China Going Broke

It is only a few weeks ago that China was promoting its role as the preeminent expanding economy of the world. It also regularly lectured the US about containing its deficit and getting its financial house in order. The US, running trade deficits and borrowing money at record rates had become a second economic power. China had taken its place.

All of that was China’s attitude until the US started to pressure publicly the value of the yuan and it role in fair traded between the two countries. Suddenly China become concerned about its cost of labor, at least according to is official press.China has hinted for weeks that it would have a trade deficit. Much of the cause would be the rising consumption rates of its growing middle class. And, the yuan, China reasoned, could hardly be improperly valued if the People’s Republic’s trade balance was in the red.

China did indeed have a $7.2 billion trade deficit in March. According to the Telegraph, “The shortfall, which was far greater than expected by economists, will undermine US efforts to force China to release its currency, the yuan, from its dollar peg and allow it to appreciate. ”

Geithner and Obama may use the Chinese claims to let up on their pressure about the value of the yuan so as not to terribly disrupt economic relationships between the two nations. But, over 100 members of Congress recently wrote Geithner and said that they were prepared to force changes on China, a strong hint that the discussion of trade barriers would be debated on the floors of the House and Senate.

Unemployment is high. China exports cheap goods. And, it is an election year. It is a crude argument, but effective.

Douglas A. McIntyre