It should not be too long before Congress starts threatening China with “currency manipulation charges” given the Renminbi (Yuan), has now fallen five consecutive days and sits below the level it was at when China announced the end of the peg in June.

The Telegraph reports US and China to clash over yuan fall

The yuan dropped at the fastest pace in almost two years last week and is now 1.8pc lower against a basket of currencies than in June, when Beijing announced the end to its fixed peg against the dollar.

Western economists had seen yuan liberalisation as a sign that China is abandoning its mercantilist policy in a step-by-step move towards a floating currency, which was expected to rise. They misjudged China’s motives badly.

Sander Levin, chair of the House Ways and Means Committee, said the US may have to consider retaliatory sanctions. “We must ensure that the international trading system ensures fair rules of competition. There is no real question that China’s deliberately undervalued exchange rate is unfair, contributes to global trade imbalances, and costs the US jobs,” he said.

Many on Capitol Hill suspect that China fiddled trade data with a “one-off” deficit in March when the Obama administration was preparing its verdict on whether Beijing is a currency manipulator.

Jim O’Neill, chief global economist at Goldman Sachs, said China’s exchange policy was becoming a concern. He described its as “most odd” for Beijing to weaken the yuan at a time when US data has been weak and China’s trade surplus has reached the highest in 18 months.

“It is not a great week for those of us who believe the big era of US-Chinese global imbalances is behind us.”

Tension between the US and China is escalating on several fronts. China has restricted exports of rare earth minerals by more than 70pc in the second half of this year, cutting off the world supply. China produces 97pc of these minerals, used in a wide range of high-tech industries, from hybrid engines to computers, mobile phones, radar, navigation and precision-guided weapons.

Big Imbalance Correction Ahead

The mystery to me is how anyone could possibly have thought the “big era of US-Chinese global imbalances is behind us.”

Get Out The Violins

In June dollar bears were convinced Armageddon was at hand for the US dollar. Instead on June 19, 2010 I thought China Plays Obama like Violin on Yuan Exchange Rate

On June 21, 2010 I asked Yuan Climbs Most in 20 Months – a “Whopping” .37 Percent; Are we Supposed to be Impressed?

Given that China pegged the Yuan for nearly a year, of course this is the biggest move in 20 months. Moreover, before anyone celebrates with champagne, please note the Yuan advanced 0.37 percent, hardly a big deal.

Whether this buys China some time with the protectionists in Congress remains to be seen. However, it is clear that China played its hand as good as conceivably possible with an extremely tough hard-line stance, followed up a day later with seemingly large concession.

Had China not played these games, no one would have been impressed with a pissy .37 percent move. Now, everyone is going gaga.

By the way, I have said this before and it bears repeating, If China freely floated the RMB there is a decent chance it would collapse.

While most are touting China’s amazing growth, I suggest that China’s growth is not sustainable. Peak oil alone is reason enough to believe that. Energy aside, China is busy building cities no one can afford to live in and malls with no shoppers.

Chinese Ghost Towns

Please consider Rise of the Chinese Ghost Town

In Chenggong, there are more than a hundred-thousand new apartments with no occupants, lush tree-lined streets with no cars, enormous office buildings with no workers, and billboards advertising cold medicine and real estate services – with no one to see them.

As my colleagues and I wandered, on–foot, down the center of Chenggong’s empty 8-lane boulevards and dedicated bus lanes, never seeing a single person, we marveled about the fiscal and political conditions that would have to exist to create something like this.

In June, I accompanied a World Bank mission to Kunming, where the Bank is supporting the development of a new light rail system. Upon learning that two stations had already been built in Chenggong, my colleagues and I just had to go see for ourselves — just what does a modern Chinese ghost town really look like? Well, here it is.

Dedicated bus lanes without routes assigned to them – stations without purpose

These are not isolated incidents. Property bubble, vacant offices, and vacant mall stories abound.

The first link above has a nice video of vacant commercial properties and images of the world’s largest mall. The mall is vacant.

One thing we can say is at least China is getting something for its stimulus money. The US repaves roads many of which did not need paving. We also drop bombs in Afghanistan in a nonsensical attempt to be the world’s policeman. War-mongering adds to GDP but has negative benefits.

Massive Manipulation Everywhere

The US acts as if trade imbalances are a result of China’s currency manipulation. The reality is there is so much manipulation everywhere it is nearly impossible to sort it all out.

Why is China’s manipulation of the RMB any worse than Fed manipulation of treasuries or Europe’s nonsensical bank stress test that says all is well in Europe?

If China did not build cities that no one lived in, malls that no one shopped at, and commercial real estate that no one wants to buy, would its GDP look so magnificent? If China was not doing all this unsustainable activity, would the RMB look so attractive?

It is easy to want to throw the blame on someone else, but most of the problems in the US, including the housing and commercial real estate bubbles, had their origins in Fed and Congressional policy, not China’s currency peg.

Although it would be a welcome event, China floating the RMB would not cure global imbalances or bring back manufacturing jobs to the US. Structural problems are too deep and too many.

Tariffs and trade wars are not the answer. The US needs to focus on things it can achieve by itself (such as tax policy that encourages job flight) instead of or at least in addition to perpetually harping about things not in its control. Unfortunately, with each drop in the RMB, trade wars become increasingly likely.

Mike “Mish” Shedlock
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