Why the peg saves the US economy – the WTO column

(very soon at Chinabiz)

Shanghai - When you would ask a Martian economist how to solve the current trade deficit between China and the US, his answer would probably be rather simple. Last year the deficit was almost 125 billion US dollar in the favor of China and this year the balance including July is already at 83 billion US dollar and heading for another record.
Or the US economy should slow down, or the US dollar should devalue to a great degree, or both, the economist from Mars would advice. Actually, not only Martian economists would tell us this, last week at the World Economic Forum in Beijing Jeffrey E. Garten, dean of the Yale School of Management was kind enough to let us choose between those two rather unattractive possibilities. They might be realistic option for Martians, but not for the readers of this column, who according to the latest information mostly do not reside on Mars.

When you have an interest in the Chinese, the US or even the global economy both solutions predict massive instability and disaster at least for China, since both loosing the value of its foreign reserves and a slowdown of the US economy might not be in the short term interest of China. Maybe Garten is right in the long run about the unavoidable shake-out, but we might want to postpone that moment – as long as possible.
At the CLSA investor forum in Hong Kong last week asset manager Marc Faber came with an interesting theory on why keeping the Renminbi pegged to the US dollar might be an evil communist strategy to bring down the US economically, to get China in the top-position as an economic power. Key element of his conspiracy theory is that China will not weaken the US dollar by selling its foreign reserves and change it for another currency as many fear, but will try to keep the US dollar strong.
By buying US assets using its strong foreign reserves, the interest rate in the US will remain low, and the Americans happy. In the end there will be a huge loss on those US dollars and other assets, when the inevitable meltdown comes, argues Faber. “This is a small penalty to pay for the transfer of technology and manufacturing and investments into [China].''

China will have the power to decide when the overvalued US dollar goes down, but you do not need to be a Martian economist to see that this is an economic option equal to starting a nuclear war. I do not see a huge conspiracy here, merely the need for stability or even survival until the inevitable happens.
When China really unpegs its Renminbi and frees its economic system faster, as many short-sighted US manufacturers and labor unions want to improve their short-term competitiveness, the bear might really go on a rampage.

Fons Tuinstra