Strictly Business: Three thoughts on Bakersfield's stake in Chinese monetary policy
| Thursday, Apr 15 2010 04:10 PM
Last Updated Thursday, Apr 15 2010 04:31 PM
Images:
Daniel Petrey
Margaret Malixi
Sherod Waite
China's a long way from Bakersfield. Then again, Washington, D.C., isn't around the corner, either -- and notice how much we're affected by things that happen there.
China has special relevance these days: The Obama administration is pressuring the Chinese government to loosen its control over the country's currency. That would make American exports more affordable there, and help undo what many consider to be an unfair trade policy.
No doubt some industries would benefit. Less obvious is how our local economy would fare.
Responses have been edited for length and clarity.
Our question: What would be the impact on Bakersfield if China did raise the value of its currency?
The overall impact on Bakersfield would be somewhat negligible unless your business involves importing or exporting directly with China. If China does indeed intervene and cause the yuan to increase in value against the dollar, the country would basically be playing catch-up with what would be a more realistic value. I also do not expect China to appreciate the yuan in a large percentage move, but gradually over time.
China is attempting to balance a delicate economic situation. The country ships us very cheap goods that allows it to have excess reserves. China needs the U.S. consumer to continue purchasing these goods. As a consequence of its dependence on our consumption it has assisted in funding our debt by buying our treasuries with all those excess reserves. China does not want a slowdown in our economy to lessen our demand for its goods.
The United States has a very difficult time competing against China's cheap labor. So, at a time when jobs are at the forefront of politicians everywhere, the pressure for China to appreciate their currency has obviously increased.
-- Daniel Petrey, wealth advisor with Mestmaker & Petrey Wealth Advisors
A study by the Economic Policy Institute estimates that between 2001 and 2008 the United States lost 2.4 million jobs due to growing trade deficits with China alone. Estimated net job losses for California and the Bakersfield area, respectively, are 3.91 percent and 0.87 percent of total employment. Others dispute the direct relationship between the exchange rate and the trade deficit, arguing that the U.S. trade deficit with China continued to grow during a period of significant renminbi (or yuan) appreciation of nearly 20 percent to 25 percent between 2005 and the start of the global recession in 2008.
China continues to buy about $1 billion a day in exchange markets to prevent its currency value from rising. Although Congress is contemplating sanctions against China to force a more market-oriented exchange rate policy, some assert that it is in China's interests to allow its currency to appreciate. Inflation is beginning to plague the booming Chinese economy, and currency appreciation would be an effective tool in lowering the price of imports and weakening demand for exports. This would also achieve a long-standing Chinese policy objective of rebalancing economic growth away from export dependency and toward domestic demand.
-- Margaret Malixi, professor of economics, Cal State Bakersfield
As the third largest economy in the world, China seems to think that it deserves to dance to the beat of its own drum. It has made a conscious effort to artificially undervalue the yuan. The export-driven economy is what has driven the country to rapid growth and expansion. When its goods and services are cheaper for others countries to buy, its exporters win.
China's win is our exporters' loss. When our manufacturers are unable to compete with China's lower cost exports, we suffer. Where we gain is when we can go to Wal-Mart and buy a microwave for $15 (made in China, obviously).
This unfair trade advantage ultimately hurts us. Bakersfield's petroleum and agriculture industries make us very much a part of the world market. As the world continues to shrink and trade expands, we are forced to find ways to have a balanced economy and find ways to compete on a world level. China must come around, which would benefit our entire country and, in turn, Bakersfield.
-- Sherod Waite, financial advisor and partner, Moneywise -- Wealth Management
