On this episode of China Uncensored,
complex economic issues with no clear solution!
Hi, welcome to China Uncensored.
I’m Shelley Zhang,
filling in for Chris Chappell,
who’s out receiving vacation-style therapy.
He's going to be so relaxed when he gets back.
Speaking of relaxing professions,
in a little over a week,
Donald Trump will be sworn in as President.
And here's one of the things he's vowed to do
on his first day in office.
“I’m going to instruct my treasury secretary
to label China a currency manipulator—
the greatest in the world.”
It was one of President-elect Trump's
repeated themes during his campaign:
that China is undervaluing its currency
to gain an unfair trade advantage over the US.
And he's promised to fight back with tariffs
and taxes on Chinese imports.
He's not the first person to talk about this
on the campaign trail.
"As president, I'll use all the diplomatic avenues open to me
to insist China stop manipulating its currency.”
“On day 1,
I will label China a currency manipulator.”
Ah, the day one china currency manipulator promise.
A traditional part of presidential campaigning,
right up there with visiting the Iowa State Fair
and eating whatever the heck this thing is.
That's why I love America.
Because if you want to be president,
you must first seek the blessing of the great butter cow.
So, on day one,
the president will label China a currency manipulator?
Let's be real,
on day one of a new job,
everyone is still trying to get their act together.
I once spent six hours waiting for IT to get me a computer.
But I'm sure that won't happen at the White House,
because the US government is a bastion of efficiency.
Anyway,
is China a currency manipulator?
Well, it's complicated.
For years,
China had a fixed exchange rate.
I know, this already sounds incredibly boring.
But stay with me.
A fixed exchange rate meant that the yuan—
the Chinese currency—
would always be worth the same amount to the dollar.
From 1994 through 2004,
it was 8.26 yuan equals 1 dollar.
Now, other countries have fixed exchange rates too.
The issue is that as China's economy grew rapidly,
the central bank kept their yuan fixed at the same low rate,
so it was worth less than it should have been.
Which meant that Chinese-made stuff was artificially cheaper.
So more and more American companies
moved their manufacturing to China,
where they could get more bang for their buck.
And by bang, I mean, yuan.
You could literally pay people in China a fraction
of what you would pay in America.
And all that extra money?
Profit!
So China kept its people poor
to boost its manufacturing and exports.
And America gained cheaper goods
that led to a trade deficit with China
while losing manufacturing jobs.
Which is the real reason US presidential candidates
always talk about China manipulating its currency.
Now in 2005,
China stopped fixing the yuan to the dollar.
But they still heavily manage its exchange rate.
They control how much it can change each day,
and buy and sell foreign currency
to affect the price of the yuan.
In fact,
China's central bank has the largest foreign exchange reserves
in the world.
In 2014,
they owned 4 trillion dollars in foreign currency.
So yes,
China manipulates its currency.
But here's where it gets tricky.
In the last few years,
China's been going through an economic slowdown.
And people are moving massive amounts of money
out of the country.
Both of those things make the yuan less valuable.
And the US economic recovery
means the dollar the strongest it's been in 13 years.
So in the last couple years,
China's been trying to manipulate its currency the other way.
Now it wants its currency to be stronger,
to keep it from falling against the dollar.
That's because if the yuan falls too quickly,
it could crash China's economy.
I believe we have a clip of Chinese economists
trying to save the yuan:
In fact,
the Chinese government has spent almost a trillion dollars
of their foreign reserves
trying to slow down the slide.
And it's still falling.
Ironically,
if the Chinese central bank stopped manipulating its currency right now,
it would have the exact opposite effect of what Trump
and other US politicians want.
It might look kind of like this.
So what would happen if Trump does get the Treasury Department
to officially label China a currency manipulator?
Well, under a law passed in 2015,
the Treasury would have to spend a year negotiating
with the Chinese government.
And then they still could do almost nothing meaningful to stop it.
Separately,
Trump could still put tariffs on imports from China,
but that’d be a whole ’nother episode.
Here's the thing.
When Trump and other US officials talk about China gaming the system
against the US,
they're right.
For example,
we've talked before on this show
about how Chinese companies steal US technology for profit
with the help of the Chinese military.
That sucks trillions from the US economy every year.
But officially labeling China a currency manipulator
at this point won't really achieve anything meaningful.
We need to be talking about the real issues.
Like this key economic indicator:
So, what do you think?
Leave your comments below.
I'm Shelley Zhang,
filling in for Chris Chappell, who is back very, very soon.
And for you finance whizzes out there,
yes, this is an incredibly simplified explanation
that glosses over a whole bunch of economic factors.
But, I didn't want to have to tell Chris
I drove away all his viewers by using words like
“capital outflows” and “liquidity stress.”
You're welcome.
What do you mean, you and Shelley have taken over the show?!
I've only been gone a week!
That's it - I'm taking the next flight back to New York...