The Renminbi Blame-Game

I BOW TO YOU. As United States is running massive deficit on its trade balance at the moment, Barack Obama seeks help from his new foe Hu Jintao while crossing his fingers that China would be willing to help United States by letting the renminbi to appreciate.

It’s interesting to see that for the last few years the centre of gravity of the world’s economy has shifted radically from the west to the east.

In United States, the 2008 financial crisis that was caused by irresponsible bankers in Wall Street has led many countries to stop worshipping United States’ economy as their deity. In Europe, the failure of euro and the collapse of its adopters such as Greece, Ireland, and Portugal make the Europe’s economy no longer relevant to be seen as benchmark.

Countries such as China, India, Vietnam, and Indonesia look more powerful than ever. China, particularly, managed to reach a double-digit economic growth in 2010 and overtook Japan as the second-largest economy in the world. If China’s trend continues, it is even predicted that in 20 or 30 years time United States’s position as the world’s largest economy could be in peril.

And such stellar achievement does not go unnoticed: China’s growing force in its economy has left many western leaders –who have always had histories of looking down to their Asian counterparts– to put more strict attention on the country.

United States now deemed China as an important player in global stage. Hu Jintao’s diplomatic visit to United States in January 2011, for example, was met with more coverage from the United States media than ever.

What exactly is the major factor behind China’s rise today? Of all the far-sighted tactics and strategies of Chinese leaders, economists, and policymakers that have bolstered China’s economy until present; how Chinese central bankers peg the renminbi and keep the currency low has always been considered as China’s most brilliant –and controversial– economic gambit.

Currency devaluation leads to what some economic analysts call as unfair advantage for China. They claim that China is allegedly controlling its renminbi in its own favor at the expense of other countries’ economies, as the downpour of Chinese goods today is increasing their import numbers as well as hurting their domestic industries.

Of course, China’s strategy in keeping its currency low does not matter in the past when Chinese goods only held a small fraction of the world’s economy.

But in a situation like today when Chinese goods could be found in almost every corners in the world, it prompts massive headache for many policymakers in many countries: Citizens are becoming more dependent to Chinese goods, and thus many countries see a massive surge in import in that leads to trade deficit in their balance book.

Is China really the evil here? Criticisms regarding China’s international economics policy could be heard mostly from Americans: Both US President Barack Obama and his Treasury Secretary Tim Geithner has repeatedly launched searing attacks against China’s undervalued currency, while Nobel prize-winning economist Paul Krugman even described China as ‘bad guy in currency war who is to blame for the currency tensions as the cheap renminbi is contributing to global trade inbalances’.

This renders complicated problems for economic policymakers in many countries that import goods from China, especially United States, simply because their domestic industries could not compete with cheaper Chinese goods that are more preferable among the customers.

What deteriorates the problem is today many Chinese goods come in the same quality as American, therefore pushing some western goods in the sidelines, with almost no competitive advantage against exported goods from China.

In addition to hurting many countries’ domestic industries, the maelstrom of imported Chinese goods causes many countries to run deficits in their trade balances, as their import exceed exports number. It is reasonable if many world leaders massively denounce China’s act of depreciating the renminbi far beyond its real value, as this is simply not the right time for China to become so inconsiderate.

The world is still recuperating from the United States financial crisis in 2008; arguably one of the worst economic crises the world has ever seen. In fact, today not all countries have returned to their pre-crisis economic growth, yet China seemingly acts as the real villain whose undervalued currency and massive export numbers are causing global trade imbalances and rendering trade deficits among its trade partners.

But apparently, the argument of deeming China as the real evil here is a little bit too unfair.

The first question we ought to ask is: Why does China, after all the sweltering attacks from various countries, keep insisting in maintaining the renminbi undervalued? While many countries blast China’s acts as immoral during these tough times, it’s difficult to judge their actions as wrong or against the law however.

Keeping an eye on currency’s valuation is necessary if a country’s economy depends very much on its export industry; which is precisely the situation that China is currently in. China’s economy depends much on its export industry –so much that it was reported that in 2007 export in China accounts at a staggering level of US$ 1.22 trillion, or close to 40% of its total GDP.

China’s exports also shows a striking development, as China’s export alone have grown at 25% annual rate in the last decade, over the twice of growth of China’s GDP.

An economy that depends on export sector like China means its citizens also depend on the export industry –or mostly employed in factories or companies that focus on exporting items abroad. For China, it means that adjusting policies regarding its export industry –such as letting the renminbi afloat– is the same as playing with the fates of the Chinese citizens.

