- - Thursday, August 13, 2015

ANALYSIS/OPINION:

As the stock market soared on news Monday that Warren Buffett was making another big deal, traders thought the worst was over after a string of losing days. Adding to the euphoria was news that China would speed up mergers of state-owned firms to boost growth. But then came Tuesday and the announcement that China was devaluing the yuan in an attempt to make their sagging exports more price-attractive, and, bingo, the stock market tanked.

Although most national currencies, like the dollar, are free-flowing according to their trading essentials, China‘s, with the second biggest world economy, is manipulated by its government. Its two percent devaluation is big news in an era in which currencies move fractionally. And the result is that the yuan will make American exports — which have been one of the few bright spots in recovering from the Great Recession — more expensive in China.

The Chinese policy, although surprising, was rational. For the last several years the yuan has been increasing in value, whereas competitor nations such as Japan have seen their currencies fall, giving them a trade advantage. Last month China witnessed an eight percent drop in exports and a rise in bankruptcies of firms losing business because of a strong yuan.

But this isn’t the only way the Chinese exasperate the United States. They hack our computers, they side with our enemies in the world, including North Korea and Iran. They even get along with Russia, no matter that post-World II grievances appeared to be as long-lasting as the Great Wall. The Chinese steal the trade secrets of American businesses, and the products they export that take advantage of their low labor costs are often inferior and dangerous to use. And when their stock market collapses, as it did recently, they rush to prop it up.

Although the Obama administration reached a deal on greenhouse emissions with the Chinese last year, the goals to be met are so far in the future as to be meaningless. The Chinese are too heavily dependent on President Obama’s nemesis, coal, building a new coal plant every 10 days or so.

The Chinese are smart, however, arguing that the devaluation was geared to make their exchange rate more “market-oriented,” the undefined but highfalutin phrase that American policymakers use as the gold standard of acceptable practices.

They also realize that their devaluation will help to undermine the American economy even more because it ensures that the Federal Reserve at its next meeting or for the foreseeable future will take any rate hike off the table. For to raise interest rates is a certainty that the dollar, already strong, will strengthen even more, making American exports costlier. And by continuing an unprecedented — and needless low-interest-rate policy — the Fed is forcing investors to continue its six-year policy of relying on the stock market for gains, no matter that the market is now frothy as a rabid dog and almost certain to repeat what happened in 2008.

Before Donald Trump got into the Republican presidential race, one of his favorite whipping boys was China, specifically, how that nation with its policies was taking the United States to the cleaners. He boasted that he took Chinese investors in his enterprising work to the cleaners with his masterful art of negotiation. But nobody talked about China other than Mr. Trump, who quickly moved on to immigration issues.

Now, the China enigma should be front-and-center at the next Republican debate. American businesses such as Apple are heavily dependent on China sales. Hewlett-Packard gets 11 percent of its revenues from China, 20 percent for Corning and 11 percent for IBM. There’s little doubt that China is content to rattle the United States in as many ways as possible, including its patient, backstop role as a preponderant purchaser of low-interest-rate government securities.

Lest we forget, too, every night at 9:30 p.m. New York City time, market-watchers will look with nervous anticipation as to whether the Chinese have manipulated the yuan even more for the next business day.

Thomas V. DiBacco is professor emeritus at American University.

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