Global Crisis Blog

China’s G-String at the G-20

By Shlomo Maital

As the G-20 ministers meet in Toronto and Huntsville, Ont., creating massive havoc in downtown Toronto,  China again shows its skill in sleight-of-hand diplomacy.  China is dressing up its apparent willingness to contribute constructively to the global crisis and restore global balance — but in fact, all China is wearing is one thing G-string, and maybe even not that.

With exquisite timing, China announced prior to the G-20 and G-8 meetings that it will allow its currency, the yuan, to appreciate (rise in value) relative to the euro and to the dollar.  This, in order to help reduce China’s huge trade surpluses with the West and restore balance to the totally unbalanced global trading system, a system in which paradoxically rich countries borrow heavily from poor ones (like China) by running persistent large chronic trade deficits.  Despite the recession and the crisis, America’s trade deficit remains in the order of $500 b. annually, an unsustainable level.

With the announcement, the yuan appreciated by a miniscule 0.4 percent (China’s currency is undervalued by at least 50 per cent — in other words,  if the current exchange rate is about 7 yuan per dollar, it probably should be 3.5, to reflect its purchasing power, a rate that would double the dollar price of all China’s exports.     This tiny appreciation will indicate to the G-20 that China is indeed moving in the right direction and is working to contribute to global stability as a good citizen. But this is an illusion.  China’s undervalued currency will remain undervalued, and once the G-20 meeting is over, watch the yuan-dollar rate freeze again.

Writing in The New Republic, Clyde Prestowitz argues this:

At the G-20 meeting, the administration’s first step should be for the President to ask his colleagues to cooperate in bringing about a 25 percent to 40 percent revaluation of manipulated currencies in relation to the dollar[i.e. yuan] within the next three years. The president should warn that if such an agreement cannot be reached, he will have no choice but to launch a full-scale effort in the IMF, WTO, and elsewhere to halt the mercantilist manipulation of currencies. He should leave no doubt that he will do whatever is necessary, including even taxing certain capital inflows, to achieve substantial currency adjustments.

What are the chances that President Obama will actually take such decisive action?

Less than zero.