinese, also say, wants to keep their exports up so as to maintain their growth rate etc. it is to their advantage to do what would be very strange to us in Guyana – keep their currency weak. And this is what the Chinese have done – much to the annoyance of the Americans.
In 2007, as the financial crisis in the US was beginning, the Chinese pegged their currency to the US dollar in 2007, and stuck with the peg throughout the crisis. The People’s Bank of China bought up trillions of dollars in order to keep its currency weak against the dollar.
And this, the US asserts, is not playing fair: the Chinese are maintaining a competitive advantage through a weaker currency by keeping their exports artificially cheap. They are thus stymieing the US efforts, the Americans complain, towards economic recovery. Last June, after much griping by the US (and preceding a G20 meeting) the Chinese loosened their peg a bit.
But the US, as its deficit keeps rising, now complains that it was not enough. The Chinese retort that unlike many surplus countries, they did not allow their currency to fall against the US dollar, so the US is making a false comparison. And so on and so forth.
An outside observer may point out that deficit countries like the US and the UK can simply tighten their belts – embark on an austerity programme that demands much less imports and consequently much less borrowing. This is the route that the UK has evidently chosen, hence all the cutbacks its coalition government has just announced.
The US, however, believes that this path will lead to a recession in their evidently structurally weak economy and the political will is strikingly lacking in Washington. With the US currency still used as a reserve currency by many countries, the US, in addition to bringing interests close to zero, has expediently, but ultimately futilely, been printing greenbacks to feed its habit.
Most worryingly, the US has signalled that it may take the protectionist option that it warned the rest of the world since its crisis in 2008, might plunge the world into a global recession.
In September, the U.S. House of Representatives, with a 348-to-79 majority passed a Bill that allows the country to impose countervailing duties on imports from China. Those duties are to be calibrated using estimates of the extent of “undervaluation” of the Chinese currency.
Last week, top G20 officials in Seoul vowed to avoid weakening their currencies and let the market take its course. But if the past is any precursor to the present, this promise will be honoured more in the breach.

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