China & Currency Manipulation: Who's the Decider?

I have yet to understand the balancing act that is our government's policy toward Communist China. One China Policy? Strategic Competitor? Shared interests? Hegemon? All of these terms have been used in the discussion.

In the economic discussion, complaints have come up time and time again about the undervalued status of China's currency. Behind the debate, a campaign of economic warfare between the dollar, the euro, the yen, and the yuan has been waged in the name of national interest and one-upsmanship.

Now, the latest carrot-topped item appears this week with headlines (courtesy of the US State Dept.) announcing, "U.S. Finds No Conclusive Evidence of China Currency Manipulation." [See brief Reuters video here]

Hm. Well, you could see how some might be confused by this since just six months ago, the 2005 Annual Report to Congress of the U.S.-China Economic and Security Review Commission was released and on page four, under the heading, "Findings," is this:

"Most economists believe that the RMB is undervalued by 15 to 40 percent. China’s currency manipulation acts as a subsidy for Chinese exports to the United States and a tax on imports from the United States, and serves as an incentive for U.S. and foreign firms to move production to China."

In fact, in the Commission's 2005 Annual Report Recommendations document, the very first item is "Addressing China's Currency Manipulation."

So, which is it? Are they manipulating their currency or aren't they? If they are, as "most economists believe," then why are we playing these games? I can't possibly see how it garners us any respect. To be honest, it makes us look naive, as if there is some sort of goodwill to be expected on behalf of the Chinese government for going along with the charade. Am I missing something?

I know, I know, it's "complicated," but there's a point where niceties devolve into weakness. You don't have to look far to discover that China has been strategizing about the uses of currency manipulation for years, is well aware of its effects, and seems to have employed the practice accordingly.

Read the following passage carefully. It comes from a 1999 book titled Unrestricted Warfare, written by Chinese PLA officers Col. Qiao Liang and Col. Wang Xiangsui (emphasis added):

We can only shake off taboos and enter an area of free choice of means -- the beyond-limits realm -- if we complete our picture of the concept of beyond-limits. This is because for us, we cannot achieve objectives merely by way of ready-made means. We still need to find the optimum way to achieve objectives, a correct and effective way to employ means. In other words, to find out how to combine different means and create new means to achieve objectives. For example, in this era of economic integration, if some economically powerful company wants to attack another country's economy while simultaneously attacking its defenses, it cannot rely completely on the use of ready-made means such as economic blockades and trade sanctions, or military threats and arms embargoes. Instead, it must adjust its own financial strategy, use currency revaluation or devaluation as primary, and combine means such as getting the upper hand in public opinion and changing the rules sufficiently to make financial turbulence and economic crisis appear in the targeted country or area, weakening its overall power, including its military strength. In the Southeast Asian financial crisis we see a case in which the crisis led to a lowering of the temperature of the arms race in that region. Thus we can see the possibility that this will happen, although in this case it was not caused by some big country intentionally changing the value of its own currency. Even a quasi-world power like China already has the power to jolt the world economy just by changing its own economic policies. If China were a selfish country, and had gone back on its word in 1998 and let the Renminbi lose value, no doubt this would have added to the misfortunes of the economies of Asia. It would also have induced a cataclysm in the world's capital markets, with the result that even the world's number one debtor nation, a country which relies on the inflow of foreign capital to support its economic prosperity, the United States, would definitely have suffered heavy economic losses. Such an outcome would certainly be better than a military strike.

*Ahem* What was that headline again? -- "U.S. Finds No Conclusive Evidence of China Currency Manipulation"? Then, what about the Review Commission's findings? Why have we been asking for months, years even, that China revalue its currency?

Newsflash: It is in their strategic interests to continue the tactics they have used because it has worked. They do not wish to placate the US simply because we want them to. Economic warfare is still warfare. A country that kills its own citizens for dissent is not concerned with harming its neighbors' economies. It is not in our strategic interests to believe they want to play fairly. After all, when has a communist dictatorship ever done so?

[Hat tip to Pajamas Media for linking the post!]