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China Reform Monitor - No. 886

China's losing currency bet;
The Great Firewall of China

Edited by Ilan Berman
February 29, 2008

January 31:

By now, most Americans are familiar with how China unfairly “fixes” its exchange rate to the dollar, keeping its currency cheap and its exports to the U.S. booming. What is less known, however, is that this “currency manipulation” is now costing China billions of dollars each year. Through an arcane system of state intervention into the economy, China is now paying more money on domestic currency bonds (its fixed exchange rate forces it to sell these to keep inflation in check) than it is earning on its massive dollar reserves, which tend to be parked in low-yielding U.S. Treasury bills.

Hong Liang, of Goldman Sachs China, estimates this process constitutes a $4 billion monthly loss for the PRC, while Brad Setser of the Council on Foreign Relations puts the annual figure at five percent of Chinese GDP. Additionally, as interest rates in the U.S. and China continue to drift in different directions – a certainty in the near term - the massive losses will only grow. Perhaps more troubling for Beijing, however, is that the damage may not be restricted to the economic realm: the Financial Times believes that, “were they tallied, [such losses] could easily become a significant political issue in China.”

February 4:

The Chinese government’s complex system of Internet censorship has been dubbed by some in the country as the Great Firewall of China. But this system may be showing some cracks: Internet guides to evading China’s censors have begun proliferating among Chinese web users, and some have even taken the unprecedented step of taking their case for greater Internet freedoms to court. According to the International Herald Tribune, Du Dongjing, whose personal finance website was unexpectedly blocked by the government last year, is suing China Telecom for breach of contract. Du believes that under the current conditions, he can win the case. “I can even make a contribution to improving Chinese democracy.”

February 9:

Even the fiercest critics of trade with China admit that importing cheap goods from the Middle Kingdom has brought at least one major benefit to the U.S. in recent years: lower inflation. Falling prices of everything from duvet covers to water coolers has kept U.S. inflation – and interest rates – in check, even as prices for food and gasoline have soared.

That trend, however, may be changing, with dire implications for the U.S. economy. Due to a number of factors – “the weakening dollar, soaring domestic inflation, new labor laws, the end of some government export subsidies, the increasing cost of raw materials, more stringent product safety regulations, and bad weather,” China is now exporting inflation to the U.S., rather than holding it down, reports the Washington Post. Prices of goods from China rose in 2007 for the first time in years, forcing companies to pass on those hikes to consumers, or shift production to lower-cost destinations in Asia.

February 14:

All the attention brought to Sudan by the ongoing genocide in Darfur has helped expose just how closely the African country has become economically linked to China. But many would be surprised to find how deep China’s cultural and political imprint has become as well. After years of booming trade, one now finds Chinese architecture littered through Khartoum, Sudan’s capital. Chinese New Year lanterns, Chinese buses, and Chinese posters are all commonplace as well. However, the BBC reports, not all Sudanese have turned their back on their former patrons: at least one diplomat admits “[t]he West is a more natural partner for Sudan than China, and most Sudanese know it.”

Related Categories: Africa; China; International Economy

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