CHINA OVER US BY 10

The Bush admin is calling on China to revalue the Renminbi up by 10 percent. This is a long, ongoing affair in international monetary relations upon which people smarter than I have written tomes.

(EDITOR'S NOTE: Once and for all, here is the difference between the yuan and the Renminbi. Renminbi, loosely translated as the people's notes, is the official name of China's currency. Yuan is the unit of account. This distinction confuses Western journalists to no end. So it would be proper to say that, "China may revalue the Renminbi," or that, "Average wages in Chinese manufacturing are 917 yuan per month." But not that, "China may revalue the yuan," or, "This bun bao costs 3 Renminbi." Get it? Okay. Now you know, and feel free to correct people--especially know-it-all journalists--when they screw it up.)

The question is, "Why 10 percent?" Even Washington's rabid pro-globalization cheerleaders see China's currency as undervalued by 15-25 percent by conservative estimates. If you've ever been in any kind of negotiations (salary, nuclear disarmament, whether you or your older sister gets the last cinnabon, etc.), then you know that your opening position should be inflated above the level of settlement that you hope to achieve. That way you have room to negotiate down. In this case, the Bush administration's opening position is way below what even sanguine globalizers believe to be prudent. By this logic, what the Bush administration deems a "substantial alteration" of China's exchange rate policies is less than a 10 percent appreciation.

What gives? This latest overture is little more than monetary saber rattling. The Bush administration doesn't want China to revalue. Many, many multinational corporations who have been investing in fixed capital in China (factories, etc.) or have been building business relationships with domestic producers are cleaning up on the deal. Imagine you are a manager and you have the opportunity to buy all your inputs in a currency that is 30 percent undervalued, but then still sell all your output in dollars and euros. Pretty sweet deal. Another reason the Bush administration might not really want a revaluation is for its short term effects on US interest rates. If China revalues, all of the sudden the $610 billion China is holding in US treasuries won't be worth as much. The price and the yield of bonds are inversely related, so when the price of those bonds falls, the interest rate goes up. If interest rates go up, it raises the cost of servicing US government debt, raises the cost of home mortgages, and generally puts the brakes on the economy--all combined this makes it difficult for Bush to do things like deficit finance imperial wars and privatize social security.

On the other hand, the Bush administration can't appear to be doing nothing, which pretty much has been their strategy up until last week when Treasury Secretary John Snow delivered this obscure report to the Senate Banking Committee. But doing nothing is no longer politically feasible. Growing and deserved outrage over the Bush administration's inaction and indifference to China's currency manipulation is fueling calls for retaliation, which could end both of Bush's China gambles.