CHINA: China's Currency Distortion Affects U.S. Workers

April 2, 2010

In two weeks, Treasury Secretary Timothy Geithner will deliver a report to Congress, in which he will say whether the Chinese government is manipulating its currency. Lawmaker from both sides are calling for Geithner to label the Chinese manipulators. Rep. Tim Ryan (D-OH) says the currency distortion puts "a lot of Americans out of work."

TRANSCRIPT:

MARY LOUISE KELLY, host:

The United States government is also thinking about its financial relationship with China. Lawmakers from both sides of the aisle are calling for Treasury secretary Timothy Geithner to declare that China is manipulating its currency. Geithner will deliver a report to Congress about two weeks from now.

In the meantime, lawmakers like Ohio Democrat Tim Ryan are saying things like Chinese currency distortion is putting a lot of Americans out of work. And if you're wondering what a decision by the Central Bank of China has to do with workers in Ohio, we have an explanation from Alex Blumberg of our Planet Money team.

ALEX BLUMBERG: To understand why American lawmakers are so upset about Chinese currency policy, it helps to follow the money. So let's start with someone pretty typical - an American businessman who gets stuff made in Chinese factories.

Here's one - a guy named Emron Kareem(ph).

Mr. EMRON KAREEM: My business is called Trophy Skin. We produce medical devices that treat skin conditions using light therapy.

BLUMBERG: Picture a medical-looking lamp with a blue light that kills acne bacteria. Kareem has his lamps manufactured in China at a factory he found online. Every couple of months he wires the Chinese factory money for a new order - American money.

KAREEM: They always quote in U.S. dollars. I found that across pretty much every supplier that I've worked with.

BLUMBERG: Okay, so this is the first stop in following the money, the first step in understanding what people mean when they say Chinese currency manipulation.

Kareem is not the only person in America wiring dollars to Chinese factories. No, no, no. Every day thousands of American companies send billions of dollars to Chinese suppliers. And what we're interested in - what happens to those dollars when they get to the Chinese factories?

To answer that question, you need an economist. I have one of those too: Paul Wachtel at New York University's Stern School of Business.

Professor PAUL WACHTEL (New York University): Those Chinese factories need to buy electricity. They need to pay their labor. Theyve got to pay for transportation. But if they're operating, obviously, in the Chinese economy, they need to do it with the local currency. So they take those dollars and they buy Chinese currency.

BLUMBERG: And this right here, this is a critical moment in our story. You have all these Chinese factory owners with billions of dollars. To pay their bills they need to convert dollars into the Chinese currency, renminbi. So they're all saying: I need renminbi. There's this huge demand for renminbi and therefore it should cost more dollars to buy it. The demand has increased, the cost should go up as we'll - at least if the supply of renminbi is constant.

Except that the supply isn’t constant, and this is where the manipulation comes in. Someone is increasing the supply of renminbi. Who has the power to do that?

Prof. WACHTEL: The Central Bank of China. Whenever it sees the value of the currency beginning to rise, they're ready and willing to supply the renminbi to make sure the price doesn’t increase.

BLUMBERG: So this is the charge: The Central Bank of China is creating additional renminbi for the sole purpose of keeping it undervalued. Manipulation.

Now, why would the Chinese want to do that? And why do Ohio congressmen want it stopped? Well, the Chinese do it because it makes their exports more attractive. It makes it cheaper for people here in the U.S. and all over the world, actually, to buy things made in China.

But the flipside is, and here's the problem: It makes our stuff more expensive in China, so Chinese people can't afford to buy as many iPods and Polo shirts and Kindles, and for that matter, acne lamps, from America.

Again, Paul Wachtel.

Prof. WACHTEL: China should be importing more, which would increase exports from developed countries like the United States, and the lead the robust growth evenly around the world.

BLUMBERG: Recently a new group came forward saying the Chinese government should let the renminbi rise in value - not the first group you'd expect to publicly question the Chinese government either. It was a group of Chinese business leaders.

One of them, the president of a Chinese computer company, said it wouldn’t be a bad thing if ordinary people in China had more purchasing power. He, like the rest of the world, wants to sell more stuff to China.

For NPR's Planet Money, I’m Alex Blumberg.