This week China has offered to loosen its exchange rate, under immense pressure from other G20 countries.
There will be additional pressure at this week’s G20 meeting for China to go further, and fully let it ‘float’ – allowing the markets to fully decide the rate.
A bit confusing? Here is a bit of background of what this means (from an earlier G20 Breakdown post) and why it’s important.
The U.S. and China are in a big battle right now over exchange rates – with serious global repercussions. Some are calling for this issue to be resolved through the G-20.
China relies heavily on selling cheap exports to the U.S., while the U.S. relies as much on China buying it’s treasury bonds in order to service the U.S. debt. This relationship has created a kind of an equilibrium where neither side wants to tread too strongly on the other.
However, the U.S. is accusing China of falsely depreciating it’s currency (the renminbi) so that China can increase its exports to the U.S. (and other countries) based on the low cost of buying their products. The U.S. is losing export opportunities due to it high exchange rate relative to the renminbi.
And there are calls for action against China, despite fears of retaliation. Even the U.S. Chamber of Commerce, which has done everything over the years to back China’s entrance into the world economy (at the behest of multinational corporations), is calling for the U.S. to name China as a ‘currency manipulator’ and possibly place tariffs on China.
It is also interesting to see the U.S. crying foul about a market (theirs) being artificially flooded by cheap goods (China’s). The U.S. agricultural industry has been doing this for years with cheap subsidies of corn and other products to Latin America, especially Mexico. This has wiped out much of Mexico’s domestic corn industry, knocked farmers off their land, and been a key factor in Mexican economic migration to the U.S. The U.S. has traditionally been fine with artificial markets, as long as they are not hurt themselves.
This all points to a key problem facing global capitalism in the wake of the financial crisis – lack of demand and overproduction. In the wake of low depressed wages worldwide and high unemployment, there is a scramble to get at whatever consumer demand they can round up. Thus the focus on countries like China that still have global demand for their products, and the concern that they are doing it artificially. The countries with strong trade surpluses like China are seen to be “taking more than their fair share of world demand and are under pressure to boost their domestic markets”.
This pressure on surplus countries to create consumer demand will surely increase if the deficit warrior approach of the G20 called for by Canada, Britain, Germany and others comes into effect.