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China Reform Monitor
No. 686, February 29, 2008
American Foreign Policy Council, Washington, DC
China's losing currency bet;
The Great Firewall of China
Editors:
Ilan Berman and Jeff Smith
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January 31:
By now, most Americans are familiar with how China unfairly “fixes” its exchange rate to the dollar, keeping its currency cheap and its exports to the U.S. booming. What is less known, however, is that this “currency manipulation” is now costing China billions of dollars each year. Through an arcane system of state intervention into the economy, China is now paying more money on domestic currency bonds (its fixed exchange rate forces it to sell these to keep inflation in check) than it is earning on its massive dollar reserves, which tend to be parked in low-yielding U.S. Treasury bills.
Hong Liang, of Goldman Sachs China, estimates this process constitutes a $4 billion monthly loss for the PRC, while Brad Setser of the Council on Foreign Relations puts the annual figure at five percent of Chinese GDP. Additionally, as interest rates in the U.S. and China continue to drift in different directions – a certainty in the near term - the massive losses will only grow. Perhaps more troubling for Beijing, however, is that the damage may not be restricted to the economic realm:
the
Financial Times believes that, “were they tallied, [such losses] could easily become a significant political issue in China.”
February 4:
The Chinese government’s complex system of Internet censorship has been dubbed
by some in the country as the Great Firewall of China. But this system may be
showing some cracks: Internet guides to evading China’s censors have begun
proliferating among Chinese web users, and some have even taken the
unprecedented step of taking their case for greater Internet freedoms to court.
According to
the International Herald Tribune, Du Dongjing, whose personal finance
website was unexpectedly blocked by the government last year, is suing China
Telecom for breach of contract. Du believes that under the current conditions,
he can win the case. “I can even make a contribution to improving Chinese
democracy.”
February 9:
Even the fiercest critics of trade with China admit that importing cheap goods
from the Middle Kingdom has brought at least one major benefit to the U.S. in
recent years: lower inflation. Falling prices of everything from duvet covers to
water coolers has kept U.S. inflation – and interest rates – in check, even as
prices for food and gasoline have soared.
That trend, however, may be changing, with dire implications for the U.S.
economy. Due to a number of factors – “the weakening dollar, soaring domestic
inflation, new labor laws, the end of some government export subsidies, the
increasing cost of raw materials, more stringent product safety regulations, and
bad weather,” China is now exporting inflation to the U.S., rather than holding
it down,
reports the Washington Post. Prices of goods from China rose in 2007
for the first time in years, forcing companies to pass on those hikes to
consumers, or shift production to lower-cost destinations in Asia.
February 14:
All the attention brought to Sudan by the ongoing genocide in Darfur has helped
expose just how closely the African country has become economically linked to
China. But many would be surprised to find how deep China’s cultural and
political imprint has become as well. After years of booming trade, one now
finds Chinese architecture littered through Khartoum, Sudan’s capital. Chinese
New Year lanterns, Chinese buses, and Chinese posters are all commonplace as
well. However,
the BBC
reports, not all Sudanese have turned their back on their former patrons: at
least one diplomat admits “[t]he West is a more natural partner for Sudan than
China, and most Sudanese know it.” |
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Copyright
© 2008, American Foreign Policy Council. All rights reserved |
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