Tuesday, March 27, 2007
CHINA: PURCHASES OF YEN NOT A REAL OPTION
By Peter Navarro
Tuesday, March 27, 2007, FT
From Prof Peter Navarro.
Sir, Fred Bergsten's recommendation that China should diversify its foreign currency reserves into the Japanese yen shows a fundamental misunderstanding of the current monetary policies of both the Chinese and Japan ("The yen beckons China's dollar billions", March 13).
China directly manipulates its currency by maintaining a fixed dollar-renminbi peg through the recycling of large sums of US dollars back into the US bond market. The broader goal is to sell as many exports as possible to the US so as to create jobs in China, where the unemployment rate remains stubbornly high. As a defensive measure, Japan, as well as Taiwan and South Korea, must likewise manipulate their own currencies in order not to lose competitiveness or market share to China. However, in a floating exchange rate system, Japan achieves manipulation indirectly through maintaining artificially low short-term interest rates and tacitly supporting the so-called "carry trade", which helps to keep the yen low.
Any attempt by China to prop up the yen through currency purchases would be interpreted as a wildly provocative and mercantilist act by the Japanese as it would enhance China's ability to take US market share from Japan. The more likely scenario is that China will increasingly use its foreign currency reserves to buy equity shares in US companies and, over time, the US companies themselves. By gaining control of US companies, China will therefore gain more control over the decisions of US companies to offshore and outsource to China. Such a strategy will also accelerate technology transfer from the US to China.
Where Dr Bergsten does get it right is in his insistence that China let its currency "rise to a level that would no longer require intervention". In the absence of such a policy shift by the Chinese, the road ahead will be bumpy for both the US and Japan.
Peter Navarro,
Business Professor,
University of California,
Irvine, CA 92697, US ¶ 3:23 AM
Tuesday, March 27, 2007, FT
From Prof Peter Navarro.
Sir, Fred Bergsten's recommendation that China should diversify its foreign currency reserves into the Japanese yen shows a fundamental misunderstanding of the current monetary policies of both the Chinese and Japan ("The yen beckons China's dollar billions", March 13).
China directly manipulates its currency by maintaining a fixed dollar-renminbi peg through the recycling of large sums of US dollars back into the US bond market. The broader goal is to sell as many exports as possible to the US so as to create jobs in China, where the unemployment rate remains stubbornly high. As a defensive measure, Japan, as well as Taiwan and South Korea, must likewise manipulate their own currencies in order not to lose competitiveness or market share to China. However, in a floating exchange rate system, Japan achieves manipulation indirectly through maintaining artificially low short-term interest rates and tacitly supporting the so-called "carry trade", which helps to keep the yen low.
Any attempt by China to prop up the yen through currency purchases would be interpreted as a wildly provocative and mercantilist act by the Japanese as it would enhance China's ability to take US market share from Japan. The more likely scenario is that China will increasingly use its foreign currency reserves to buy equity shares in US companies and, over time, the US companies themselves. By gaining control of US companies, China will therefore gain more control over the decisions of US companies to offshore and outsource to China. Such a strategy will also accelerate technology transfer from the US to China.
Where Dr Bergsten does get it right is in his insistence that China let its currency "rise to a level that would no longer require intervention". In the absence of such a policy shift by the Chinese, the road ahead will be bumpy for both the US and Japan.
Peter Navarro,
Business Professor,
University of California,
Irvine, CA 92697, US ¶ 3:23 AM
