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.”

Euro Crisis: Bleak Future for Single Currency

ONE-HAND BATTLE. In Europe, the implementation of Euro is actually weakening most of the European economies as it limits their monetary independence and prevent them from implementing monetary policies for their own benefits.

Economists and policymakers in Euro-adopter countries are having stormy weather outside their office windows now.

Early this month the Portuguese government declared its inability to pay its debts and requested financial assistance from the European Union (EU). After the economies of Greece and Ireland collapsed last year, Portugal was the third Euro-adopter countries which failed to pay its debts and asked for bailout.

Besides, it may not be the last nation to follow the path of Greece and Ireland, and quite a few analysts claimed that debt-laden economies like Spain, Italy, France, and Belgium could be the next dominoes to fall.

The single currency policy in Euro was supposedly to be great idea at the beginning; but looking at how recent events unfolded, some optimists however started become skeptics: Is the Euro responsible for recent Europe’s mess?

The best way to understand the single currency’s predicament is to imagine a nation’s economy operates like a huge Transformers robot.

Every nation – be it Portugal, Germany, Greece, Ireland, Spain, and others– has its own robot model, with each of the robots has unique characteristics against each other. What’s similar about them is all robots are armed with two guns both on their right and left hands (as seen on the movie), so they can protect themselves from their enemies and their overall stability can be assured.

Suddenly, robots from European countries come up with a seemingly great idea that they, apparently, could become stronger if they just unite and combine their small guns into one gigantic weapon. This could be done only if each robot is willing to sacrifice the gun on their left-hand, so it can merge with other robots’ guns to be transformed into one gigantic and powerful weapon.

Several robots from Croatia and England refuse the offer, but almost all European-built robots agree with this proposal. In the end, those robots boast a one-for-all gigantic and massive weapon as the reward of their unification, with the expense of having only one gun in their right hand as they continue their survival.

Today, the importance of those missing hands starts to be felt; but unfortunately now is simply the point of no return for those European nations.

Basically, to fix problems and avoid crises in the economy, a policymaker is equipped with two powerful “weapons”: A monetary policy which is related with interest rates and currency, and a fiscal policy which is related with tax and government spending. For example, United States implemented both fiscal and monetary policies in the form of a 1 trillion dollar tax cut (fiscal) and slashing interest rate to the level of 0.25 percent (monetary) to resuscitate its economy during the last financial crisis.

But when Euro-adopter country like Spain suffer from high unemployment rate like today, Spanish policymaker could not simply adjust the interest rate (monetary) to shoot down the problem. Because they decide to use Euro as a single currency, all policies that related to currency –which are monetary policies– have to be thoroughly discussed and carefully implemented for the sake of the EU members as a whole, not a single country like Spain alone.

During this situation, other European countries like Germany or France may have different economic interests than Spain’s, and slashing interest rate –a policy which would devalue the Euro– perhaps would make those countries worse-off.

In other words: It’s true that those robots sacrifice one of their hands and hold share in the massive weapon, but one simply could not use the weapon as he pleases –because other robots, presumably, may have different type of enemies to shoot.

What exacerbates the problem is not all European robots are armed with right-hand weapon that is powerful enough to cover their left-hand weapon’s loss. Some countries like Germany and Finland have strong fiscal position, while the balance book of countries like Greece and Ireland are full of debts and could not really afford to spend much money for fiscal policies.

The consequences are predictable: The economies of Greece and Ireland defaulted, and EU member countries with strong fiscal position suffered enormous economic losses as they had to provide the multi-billion bailouts to help those ill-fated economies.

Meanwhile, Indonesia and its neighbors in ASEAN region have been weighing the possibility of having a single currency like Euro for years.

Some ASEAN representatives and economic ministers believed that the implementation of single currency in ASEAN could bring economic community in the region to the next level, as it would enhance economic development in the area and forge stronger ties among ASEAN countries.

But current Europe’s crisis is a lesson to learn for Indonesia and ASEAN as the risk and the potential economic losses if the single currency policy fails is indeed massive.

Yes it is true that the single currency has boosted trade numbers in EU by as little as 10 percent since it was first implemented. But as recent events show, Europe’s single currency in Euro turns out to be a monetary trap and makes some economic problems more complex than they actually are.

If Euro fails in those Europe’s developed and high-welfare economies, adopting single currency in ASEAN –a region where developing and developed economies are living side-by-side and economic gaps among them are obvious– is definitely not a wise idea. At least not for now.

Indeed, after a decade full of applauds for Europe and its success story of single currency implementation, today is the day when the credibility of single currency policy is being put on its highest test.

This article was published in The Jakarta Post on Wednesday, April 20 2011

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.