Grumbling About China and the Renminbi

Wonder why President Obama's trip this week to China didn't go more smoothly? Meetings between Obama and top Chinese leaders were reportedly stiff; the Chinese also limited domestic press coverage of Obama's appearances. The explanation is disarmingly obvious: huge disagreements separate the two countries that can't easily be papered over.

Anyone doubting that ought to take a quick read of the latest annual report from the U.S.-China Economic and Security Review Commission, a group established by Congress in 2000 to examine the connections between the countries' economic relations and broader issues of national security. The Commission has typically been more suspicious of Chinese policies and motives than many American analysts. This year's report is no exception.

The picture of China drawn by the Commission is of a rapidly-growing country that, through an undervalued exchange rate and systematic industrial policies, increasingly challenges the U.S. economy and is rapidly expanding and modernizing its military. The commission cited estimates that China's currency, the renminbi (RMB), is undervalued by 12 percent to 40 percent. Despite a 4 trillion RMB ($586 billion) "stimulus" package announced in Nov. 2008—to offset the effects of the global economic crisis—China "is still pursuing an export-led strategy," the report said. At the end of September, China's foreign exchange reserves totaled $2.27 trillion.

Though the U.S.-China trade deficit in 2009 of $144 billion (through August) was down 17.6 percent from the same period in 2008, most of the decline reflected the deep U.S. recession and less demand from American consumers. In fact, the report said, China's share of the total (non-oil) U.S. trade deficit continues to rise and is now about 80 percent, up from 40 percent as recently as 2005. The Commission echoed the criticism of many U.S. economists who argue that China's large trade surpluses, reinvested in heavily in U.S. Treasury bonds, contributed to the present economic crisis. The argument is that the reinvested dollars kept interest rates down and caused banks and other investors to shift funds into riskier mortgage-related securities with higher interest rates.

"If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity, and lay groundwork for the next [economic] crisis," the report warned.

Aside from trade policies, the report also alleged that China has stepped up its cyber attacks against U.S. private and government data networks. It cited Defense Department estimates that "malicious" incidents against DOD systems had doubled since 2005, from 23,03l to 54,640 in 2008, and are on track to increase another 60 percent in 2009. The Commission conceded that tracing the origins of cyber attacks is difficult and that many come from ""private hacking groups.". However, the report contended that the technical features and targets of some attacks pointed to heavy Chinese involvement.

On military matters, the Commission said that, supported by an expanding economy, China "has embarked on its largest naval modernization since the founding of the PRC [People's Republic of China] in 1949." The main aim is to deter "Taiwan from declaring independence" and "to impede other nations—including the United States—from intervening on Taiwan's behalf." In recent years, the report said, China had purchased or built 38 submarines, 13 destroyers and 16 frigates and has developed "advanced offensive and defensive weapons, such as anti-ship cruise missiles, land –attack cruise missiles, and sea mines." However, American officials believe that the United States retains naval superiority in the region.

The Commission's powers are confined to investigations and recommendations to Congress. Its recommendations this year included making more formal complaints to the World Trade Organization about Chinese trading practices and taking legislative steps to offset the effects of the undervalued RMB.