I've written several times here in Money and Markets about the geopolitical time bomb surrounding China's currency manipulation. The most recent was in my October 31 column.
I expect this issue to grow in intensity and become a major point of contention for the global economy in the coming year. In recent days the chatter about China and its artificially weak yuan has been picking up.
The Europeans have become more vocal about the problems a weak yuan is causing for their exports. The euro has gained 20 percent against the yuan in the past eight months, putting its exports at a disadvantage. And this week European industry leaders called for the EU to step up its pressure on China to start letting the yuan appreciate again.
The IMF explicitly included commentary on currencies in its recent report to call out China's currency as "significantly undervalued."
And with President Obama making his first trip to China next week, the pressure for the U.S. to start taking a harder stance on China's unfair currency policies are elevating.
Since Obama has taken office, the Chinese have virtually returned their currency to a peg against the dollar. And since March, with the resurgence in global risk appetite and the subsequent bounce in global currencies against the dollar, the Chinese have enjoyed a de facto devaluation against other major trading competitors around the world.
Most importantly, China has kept its exchange rate constant against the recently declining U.S. dollar, the currency of its main trading partner.
A Currency Policy Crisis
Is Upon Us …
The world cannot find sustainable growth until economies like the U.S. and China become more self-sufficient. That means deficit trading countries like the U.S. need to start consuming less, saving more and producing more. And export-centric countries, especially China, need to start exporting less and building more domestic-led growth.
It's clear that the one-way trade dynamic of the past decade is not sustainable …
This is why the G-20 is so concerned about repairing "imbalances." These trade imbalances are a recipe for more cycles of booms and busts … and with more frequency. And this imbalance problem speaks directly to China … and to a large degree its currency policies.
The global trade imbalances can't be corrected until China stops controlling the value of its currency — until they stop keeping it artificially weak.
The U.S. cannot keep sending its money to China in exchange for cheap commoditized goods. And the rest of the world cannot allow China to vacuum up all of the world's capital by undercutting the rest of the world on exports. It's an unfair advantage.
