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Wednesday
October 17th, 2018

j r schrockGUEST COLUMN,  John Richard Schrock, Education Frontlines

 

Arriving in China, I converted some U.S. dollars and was surprised to receive a little more Chinese yuan than I expected. The exchange value of the Chinese currency was a little less. That weak yuan is an advantage not only for me but also United States customers. What happened?

China does oversee its currency for the benefit of its people. Back in the Republican and Warlord Era (1911-1949), China suffered bouts of hyperinflation where folks used a wheelbarrow to carry nearly useless money to the store to buy a small bag of rice. To prevent such a collapse, China controls the value of its currency. In the U.S. the Federal Reserve attempts to temper the market using interest rates but China is more “hands on.” While there are many major Chinese banks competing for customers, the Party maintains membership on their governing boards.

During the Great Recession of 2008 caused by “sub-prime loans” in the U.S., the damage to our banking system rippled around the globe to cause a worldwide recession. Our government’s infusion of money for bail-outs as well as increased spending for “shovel-ready” projects to bring back the economy were minor compared to the massive infusion of funds here in China. If China had not super-invested to save its economy, there was a good possibility the world would still be suffering from the Second Great Worldwide Depression of 2008.

When Deng Xiao-ping took over in 1980 and instituted market reforms to grow the country, he likewise used currency valuation to drive investment. Simply, compared to Americans who spend a dollar and five cents every time we make a dollar, Chinese have traditionally saved 40 to 60 percent of their paychecks. By announcing that the Chinese yuan would soon be devalued, the government back then encouraged its citizens to take money from savings (where it would soon lose value) and invest it into business and development. The Chinese economy took off with annual growth in GDP reaching 18 percent before 2008. Today’s 6.5 percent annual growth is still twice what the U.S. or E.U. can achieve.

And Western pundits who claim this growth is fake government reporting need to walk the streets of China’s cities where construction is everpresent.

And money goes further in China. Chinese professors make the lowest salaries of any professors in developed countries. Yet the buying power of the yuan is greater for day-to-day food, clothing, etc. in the average communities in China. But if I want to buy Western-style rich chocolate, then I pay as much as I would in the United States. And living in the modern Shanghai Pudong District or other elite regions will cost you dearly, just as in elite communities in the U.S. But many Americans who retire and live overseas find they can live a richer life than stateside. That would be the case here.

So how about the problem with “currency manipulation,” the perennial hissy-fit thrown by China-bashers? My dollar bought more yuan, didn’t it.

China is acting in a limited way to protect its export industries but also in a way that benefits foreign buyers — you and me. And Americans have some misconceptions — a big one being that if America doesn’t buy China’s goods, China will crash. But China’s middle class has grown far larger than ours.

For commonly used products, when they produce 10 items, their own middle class buys eight or nine.

China also sells to the rest of the world, not just us. So unless the business is making Christmas trees, they can survive without our business. 

Remember the childhood chant: “Tit for tat. You shoot my dog, I kill your cat.” Obviously not every child that grows up to become President learns it. So China must retaliate with tariffs in kind. But so far they have been less severe and only “kick our cat.” China understands how tariffs increase the cost of Chinese goods to the American public. With a 30 percent tariff, that quality imported screwdriver (and China makes some of the best) is going to cost the American buyer 30 percent more. By weakening the yuan, that makes the increase in cost to you slightly less, and you may still buy it — but be a little poorer.

Such tariffs will not restart the antiquated rustbelt steel mills or re-hire expensive steelworkers. 

This recent slight devaluation of the yuan will probably draw accusations of currency manipulation again. The irony is that these charges were made over the last two decades when the yuan was tightly locked to the U.S. dollar. So it was “manipulation” because it wasn’t allowed to “float”? When a currency floats in a “free market,” then there are a host of scoundrels with computers that become rich by buying and selling currency, causing a volatile market where exchange rates fluctuate wildly. When speculators who produce no product get rich, an equal number of innocents get poorer.

So when I exchanged my U.S. dollars for more yuan than I expected, I smiled as I realized that the Chinese government was looking out for what was best for their people, and for us as well.

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