Currency Wars: How Ben Bernanke Outsmarted China

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In the currency wars with China, the U.S. seems to be winning: The yuan has appreciatedFor years, U.S. officials have ritually complained that China's currency is undervalued and that the country should let it appreciate. But President Obama soft-pedaled the problem at the White House summit with President Hu Jintao last week.

Why? Washington is quietly celebrating that fact that Fed Chairman Ben Bernanke has outsmarted the Chinese government, forcing it to revalue its currency or face increasing domestic unrest.

"No U.S. official will admit this, but Bernanke has succeeded in breaking the Bank of China in the same way George Soros broke the Bank of England in 1992," says James Rickards, senior managing director for merchant bank Tangent Capital in New York. "The U.S. has won the first round of the currency war."

He adds: "People forget that one of the factors that caused the Tiananmen Square protests of 1989 was popular discontent with inflation, and the Chinese leadership doesn't want anything like that."

China Gets "Hot Money"

How did Bernanke pull off the magic trick that previous U.S. administrations were unable to accomplish? Last fall, he announced a program of quantitative easing -- a federal bond-buying program -- which was targeted, he said, at raising U.S. inflation to head off possible deflation.

But in reality, it had a completely different result: Money poured out of the U.S. and flowed into China. According to Adam Wolfe, research analyst at Roubini Global Economics, the amount of so-called hot money entering China reached $1 billion a day in 2010.

Coming on top of China's massive trade surplus, those inflows presented a dilemma for the Bank of China. In order to maintain its exchange rate with the U.S. dollar, which was fixed after 2008, the Chinese government bought dollars from exporters and banks and printed local yuan for each dollar it purchased.

But last fall, the supply of yuan skyrocketed, increasing by 19.7% in December, Wolfe says. Increasing the money supply causes prices to increase as more money chases fewer products. Chinese inflation had ramped up 4.9% in November, compared with the same month in 2009.

Two Available Options

China has attempted to keep a lid on prices by cooling the economy, raising interest rates twice last autumn. But that prescription has failed. According to fourth-quarter GDP figures, the economy grew by 9.8%, raising the likelihood that the Beijing government will have to slam even harder on the economic brakes.

It has just two ways to limit prices: impose price controls or raise the value of the yuan, which reduces the price of imports. Price controls rarely work for more than a short time because people find ways around them, such as the black market.

It now seems likely the Chinese will opt for raising the yuan's value. Since last June, the currency has appreciated about 3.5%, or an annual rate of about 7%. When you add inflation, that's 12%. Wolfe says he expects the same level of appreciation for 2011, while Rickards says he sees the yuan rising by at least 10%.

For investors, the yuan is a good one-way bet because it's highly unlikely to come down anytime soon.

China might feel some resentment about its position. "The Chinese feel betrayed by the U. S.," Rickards says. "They feel that part of the deal for buying all those Treasurys was that the U.S. would maintain the value of the dollar. There's an old saying, 'if you're in a poker game and you don't know who the sucker is, then you're the sucker. The Chinese have just woken up to the fact that they're the sucker."

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henkelssplicing

driving a 100 mph towards a cliff,and he wants to go faster , yea real smart

January 25 2011 at 4:08 PM Report abuse +1 rate up rate down Reply
henkelssplicing

making the dollar worth less ,means it cost more dollars to by stuff like oil,and we out smarted them now ive heard it all

January 25 2011 at 3:58 PM Report abuse +2 rate up rate down Reply
jussnap

It's interesting reading the educated comments some people are capable of making. However, the faults in grammar drive me nuts. Totally takes away from your credibility. A good read though.

January 25 2011 at 2:11 PM Report abuse rate up rate down Reply
halfatuna

china is still ahead of us by leaps and bounds--it seems we hand them the tools to screw us to the wall---NJ THE MOST CORRUPT STATE IN THE NATION

January 25 2011 at 12:53 PM Report abuse rate up rate down Reply
legalcld

Bernanke hasn't done anything but print more money that will eventually come back and bite us in the behind at some point in time$$$ China on the other hand has managed to take our jobs, technology and water without firing one shot! Now who's the smart one here?

January 25 2011 at 11:27 AM Report abuse +7 rate up rate down Reply
ideassoul

The only reason the United States is most powerful country of the world is because the smartest people live here. The idea of printing paper was a good idea the Chinese Government economy is a State economy they can manipulate the currency and labor over there is cheap we cannot compete because we have social benefit and Union that protect our workers.

The problem that the Chinese have is that they invest like gambling without thinking the with straight head, they were buying dollars and thinking we are going to to put the United States country in our pocket, the United States came with the good idea lets go and print as much as we can and send those paper over there and they fell in the trap. They started to print paper and now they have a problem because the Chinese income is most lower than our income and we do not have a billion and slmost a half of people!

Ideassoul

Ideassoul

January 25 2011 at 11:19 AM Report abuse +1 rate up rate down Reply
pete

And now that the vindictive Chinese are aware that the man who couldn't keep the US afloat pulled one over on them, they will be looking for a way to demand payment or foreclose on the loan. The hold a lien on the whole country, and the idiot media thinks it's funny how Ol' Ben put one over on them????

