US dollar plot claim is nuts
Last week the Shanghai Daily published an opinion piece accusing the United States government of a dastardly plot to defraud the Chinese people through a disguised default on its foreign debt.
The author's argument was simple: China has lent hundreds of billions of US dollars to America in good faith. In return Washington is reneging on its side of the deal and cynically ripping off the Chinese people by depreciating its currency so it does not have to pay back the full value of the money it borrowed.
'The US is actually welshing on its debts malignantly by allowing the devaluation of US dollars,' wrote the author Mei Xinyu, a senior researcher at the Ministry of Commerce.
And to make sure readers understood the point, the article was helpfully accompanied by a four panel cartoon depicting a smiling Chinese entrusting a sackful of walnuts to an American, who greedily scoffs the lot before returning the sack containing only empty and broken shells.
'China's US dollar assets are the money earned by its people through hard work, so the central government has the obligation to preserve them rather than allowing the depreciation of US dollars,' the author thundered, before calling on Beijing to resist any further depreciation of the US currency at the next session of the US-China special economic dialogue in June.
On a superficial level, it might seem as if the author has a valid complaint. After all, in recent years China has indeed lent vast sums of money to the US. According to figures from the US Treasury, China now holds almost US$500 billion of US government debt (see the first chart below), although most independent analysts believe the true amount to be far higher. In total, it is likely that Beijing holds around US$1 trillion of its foreign reserves in the form of US dollar-denominated assets.
And the decline of the US currency is eroding the yuan value of those holdings. Since July 2005, the US dollar has fallen in value by just over 15 per cent against the Chinese currency (see the second chart below), which means Beijing's US dollar assets are now worth almost 1.3 trillion yuan less than they would have been had the exchange rate remained stable.
But this does not mean the Shanghai Daily's complaint makes sense. Beijing accumulated that US$1 trillion by intervening in the foreign exchange market. For years it bought up China's US dollar trade receipts in order to hold down the value of the yuan so that China's exporters could enjoy a competitive advantage in the US.
The money was then lent back to the US in the form of US dollars in order to hold down US interest rates, so Americans could afford to borrow and spend on Chinese-made goods.
In other words, Beijing voluntarily assumed the management of foreign exchange risk on behalf of Chinese industry. If it hadn't, its currency would be stronger, its trade receipts less, its foreign reserves smaller and it would not now be so exposed to the US dollar's decline.
As that risk rebounds on Beijing, Chinese officials can hardly claim they were not warned of the danger. The International Monetary Fund said in 2002 that the US dollar was severely over-valued, while it was clear from 2001 that President George W. Bush was not as committed to a strong US dollar as his predecessor.
So to complain now that Washington is defrauding China by devaluing the US dollar is not only wrong, it is nuts.