It is clear that by devaluating the renminbi, China is trying to make jobs and save its own citizens. For example, a research shows that total employment in China significantly increased by 7.5 million per year over 1997-2005, with export growth contributed at most 2.5 million jobs per year. The researchers also concluded that exports have become ‘increasingly important’ in stimulating employment in China.

Chinese policymakers, after all, are just doing what they have to do: Implement the best policy for their own citizens.

Of course, it is not to say that what China has done is morally justified in this post-crisis period; but it is also unfair to put a verdict that what Chinese policymakers have been doing is completely wrong. Today, the soaring economic growth of China has successfully dragged millions of Chinese out of poverty, and policymakers in China are merely implementing a policy to support its export sector, which provides jobs for million of Chinese and makes them better off.

Yet an economic superpower like United States is acting like a street beggar these days, pleading Chinese policymakers to pity them and help the country to overcome its massive trade deficit.

Why United States is acting so shameful like that goes beyond my comprehension. Well, China’s response regarding this US-China currency fallout is predictable, and it is represented at its best by the words from Yu Jianhua, a Director at China’s Ministry of Commerce, who said:

“Don’t make other people take the medicine for your disease.”

It's the Global Economy, Stupid

PUBLIC ENEMY. Barack Obama might not be popular during the G-20 summit following the decision of The Federal Reserve to pump US$ 600 billion to the US economy; a policy which will weaken the US dollar and propel more hot money inflows, inflation, and asset bubbles to the developing world.

As the United States President, Mr. Barack Obama surely has too many thoughts in his mind, doesn’t he?

The major overhaul in US healthcare system reflected Obama’s responsiveness in domestic policies and fulfilled his campaign promise, while the way he handled the British Petroleum fiasco in Gulf of Mexico indeed had satisfied the environmentalists.

In foreign policy matters there’s an urgent need to embrace the Muslim world after George W. Bush responded the 9/11 attack with waging wars here and there. The relationship has never been bitter: In Iraq, the US enraged many Muslim communities by demolishing the country because of the Weapon of Mass Destruction that never exists. In Afghanistan people still cry for more American troops to be deployed, arguing it is the US’s responsibility to fix the chaos that Bush once initiated.

But it seems Obama’s mind is being crammed with too many foreign issues that the US has to deal with –and the economy is not being put as his major precedence. Perhaps we could recall one of the most famous remarks in the history of United States politics, which was coined by Bill Clinton during the 1992 presidential campaign against George H. W. Bush.

That phase of Clinton’s emphasized the need to put economic issues as the most important priority among others. As Bush at that time gained fame among his voters because of his foreign policy developments, Bill Clinton, impressively, become the eventual winner the election thanks to his audacious –and effectual– campaign slogan: It’s the economy, stupid.

That’s what Obama should know, because the dreadful economy at present is definitely the reason why his Democratic party conceded a defeat against the Republican recently. Obama’s report card in the economy is a complete mess: In US currently unemployment rate soars higher than ever, and the multi-trillion dollar bailout is not actually effective to fix the situation or jumpstart the domestic economy either.

Also, Americans are not too interested with the revamp on regulations of Wall Street, as they urge Obama to put more attention to the jobless people who desperately look for dollars to feed their family on Main Street.

While Obama is not popular home, The Federal Reserve’s decision to boost the US economy by purchasing treasury bonds worth of US$ 600 billion and keep the interest rates at a historically low level may make him a more unpopular figure overseas.

Yes, Obama may be welcomed with ecstasy by Indonesians as he gave his speech in fully-packed hall of University of Indonesia’s. But surely unhappy leaders of G20 economies would not be that kind to shake his hand with such warmth as the Indonesians did –and they surely greeted him with sinister smiles on their faces knowing what the US had done to the global economy.

The US is the major perpetrator behind the recent currency wars, depreciating its dollar in order to make its exported goods more competitive abroad, as well as continually keeping its interest rates low to boost its economy. As if the historically low interest rates are not enough to cultivate hot money inflow and prompt headache among developing countries, now The Fed is looking to print US$ 600 billion more to the economy –a move that will surely increase the US dollar supply in the market, press the US dollar to depreciate further, and ultimately bring the new chapter of currency wars.

The United States is playing dangerous game here in implementing such self-centered policies like those because the consequences of the policy are likely to put the stability of global economy at bay. Depreciation in US dollar currently leads to a considerable corrosion in many countries trade balances, while a near-zero interest rate already stimulates a significant surge in capital inflow among developing countries.

And regarding the US$ 600 billion injection to the US economy: Is this a trade protectionism in disguise? Weaker dollar will eventually make US goods more competitive abroad; stabbing many US trade partners in the process. Countries around the world would not be so happy with this. “You blame me as the global economy’s hitman and now look what you’ve done,” says China.