January 25 2011 at 11:12 AM Report abuse +2 rate up rate down Reply
2 replies to pete's comment
priority109

pete pete PETE ! this is nothing more than unadulterated scatology meduyuuuh spin as thee economy's in deep dooo do and bernankee didn't do any such thing. they know WE WANT THE FED fully investigated etd etc ,so the put out a lie from the ministry of bs ,commonly known as the mainstream media.

January 25 2011 at 11:20 AM Report abuse +1 rate up rate down Reply
jbmcjbm

Where do you get your facts?

January 25 2011 at 11:23 AM Report abuse rate up rate down Reply
noandrkj

We need more people governing this country with BUSINESS experience and who are good at negotiating. This is includes the President, his Staff and Congress. The experience should be based on a domestic and international experience. We need more honest lawyers, less courruption at the local, state and national level. Simple tax laws at all levels and instill a confidence level through education and importing people with good economic, science, medical, etc knowhow. We have to rely less on taxing our people and protecting those that are legitimate citizens and those that go by the rules getting into and producing good in this country. In short we have to build a team spirit that can head us in a future that instills good family values, education and inspiration to think out of the box. We don't need to have an economy that has 80 percent of the world lawyers, we a country that has 80 percent of those who can produce new and better products manufactured in the US. Our GNP has brought us up to a high level and intellectual innovation in new products at all levels i.e. consumer goods, industrial goods, medical innovations, yes, weaponry, etc. The US has to re evaluate its whole trading partner relationship with China immediately. I cannot think of one good thing about trading with a communist nation.

January 25 2011 at 11:10 AM Report abuse -1 rate up rate down Reply
2 replies to noandrkj's comment
jbmcjbm

You forget the President was recruited by Wall Street before he was in politics

January 25 2011 at 11:25 AM Report abuse +1 rate up rate down Reply
tevroc143

We have tried the business experience approach - guess what? It is NOT working. Bush was a business man - we had him for 8 long miserable years.
He bankrupted every business he every had in the private sector and then bankrupted America. You cannot run the federal government like a business. Our country would be in better shape had we stayed with the Clinton way of doing things. Our country would be better off if we didn't allow business men to run our Defense Budget as well. We have no business in either war Bush put us in. 17 of the hijackers came from Saudi Arabi, not Afghanistan or Iraq. Businessmen, specifically OIL MEN put us in Iraq. Their poor decisions have cost this country loss of life for nothing and trillions of dollars for nothing, except for the few businessmen who managed to make the profit off both wars. War is business and this must be stopped!

January 25 2011 at 12:13 PM Report abuse -1 rate up rate down Reply
importmike

Mr. Wallace has no idea what he is writing about. The truth is that the inflation in china is being caused by commodities prices going thru the roof. Not just oil, but everything from wheat and corn to copper and cotton. The price increases we are seeing are certainly not due in any large part to the currency differential.

Secondarily, the cost labor in China has risen dramatically. This is due to several factors, but the greatest part of this increasing cost is that there is basically a shortage of labor to produce the products that the rest of the world is demanding. Labor also is a commodity, and increases or decreases with demand.

I have been doing business in China for over 40 years, and his assessment that Bernacke won out over the Chinese by currency manipulation, is purely a fairy tale. His printing money will eventually lead to a disaster in theis country, as demand creates inflation that will make the Carter years look like easy-street.

January 25 2011 at 10:55 AM Report abuse +6 rate up rate down Reply
2 replies to importmike's comment
priority109

when the SHTF it's gonna be something else in the USA ! hope those that understand are dealing well WITH the ridicule as we stock up on nonperishables and even clothing---cotton went up what ?? 35% ? what's your underwear made outta ? socks ? and WHERE are they made ?

January 25 2011 at 11:06 AM Report abuse +3 rate up rate down Reply
jbmcjbm

China's only valuable export is minerals and drug compounds which they control the price, so you don't know what you are talking about

January 25 2011 at 11:28 AM Report abuse rate up rate down Reply
priority109

omg......can the mediyuuH spin get any better than this ? i thought the bs on china's technology was" good", the spin that their spies got it when WE ALL KNOW clinton sold them everything right down to our encryptions and some other AF pos sold them aircraft tech as well to pay his mortgage---and now we're supposed to worship bernankeeee ? anybody see the "days" we LIVE in ? and WHAT we're witnessing ?????

January 25 2011 at 10:52 AM Report abuse +2 rate up rate down Reply
1 reply to priority109's comment
ilduce2

I'm glad to see that we have some smart people on this board that know whats really going on...........These LIB MEDIA creeps always tilt the "news" to make MARXISTS look good..........and then, they make up GARBAGE to turn voters away from Republicans..........Dam....Republicans are bad enough........We don't need MARXISTS Democrats running our country........and they would have absolutely NO CHANCE if not for the LIB MEDIA.

January 25 2011 at 10:57 AM Report abuse +5 rate up rate down Reply