China and US: a clash of interests

Two events which had been anticipated for quite long took place in the U.S. shortly before the G20 summit in Seoul. On 2 November the Democrats lost control of the House of Representatives, and on 3 November the U.S. Federal Reserve announced that it would pump $600 billion into the US economy by the end of June 2011 in order to boost the fragile recovery. The second event has been widely discussed by experts and officials.

In his article headlined ''When China exports,everyone pays'', Paul Krugman, an American pro-Democratic economist and the Nobel Prize winner, justifies the decision made by the Federal Reserve and criticizes those Europeans who blame the US of using the weakening dollar to strengthen its foreign policy. But this is not true, says Mr. Krugman. “What the Fed is trying to do through quantitative easing, or releasing more money into the economy, is to foster an expansionary monetary policy and increase productivity in the face of a depressed economy and threats of deflation.” Meanwhile, China, as Mr. Krugman sees it, is raising interest rates ''as part of an effort to encourage personal savings and stop prices from soaring''.

In his article the expert repeats a popular belief that China pursues a weak-yuan policy and thus 'beggars its neighbors'. It is fighting inflation which in the long run reduces world demand and protects the Chinese economy from overheating.

But if we take just a bit more attentive look at the statistics, we'll see how weak Mr. Krugman`s argumentation is. And the problem is not only about an obvious truth that the global financial crisis was caused – either accidentally or deliberately – by the Federal Reserve, and the whole planet had to pay for it. Neither is it wise to blame China for its weak-yuan policy: unlike some other East Asian countries that had devalued currencies in 2009, China pegged the yuan to the dollar and started to revalue its currency last summer despite a growing inflation, which meant to lose in competition with other exporting countries. It would be enough to see the dynamics and the scale of support each importing country provides to neighbors (if we agree that export is evil).

 In 2008-2010 China worked out an effective stimulus plan (which did not have to do anything with trivial pumping of money into domestic economy) and managed to sustain a positive economic growth. This helped the leading countries keep import reduction down: by 26% in the US, by 28% and 21% in Japan and Germany respectively. In China import reduced by 11%.

In 2009 exports in the US reduced by 18%, while China saw a 16% reduction in exports, more than it was in case of import. As a result, China's trade surplus was lowering, and in March of 2010,import exceeded export for the first time in many years. Although the situation came back to normal quite soon afterwards, China's trade surplus in the summer of 2010 was $84 billion, almost $40 billion less on the year.

In 2009 China was not only the world's leading exporter but ranked second after the US in terms of import. In early 2010 a monthly volume of import reached the pre-crisis level. In August 2010 the US imported goods worth $30 billion less than in July 2008.

In mid 2010 China saw a faster exports growth, which probably became a reason for the revaluation of yuan. And it is likely that China may face some obstacles from the US Federal Reserve while trying to improve the situation with exports. And there may be different approaches to it in China: the government will continue the revaluation of yuan, while exporters will be forced to tighten their belts.

As I have already said, China has been trying to cool the flow of 'hot money'. Unlike many other countries, where speculation often overruns common sense, China has been trying to ensure stability to its industries. And this explains why Beijing is so annoyed with the Federal Reserve policy.

However, Chinese exports view a weak-dollar policy as the right of the US to choose measures to support its economy. And it is quite strange that Mr. Krugman, who is known for his liberal views and criticism of exaggerated protectionism of the Republicans, is now labeling China as a No.1 enemy to the global economy.

Once China was at the very beginning of its way to join the globalization process, the official Beijing announced that each government is responsible for its economic situation before the rest of the world. And China's export and the yuan rate have nothing to do with it.