China and America’s intriguing business relationship

The economic relationship between America and China is an uneasy one built on mutual dependence. It features a smorgasbord of jobs, investment, debt and cheap goods.

And it’s being tested this week by the Obama administration who is asking China to help them out by revaluing its currency.

But China is reluctant for fear of disrupting its crucial economic progress.

To understand what’s at stake, it’s necessary to look at the various elements of the world’s most intriguing business relationship.

China, with its cheap labour, is now the world’s biggest exporter (overtaking Germany earlier this year). America, with its 300 million wealthy citizens, is its biggest customer.

But the relationship runs a lot deeper. American businesses use China’s cheap labour to make their goods while China’s use those businesses to provide its people with jobs.

Additionally, the Chinese are notorious savers (both household and corporate), while Americans are huge spenders. The result: America now has the world’s largest debt, and China is its biggest lender.

In fact, the Chinese government owns US$800 billion of American government debt – enough to command the life and death of the American dollar and economy.

On top of that, the Chinese government and companies have also lent billions to American banks.

So given all these economic ties, it’s easy to see how the two have become mutually dependent. America depends on China for cheap goods and money. China depends on America for jobs and investment.

And at the centre of the relationship is China’s cheap currency – the yuan.

Currently this is pegged to the US dollar – meaning if the dollar goes up or down, so does the yuan. This is in contrast to most currencies which have floating values based on supply and demand.

This artificial exchange rate has kept the price of TVs low for consumers, and the price of Chinese investment cheap for businesses.

But now the US wants China to revaluate the undervalued yuan because it’s hurting their economy.

Thousands of US manufacturing jobs have been lost to China, and US consumers are choosing Chinese-made goods over American ones because they’re cheaper.

On top of this, US exporters can’t get a decent foothold in the growing Chinese market because the exchange rate means their products are too expensive for Chinese consumers to buy.

The Obama administration is feeling the pressure to do something about the country’s economy with congressional elections later this year and his re-election campaign in 2012.

To bring down his country’s debt and unemployment he needs America’s exports to increase and companies to create jobs.

And even though a revaluation of China’s currency is no silver bullet, they feel a slight adjustment might help.

Last week US Treasury Secretary Timothy Geithner made a surprise visit to Beijing to discuss the matter.

Meanwhile President Obama took the opportunity at this week’s nuclear summit in Washington to press the idea with Chinese President Hu Jintao.

On the plus side for China, a stronger currency would mean any travel or goods they buy from overseas would be cheaper.

But China is extremely wary of moving too fast.

Adversely, it would mean their Chinese-made goods would no longer be as cheap in rich countries, resulting in consumers buying less of them.

It would also offer less incentive for American businesses to relocate their manufacturing to China because the price advantage would be weakened. This would result in a number of businesses pulling out of China or deciding not to move there in the first place.

All up, a stronger currency would mean fewer jobs for Chinese people due to a drop in both American manufacturing and consumer demand for their products.

China certainly sympathises with its business partner. But its argument is that it still has millions of Chinese in poverty who need jobs too.

They say until China can sustain its economic growth without the need for substantial overseas investment or demand, the yuan’s value must remain low and fixed.

They also point out that both America’s consumers and their businesses based in China would lose out on a strengthening of the yuan with store price hikes and decreased profits. The Obama administration needs to weigh this up with his goal of creating jobs.

To add to all the complexities is the impact a revaluation might have on America’s loan repayments to China and the value of China’s huge US dollar reserves.

Nevertheless, experts are suggesting a deal has been done. It’s rumoured to be an immediate increase of 2% to 3% in the yuan to the dollar with the prospect of further adjustments in the future.

True or not, it’s only a small adjustment and largely insignificant (few companies would change plans over that). But it could be an indication of China’s willingness to help out its number one business partner where it can.

By The Casual Truth