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Jake Van Der Kamp

'In a letter addressed to the Chinese team, the Ways and Means Committee said Beijing was flouting world trade rules by manipulating the value of the yuan to boost exports, and distorting trade with subsidies.

' 'The committee has serious concerns about China's massive and constant interventions in the currency markets,' the letter said.

' 'Those interventions keep the value of the Chinese currency... artificially low - making exports from China relatively cheap and imports into China relatively expensive.' '

SCMP, May 25

If this were baseball and these were indeed the straight facts of the matter then you might say that the China bashers in the United States Congress had just batted a homerun.

The facts of the matter, however, are that they missed again - got the straight facts wrong that is - and they've done it more than once already. We'll call that Strike Three, fellas. Take a hike back to the dugout and next time learn to swing straight before you go up to bat.

One interesting discovery anyone can make when starting to analyse China's foreign trade figures is that Beijing publishes only a few headline figures in yuan and then only as an afterthought. Everything is denominated in US dollars.

There is a reason for this. China's trade is priced in US dollars, not just as a statistical or booking convenience but in real fact. It has rarely even crossed the mind of any exporter in the mainland to conduct his business in a form of funny money that has a controlled exchange rate and cannot be taken abroad.

You might think this natural for exports as the US is the biggest single export market but it is also true for imports. Mainland manufacturers still rely heavily on foreign sources of raw materials and semi-manufactures and they buy these goods in US dollars. Even such things as energy inputs are heavily US dollar sensitive.

It has to be so anyway because finance is crucial to the workings of a trading company and you cannot make proper financial arrangements in a currency that is not internationally exchangeable and has rigged interest rates.

Thus why worry about whether the yuan is artificially low or high to the US dollar? It is a domestic currency only and has very little to do with trade between the mainland and the US.

About the only the way in which it can make a difference is in the wages paid to the manufacturing workers as these are, of course, denominated in yuan.

But bear two things in mind about this. The first is that the wage component of the final retail price of China-made goods sold in US shops is tiny, probably no more than 10 per cent and I've heard as low as 5 per cent.

The second is that wage growth in the mainland has been high for a number of years and is at present running at an average of about 15 per cent a year, probably higher for production workers. It outstrips American wage growth by at least 11 per cent a year.

Now add in another factor. Beijing is indeed making constant interventions in the foreign exchange market as the China bashers say it is, but it is doing so by steadily driving the yuan up against the US dollar and at an accelerating rate.

As the chart shows, the yuan's annual rate of appreciation against the US dollar has risen from about 1.5 per cent 10  months ago to more than 4.5 per cent.

Add this to my wage equation, which was expressed in local currency terms and wage growth in the mainland is outstripping wage growth in the US by  15 per cent a year in equivalent terms.

Now let us imagine that we could get it through the heads of these China-bashing Congressmen that manufacturers in China can have a competitive edge over their US counterparts only in wages because neither can have a competitive edge over the other in pricing of components if both buy these in US dollars alone.

And in that case isn't China already doing a great deal to address the US trade complaints when wage growth in China exceeds US wage growth by 15 per cent a year?

Finally, what is all this talk about China distorting trade with subsidies? We get this from people who represent a government that is happy at any time to distort trade with sudden tariff changes, that massively subsidises agricultural exports and that hides massive technology subsidies through the US$600 billion a year it spends on its death machine.

But if hypocrisy were not enough, the man in the White House says that people in China should eat more US beef because 'it's good for them and they will like it'.

Arrrghhhh!

jake.vanderkamp@scmp.com



US Congress strikes out over currency intervention