I just returned from a ten-day visit to Beijing, so I thought I’d share a few thoughts on the blog.
It appears that the Chinese are weathering the economic slowdown fairly well. In the U.S., politicians on the left constantly meddle with markets and expand the debt to buy votes, and the consequences have been devastating. Chinese politicians enjoy single party rule; they are not subject to a free and independent press, not to mention talk radio. Our open government approach creates serious problems when so many Americans are recipients of transferred wealth from the productive class. It takes vigilance to defend liberty, while Marxism festers with incessant emotional appeals to class envy.
The Chinese don’t have the type debt problems we have in the U.S. Consumers buy what they can afford, only borrowing for big ticket items like a house (apartment) or car. The government is more interested in holding U.S. debt than incurring its own. An estimated 150 million Chinese live below the global poverty level, but they are not in a good position to seek redress from their political leadership.
Wealth redistribution is central to communism, but I really didn’t see any more of it in China than in the U.S. Beijing has more than its share of inequality, while the professional class lives pretty well. Reasonable health care and decent housing by U.S. standards are still hard to come by for many Chinese families, especially those outside of the large cities where poverty is a major problem.
The Chinese government blocks a number of websites outside of the U.S. for political reasons. Major U.S. news sources like FOX and CNN are available. I was able to log in to Sirius online, and to the major conservative talk show sites I tested as well (Church, Hannity, Levin, Limbaugh, Wilkow) as well. BATTLE4LIBERTY is blocked, however.
The list of sites blocked for political reasons is not always rational, but is often tied to particular comments posted on a particular site or to the use of certain phrases picked up by webcrawlers. This is unfortunate in the case of BATTLE4LIBERTY. I do my best to analyze the Chinese economy as objectively as possible, and the people I work with there are certainly warm and friendly. Relations between the U.S. and Chinese governments have their tense moments, but they have moved far beyond what they were a couple of decades ago. I may be a frequent critic of economic and social policy in China, but it’s not like my own government hasn’t created enough problems of its own.
The truth is that many of the economic challenges we have with China have been facilitated by poor U.S. policy and too much economic intervention. The ongoing problem with the dollar-yuan exchange rate in a good example; the Chinese government is pursuing a policy it believes to be in its best long term interest, while we lack the resolve to take a strong position and defend a fundamental principle of free trade. While I was there, the Chinese government instituted a tariff on U.S. poultry imports. They cited “dumping” that was “unfairly harming Chinese agriculture.” Go figure.
I always enjoy traveling to China and I learn a lot when I’m there, but it’s good to be home. One thing is true: I love my country, but I must say that it’s getting harder to preach the merits of free markets in China these days with a straight face.
So what’s the Chinese game plan with the yuan? Wouldn’t a stronger yuan bring in more dollars for their goods? Why do they oppose this?
it’s a badge of honor to have your website blocked in china
A stronger yuan would bring in more dollars for Chinese goods ONLY if we would be willing to pay more. For example. if the yuan strengthened by 20%, then Chinese goods would cost 20% more in the US. Demand would decline with the price hike, and some goods currently made in China would find lower labor costs elsewhere. In other words, the Chinese would get more for what they sell, but the would not sell as much. They are willing to sell cheap on the world market in order to secure market share and develop their manufacturing base. China is neither the first nor the only country to pursue this development strategy, but it’s certainly the largest.
There is no reason why China should be intimidating us. We always back down at the bargaining table when they have more to lose than we do. They need our markets more than we need their stuff.
Heard you again on the Wilkow Majority. Keep up the good fight
Dr. Parnell, I could use some study on the various aspects of currency, especially as related to international trade. I would like to learn more about how this all works. I am kind of lost when you talk about the stronger dollar and how that affects trade and so forth. can you recommend some references to study up on this topic?
It’s hard to recommend sources because of the complexity of the topic. Here’s a pretty good overview:
http://www.investopedia.com/articles/03/020603.asp
Murray Rothbard’s argument for a 100% gold-based currency is worth reading as well. He died in 1995, but his work is still considered by many to be the best on the issue:
http://mises.org/daily/1829
Here are some key concepts:
The IDEAL system is a gold standard for all currencies. Absent of such a standard, the next best thing is to allow exchange rates to vary according to supply and demand. In a rational market, a given good or service will cost the same across markets (except for local differences in labor, raw materials, etc.), and currency traders will buy and sell currency to keep that equilibrium.
In a fixed exchange rate system, a country’s central bank buys and sells currencies to manipulate the valule of the domestic currency. This really amounts to subsidizing the value of the currency. China has bought a tremendous amount of dollars to keep the value of the RMB trading within a fixed rate. This rate is tied or “pegged” to the US dollar. By fixing the exchange rate, a company and maintain a stronger or weaker currency that it would otherwise have if it left the rate to the market. In China’s case, a weaker RMB means that each unit of currency would have less value when traded for other currencies. This makes imports (particularly from the US) more expensive, but makes Chinese goods cheaper to export because buyers in other countries don’t have to exchange as much of their own currency to make the transaction.
The Chinese currency is weaker that it otherwide would be if it were alloed to “float” (i.e., exchange freely) on the market. It it were allowed to strengthen, then Chinese goods would becmoe MORE expensive in the US, but US imports to Chine would increase becuase their prices in terms of Chinese currency would decline. The fact that this is not allowed to happen (in part) explains the trade deficit. We buy so much of what is produced in China because it’s artificially cheap. The Chinese buy comparatively little of what we produce because it’s artificially expensive.
Needless to say, being able to buy Chinese goods at cheap prices is not all bad, but pegging the exchange rate to maintain a weak RMB is neither beneficial not efficient in the long run. The Chinese deliberately maintain a weak currency to prop up and develop their industries; they sell stuff cheap now to build market share. However, this is not a level playing field for firms (and workers) in the US and other countries. It’s one thing to have a decline in the manufacturing base because companies in other countries can produce more efficiently. It’s another thing to have a decline because companies in other countries have the advantage of dealing in a weak currency.
The bottom line is that ALL government manipulation in the economy distorts markets; it results in outcomes that are less efficient and would not have occurred without government intervention. In this case, pegging the dollar-yuan exchange rate creates inefficiencies that penalize US companies/workers and balloon the trade deficit.
Parnell’s right. This is a very technical issue. With central banks buying and selling currency and gold and printing more money, free floating exchange is far from perfect, but it’s the best we have short of a universal gold standard.