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Is the Vaunted Chinese Economy About to Pop?

China is reeling from overinvestment, underconsumption, and razor-thin profit margins. That's a tough mix in the best of times; and these aren't the best of times.
 
 
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There's no doubt that China manipulates its currency to gain an advantage over its competitors. There's also no doubt that Treasury Secretary Timothy Geithner will do everything in his power to avoid a confrontation with China's President Hu Jintao when he arrives in Washington in two weeks. That's why Geithner has decided to shelve Treasury's mandated currency manipulation report for the time being and defuse a potential imbroglio with Hu. But the Treasury Secretary's unwillingness to embarrass his guest, has angered members of congress who think the administration needs to take a tougher stand on China to protect American workers and U.S. exporters. Senators Charles Schumer (NY-D) and Lindsey Graham (SC-R) are demanding that China be labeled a "currency manipulator" so that punitive action can be taken. That could lead a full-blown trade war with America's biggest creditor.

There's no chance that the Geithner will openly challenge Hu or that the administration will take any action that would jeopardize relations. China's President will get the red carpet treatment for the length of his visit and Geithner will spend the bulk of his time pressing the leader for concessions that will allow greater access to China's market for his buddies in the financial services industry. That's the "hidden agenda" that both the congress and the media fail to see. From Geithner's point of view, the confab is not really about "strategic dialogue" on "mutual economic and security issues". That's just a smokescreen. Geithner is backed by powerful Wall Street constituents who could care less about exchange rates or jobs. What they care about is markets and profits.  And for that, they need greater access.

During his term as Treasury Secretary, Henry Paulson spent more time in Beijing than he did in Washington. But his goals were the same as Geithner's; to do whatever it takes to pry open the biggest consumer market on earth. That basic policy hasn't changed.

No one believes that Geithner is going to fight to save American jobs. It's laughable. From his perspective, the currency flap is just stick for beating up on China when groveling doesn't work. But it's too early to put the stick to work, just yet. For now the policy is all "carrots", although that could change in an instant if Wall Street doesn't get its way.

Americans have a fundamental misunderstanding about the US/China relationship. China is not in the driver's seat and neither is the United States. There's a third party involved, but that party remains mostly invisible. And that's how they like it. Here's an excerpt from the Washington Post which explains the whole thing:

"If the United States does decide to impose tariffs on China, Chen said, American companies operating in China, which account for more than 60 percent of China's exports to the United States, would surely be hurt the most. ‘In the end,’ Chen said, ‘America is the one that needs to adjust.’

"While some analysts have predicted that China would soon start to let the yuan appreciate, Chen's interview illustrated the fact that there is a strong lobby in China opposing revaluation. One reason why a revaluation would be dangerous for China, Chen said, is that profit margins for Chinese exporters are tiny -- ranging from 1.7 to two percentage points." ("China's commerce minister: U.S. has the most to lose in a trade war" Washington Post)

To repeat: "American companies.... account for more than 60 percent of China's exports to the United States." That means the head honchos of the biggest multinationals are calling the shots. China is not the villain here. After all, they're only getting a measly 1.7 on their investment. If the renminbi strengthens at all; they're in the red. China's back is against the wall. What are they supposed to do; work for nothing and let the voracious multinationals walk off with 100 percent of the profits?

 
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