The Struggle between China and the United States, between the YUAN and the DOLLAR, is the centerpiece of global finance today and the main front in currency war (CW).The evolution of this struggle begins with the emergence of China from a quarter century of economic isolation, social chaos and the doctrinaire suppression of free markets by the communist regime.
INTRODUCTION
The modern Chinese economic miracle began in January 1975 with the four modernization plan announced by Premier Zhou Enlai, which affected agriculture, industry, defence and technology. Implementation was delayed, however due to disruptions caused by Zhou's death in January 1976, Followed by the death of communist Party chairman Mao Zedong in September of that year and the arrest one month later of the radical Gang of Four, including Madame Mao, after a brief reign.
Mao's designated successor, Hua Guofeng , carried forward Zhou's vision and made a definitive break with the Maoist past at a National Party Congress in December 1978. Hua was aided in this by the recently rehabilitated and soon to be dominant Deng Xiaoping. Real change began the next year followed by a period of experimentation and pilot programs aimed at increasing autonomy in decision to create four special economic zones offering favorable work rules to attract foreign investment, especially in manufacturing, assembly and textile industries.
They were the precursors of a much larger program of economic development zones launched in 1984 involving most of the large coastal cities in eastern China. Although China grew rapidly in percentage term in mid-1980, it was working from a low base and neither its currency nor its bilateral trade relations with major countries such as the USA and Germany gave much cause for concern.
DILEMMA EMERGE
In Recent scenario currency war is marked by claims of Chinese undervaluation, yet as late as 1983 the YUAN was massively overvalued at a rate of 2.8 YUAN per dollar. However this was at a time when exports were relatively small part of Chinese GDP and the leadership was more focused on a cheap import to develop infrastructure. As the export grew, China engaged in a series of six devaluations over ten year so that, by 1993, the YUAN had been fall up to 5.32 YUAN per Dollar.
Then on 1st January 1994, China announced a reformed system of foreign exchange and massively devalued the YUAN to 8.7 per Dollar. That shock caused the U.S. treasury to label China a “currency manipulator” pursuant to the 1988 Trade Act, which requires the Treasury to single out countries that are using exchange rates to gain unfair advantage in international trade. A series of mild revaluations followed in response so that, by 1997, the YUAN was pegged at 8.28 per Dollar, where it remained practically unchanged until 2004.
China’s internal deflation is exported to the USA through the currency exchange rate and ends up threatening deflation in the USA. This begins with the Chinese policy decision to peg the exchange rate between YUAN and US Dollar. The use of the YUAN and its availability to settle transactions are tightly controlled by PBOC (People’s Bank of China) the country central bank. When Chinese exporter ships goods abroad and earns Dollars or Euro. It must hand over those currencies to people’s Bank of China in exchange for YUAN at a rate fixed by the bank. When an exporter needs Dollars or Euros to buy foreign materials (Import), it can get them but the PBOC makes only enough Dollars or Euros available to pay for their liabilities (Imports) and no more, rest is kept by the bank.
The process of absorbing all the surplus dollars entering the Chinese economy especially after 2002 produced a number of unintended consequences.
A. The PBOC did not takes surplus Dollars, but rather purchased them with newly printed YUAN, means FED (United State Central Bank) printed Dollar and those ended up in China to purchase goods, the PBOC had to print YUAN to soak up the surplus. In effect China had outsourced its monetary policy to the FED, and as the FED printed more, the PBOC also printed more in order to maintain the pegged exchange rate.
What to do with newly acquired dollars. The PBOC needed to invest its reserve somewhere, and it needed to earn a reasonable rate of return. Central banks are traditionally ultraconservative in their investment policies, So PBOC preferring highly liquid government securities issued by the US Treasury. As a result, The Chinese acquired massive quantities of US Treasury obligations as their trade surplus with the US persisted and grew. By end of 2017, Total Chinese Foreign Exchange Reserves in all currencies were approximately $3 Trillion, with about $1.123 Trillion of that invested in US government obligations as on December 2018.
CONCLUSION
The United States desperately urged China to increase the value of the YUAN in order to reduce the growing US trade deficits with China and slow the massive accumulation of Dollar – denominated assets by the PBOC. These pleas met with very limited success.
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