China vs. Obama

President Obama vs. China. Touch gloves and come out swingin’!

“The continuous depreciation in the dollar,” said Liu Mingkang, chairman of the China Banking Regulatory Commission, “and the U.S. government’s indication that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation.”

Mr. Obama’s counterpunch: “I can tell you that in the United States, the fact that we have free Internet — or unrestricted Internet access is a source of strength, and I think should be encouraged.”

First round: China.

That’s unfair, we admit… the two men were never even in the same room over the weekend, and surely Mr. Obama said something more important to the Chinese than an implicit wag of the finger towards censorship. But those are the headline quotes this morning, the first day of President Obama’s pivotal trip to Asia, and they speak volumes. The Chinese are taking big swings… they’ve got our debt, they’ve got our imports, they recognize their major reserve currency is becoming a carry trade whipping boy… and they are not happy. America, as usual, is jabbing back with human rights pleas and the never-ending quest to spread democracy.

“With President Obama embarking on his first official visit to China this week,” Dan Amoss explains, “the issue of the dollar/renminbi peg is at the forefront of concern. As the U.S. dollar index weakens, so does the exchange rate of the Chinese renminbi versus floating currencies like the euro and the Japanese yen. This translates into an effective price cut for American and Chinese exporters, without the typical hit to profit margins. European and Japanese exporters are suffering from what they consider to be an unfair playing field.

“Debasing the value of a currency is an old-fashioned way for politicians and central banks to subsidize politically powerful exporters. Cheap currency policies are widely popular among the bureaucrats and central planners that populate the halls of academia and policymaking. But over long periods of time, the quality, efficiency and productivity of an export sector will determine its success — not whether it’s located in a nation with a weak currency.

“Like doping in sports, a weak currency gives exporters a price advantage against its competitors. But once too many countries get involved in this ‘mercantilist’ type of policy, it transforms into an ugly race to the bottom. In the end, the average citizen is impoverished by diluted purchasing power.”