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Money Talks and a War of Words

Written by Super User.

The worldwide economic meltdown left few countries unmarred. The United States is currently becoming more confident that recovery has begun and that it can finally watch contraction recede into the background. The Dow Jones Industrial Average pierced the psychological veil of 9,000 and has seen tremendous momentum since the 6,600 point realm in March, when NACM’s Credit Managers' Index (CMI) showed that the country had finally hit bottom. For most of the globe, the past couple of years have been an unwanted lesson in resolve while waiting for rebound. Then there have been those countries like China and India—two of Asia’s economic powerhouses—that have enjoyed more subdued growth, but growth nonetheless.

With estimated reserves in the ballpark of $2 trillion, China has quickly emerged as one of the most economically powerful countries in the world and there is little doubt that China, along with India, Brazil and Russia, will compete with the United States for the title of largest single country economy in the coming decades. China has worked to close the gap with the United States, the European Union and Japan. It has become the U.S.’s second largest trading partner behind Canada, and despite the fact that it is the third largest consumer of U.S. goods exports, China enjoys a trade surplus with the United States of more than $250 billion.

The U.S. and China have realized that their economic futures are hinged upon one another and began holding economic summits under the Bush Administration, which have been continued under President Barack Obama, though receiving the slight title tweak of Strategic and Economic Dialogue (SED). At the end of July, officials from China and the U.S. sat down to speak, and again, the ponderings as to whether the yuan will ever replace the dollar as the world’s currency resurfaced. The conversation first started earlier this year as countries struggled with the blanket of global recession while China beamed with first half gross domestic product growth (GDP) of 7%. People’s Bank of China Governor Zhou Xiaochuan made a speech on international monetary reform that called for a replacement to the world’s reserve currency. Zhou called the current system “a rare and special occurrence” in the world’s history, and reiterated that the economic crisis that stymied global growth clearly demonstrated that going forward the current reserve currency—the U.S. dollar— would need to change. He offered suggestions such as the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs), and ultimately stated that any change that was to take place would need to be gradual and a “win-win” for all stakeholders.

Of course, in years past, Japan’s re-emergence sparked discussions of the yen replacing the dollar, then there was the European Union’s formation and along with that came claims that the euro would dethrone the dollar as well. Each was predicted to “eventually” unseat the greenback as the world’s key currency. Currently, the yuan has an exchange rate of more than 6.8 to 1 with the dollar.

Will the U.S. be outpaced by China? There are those that certainly believe it’s not only in the realm of possibility, but is inevitable, particularly as investors remobilize in Asian markets.

“Our long-term view is not only could China’s market surpass the U.S., but that it will do so and within the next 20 to 30 years,” stated Jim Trippon, editor, China Stock Digest. "There is an old adage: when you’re No. 2, you try harder. There is no doubt that China’s economic engine is running hard, on all cylinders, unlike the U.S.’s economy.”

He added, “We have to remember that the U.S. has not always been the world’s largest economy. This position the U.S. holds is really an outgrowth of the World War II victories over Japan and Nazi Germany.”

As the two superpowers try to negotiate a bilateral investment treaty, the United States and China’s relationship continues to be peppered by a war of words. As Senate Finance Committee Chairman Max Baucus (D-MT) wrote Treasury Secretary Timothy Geithner, “The global financial system remains in crisis. And protectionist tendencies in both countries have strengthened.” There are the ongoing poultry bans between the two; the Chinese ban on U.S. beef and pork; and the accusations that the Chinese government is manipulating the value of the yuan. Geithner submitted in written testimony during his nomination hearings in January that China is purposefully devaluing the yuan to boost exports. Chinese exports have ramped out tremendously from $593 billion in 2004 and are expected to surpass a projected $1.7 trillion this year. At the end of July, the IIMF reported that it feels that China’s currency remains “substantial undervalued,” tossing out the once-used verbiage of “fundamentally misaligned.”

Matthew Carr, NACM staff writer. Follow us on Twitter @NACM_National

Readers can check out China Stock Digest at




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