Does Obama really need to come to G20 meeting anyway? While the global economy is still recovering from an economic mess which the US started, the G20 economy members are supposed to implement integrated and joint efforts to fix the global economy together, not the other way around.

Yes, the G20 group should work in cooperation; and that’s why it was formed at the first place. But now such commitment is in question because currently the group’s de-facto leader seems to be more interested in pursuing egotistic policies to save the his economy alone, not the world.

South Korea and the G-20 Summit

IT'S OUR TIME. The economic renaissance of South Korea is in the hideout compared to the rise of China and India, so this is the time for Lee Myung-bak to stop being so humble and play a more important role in shaping the world's agenda at the G-20 economic forum.

As the host, South Koreans have a story to share ahead of the G20 summit which will be held on their soil on November 11.

Now a member of the 20 world’s largest economies, South Korea’s imposing economic transformation, which is well-known as “The Miracle of the Han River”, could become an example for every citizen of developing country who envisages writing the same history as theirs.

In my university, I still remembered when my economics lecturer presented me South Korean economy case-in-studies on several occasions. During that time, my economics lecturer –who is also a prominent economist in Indonesia– always underlined the importance for us the Indonesian students, as the future economists and policymakers, to learn from Korea of how their brawny industries and massive exports tally fuel their faster-than-ever economic growth.

It's simply breathtaking seeing Korean companies such as LG and Samsung could compete with Japanese heavyweight like Sony, or when Hyundai and KIA Motors racing neck to neck with US' General Motors. In Indonesia, a nation whose export number holds only a small percentage in our economic lifeblood and for so long has become our Achilles’ heel, South Korea’s success story on its export and industry has become a benchmark for us to succeed.

It is, without doubt, a remarkable achievement for a nation whose economy once damaged badly because of the Korean War, and has few resources in disposal to repair the situation at hand.

With little natural resources and diminutive domestic market, South Koreans could be forgiven for being timid back then. Compared to their northern brother, they were very much overlooked in the global stage: at that time, their economic size was even smaller North Korea and in fact was also ranked among the poorest countries the world.

It was not until Park Chung-hee –recognized as the South Korea’s version of Deng Xiaoping– came to turn the fate of the South Koreans upside down. He helped to unleash the immense potential of South Korea’s industry by laying the foundation of an export-oriented economy, and promote an economic reform which is perceived as the highly-successful gambit that bolsters its rapid economic growth today.

By the time Park Chung-hee became president in 1961, the income per capita of South Korea was merely US$ 72. South Korea’s economy was very small back then –so small that in one of his addresses, Barack Obama mentioned to the young African leaders forum that by the time he was born –that was, the year of 1961– South Korea’s economy stood at the same par as Kenya, even less wealthier.

But thanks to its highly-successful industrialization and massive export numbers, today is a completely different story. The data from World Bank in 2009 shows that South Korea’s gross domestic product (GDP) per capita stood at the level of US$ 17,078, outpacing African developing countries –including Kenya– whose GDP per capita today are still less than US$ 1,000.

Indeed, this rags-to-riches story should be put as lesson for leaders from developing countries who fancy their citizens to have a more affluent future, including Indonesia.

For many developing countries, one of the criticisms pointed to G20 economies’ leaders these days is their ignorance towards less-developed countries, as the forum is mostly dominated by heated debates discussing the interests of developed countries rather than the less-developed ones’.

As a former poor and under-developed country that has gone through one of the most inspiring economic revolutions the world has ever witnessed, citizens from developing world in many parts of Asia and Africa –whose countries are not so fortunate enough to be included in G20 economies– will put profound expectations in the shoulders of South Korean representatives in the upcoming G20 summit.

They will very much hope that the South Korea can help in setting leadership and directing integrated economic policies which will represent and assist developing countries as a whole.

In an era where Asian countries and “new kids on the block” in the economy like China and India start to play a more pivotal role in shaping the world’s agenda, South Korea could host the next G20 forum with brimming confidence.

Yes, it is understandable if South Korea’s achievement in economy is very often underrated and superseded, as China’s and India’s inexorable economic engines are turning too many heads already these days.

But compared to its counterparts in the G20 economies, this is the nation which started the race way far behind its compatriots, yet still managed to stand at the same level with them eventually. This is one of the Asia’s economic tigers which very much depends on export in its economy, yet still weathered the recession relatively successful compared to its other export-oriented peers.

For all its economic accomplishments, in the next G20 economic forum South Korea has more than what it takes to play a more important role in shaping the world’s economy.

G20 economies must not forget the developing world, and on the upcoming G20 summit all the developing countries’ citizens will hope the host can act as their envoy, so that in the future another “Miracle of the Han River” can be engendered.