RMB Forex Sanctions in the Senate: Shooting Blanks or a Starter’s Gun?

The battle over currency exchange rates is a tempest in a teacup compared to what is coming on the US-China trade front.

Despite the Senate’s approval of a measure that could theoretically lead to trade sanctions again Chinese exporters, Sen. Chuck Schumer & Co. have missed their chance with this issue. Sec. of Treasury Tim Geithner and the rest of the Obama team threw in the towel on that fight long ago. Would it have helped the US economy? Maybe. Probably a little. Who knows? But just because Beijing won this round doesn’t mean that it doesn’t have other things to worry about.

Someday soon, someone is going to start posing as the leader of “The 99”, and when that happens China is going to be the target of convenience. If we are all very lucky, forex rates will be the only thing anyone talks about. China NEEDS a stronger currency to pay for imports ranging from Fendi bags to soybeans, and if the BJ media machine can blame the Americans, so much the better. For China trade watchers, there are much more sensitive areas to worry about if trade tensions get ratcheted up beyond the rhetoric stage.

    1) Student visas. It’s an open secret that China’s power class wants the kids to study in the US. All that talk about how America is losing its preeminent status and that the future belongs to China goes quiet when the subject is university degrees. Anything that raises barriers to studying in the US hits China where it hurts – right in the elites. America’s more mediocre private schools will complain about lost tuition (top schools with waiting lists won’t be affected much), but overall it’s pretty painless for the 99ers and will cause serious annoyance for BJ. The argument that US education has a liberalizing effect on Chinese leadership is nonsense. Just about every Chinese entrepreneur making money from censorship, IP theft or worker exploitation either studied in the US or plans on sending his kid to an American school.

    2) Finance. From access to big name investment banks handling IPOs to discreet safety deposit boxes stuffed with cash and valuables, the only thing that China’s ruling class like as much as sending their kids to US schools is sending their relatives to US financial institutions. The argument that the Chinese could torpedo the US economy by selling T-bonds has been turned on its head by our rock-bottom interest rates and low yielding fixed-income instruments. Where is China going to put that trade surplus? Euros? Yen? Rubles? The worse the world economy gets, the more attractive Treasuries become. There are lots of ways to make it harder to move funds into US institutions or investments. We’ll have to stop selling green-cards and passports, but it’s much less painful than tariffs on Wal-Mart consumer goods – at least to the 99.

    3) Food. China is a big buyer of corn, grain, soybeans, and yeah – rice grown in the US of A. This year looks like a bumper crop for Chinese farmers , and they are still importing boatloads of US produce. This is more drastic than the other options and will anger the farm states – but if Washington wants to balance the threat of a rare earth metals embargo, then this might be an option.

Trade wars are ugly. No one gains. But Xinhua propagandists and China apologists would be wise to keep their powder dry. Forex isn’t really a populist issue, and if two economies ever do decide to throw down for real, today’s headlines will look pretty tame. As long as Geithner-style empty rhetoric is the strongest medicine Washington can muster, RMB:USD rates make a great story. But if the 99 coalesce into a serious political force or the new Chinese leadership plays to their own populist impulses (2012 is coming up fast), then things could get out of hand in a hurry.

Next. The Empire Strikes Back. Chinese trade war options.

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