The Senate’s China Misstep

I wish there were a class called China 101 that every member of Congress had to attend. This would be the first lesson: If you really want the Chinese to do something, never pressure them about it in public. Loss of face is anathema in the Middle Kingdom. Which is why when the U.S. Senate passed a bill hinting at tariffs on Chinese goods if Beijing doesn’t let the value of its currency rise, the People’s Bank of China promptly and defiantly responded by pushing the value of the renminbi lower.

It’s ironic, because Beijing had been doing just the opposite until politicians like Chuck Schumer decided to start posturing and make China’s currency a proxy for a highly politicized discussion about globalization and unemployment in the U.S. The idea is that if Chinese money were worth more, American firms wouldn’t export so many jobs to China (because labor there would be more expensive) and the Chinese would be able to buy more U.S. goods and services, thus cutting trade imbalances between the two nations and helping put the global economy back on track.

Sadly, the Schumer bill doesn’t move the dial at all on such trade and currency issues. The most obvious problem is that we really shouldn’t aspire to fix the unemployment situation in the U.S. by competing with the Pearl River Delta to make shoes and lighting fixtures. Instead of passing bills threatening tariffs against countries that have created jobs, how about passing our own jobs bill? No chance of that, as President Obama’s bill now seems DOA legislatively.

Second, many of the changes the Schumer bill argues for are already in the works. The Chinese, who know they desperately need to rebalance their economy in order to maintain longer-term growth, have already let their currency appreciate 30% against the dollar since 2005 and a full 10% last year. Wages are rising; in fact, that’s the reason there’s a nascent trickle of higher-level manufacturing jobs back to the U.S., as Chinese pay hikes (coupled with higher energy and transport costs) make it less profitable to do business in China relative to the U.S. What’s more, American exports to China are actually increasing. Andy Rothman, a China expert at CLSA investment bank in Shanghai, recently pointed out to me that despite all the rhetoric about currency, U.S. exports to China rose 468% in the past decade. The next fastest growth rate to a major market was 64%, to Germany.

While the bill has no real teeth and there’s almost no chance the House will pass it (though that hasn’t stopped House Speaker John Boehner from proclaiming that it could cause a trade war), the timing is awful. The global economy, which is teetering on the brink of a double-dip recession, does not need a squabble between its two largest players, especially at a point when populist political sentiment is feverish in both places. China is entering its version of an election cycle, with a major handover of power to a new politburo in 2012. During this delicate period, no Chinese leader “can afford to look like a wimp,” says Ken Miller, an American financier who is close to many members of the Chinese government. “What’s more, the Chinese people are nationalistic. It’s easy for anti-U.S. sentiment to get out of control.”

It would be a shame if politics hampered economic rebalancing. The Chinese miracle has for more than 30 years been built on cheap labor, cheap land and cheap capital, but the model no longer works. China’s banks, which have doled out too many bad loans, are far more troubled than America’s. The frothiness of the real estate market in major Chinese metropolises makes Phoenix and Miami in 2007 look positively staid. Revaluing currency would help control inflation, a growing danger, and cool off the markets. But it has to be done carefully. Just as there are two Americas, so there are two Chinas. The latest LVMH handbag on the arm of a Shanghai yuppie costs twice the yearly earnings of a Shaanxi farmer. It’s difficult to set the right speed for economic rebalancing when there’s such a huge prosperity divide. While prices of luxury flats in Beijing may seem ridiculously high, slamming the brakes on development too fast could result in mass unemployment and the thing the Chinese fear most: social instability.

That’s lesson No. 2 in China 101. In the U.S., class warfare involves peaceful protests by crunchy lefties using sign language to keep order. In China, it means angry hordes parading victims wearing dunce caps through the streets before stringing them up in public squares. Congressional leaders should remember that before they try to humiliate Beijing into doing anything.