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America's China hypocrisy

I can predict a few things with virtual certainty. For instance, in the upcoming presidential debates, President Barack Obama and Mitt Romney will try to outdo each other in condemning China's economic practices. Their positions will be virtually identical in taking a harder line against China. But I predict further that 12 months after the election, regardless of who's president, not a thing will have changed.

That's because it's all electioneering and grandstanding. Especially during election season, many issues are in fact never articulated coherently, even when we're expected to be motivated by them.

In particular, listen to both parties' use of the word "manipulation." Here's what they'll be hacking away at. China "manipulates" its currency by keeping it artificially weak so that Chinese goods remain cheap to Americans.

However, one person's manipulation is simply another person's intervention. After all, what else should we call Federal Reserve Chairman Ben Bernanke's successive lowering of interest rates to near zero? Was that intervention or manipulation? I'd wager you wouldn't be able to find even one media use of the word manipulation when discussing Fed policy. But in fact, what Chairman Bernanke was and is doing is philosophically the same as what the Governor Zhou Xiaochuan of the People's Bank of China has been doing. They've both had their hands on their countries' money supply to abet economic performance. Six of one, half a dozen of another.

This is not new. The raising and lowering of interest rates to spur borrowing (and hence spending) is the primary monetary tool in every free market economy. I assume they teach such things on the first day of Central Banking 101. But then, on the second day, they teach how to minimize the effects on a country's currency from excessive imports or exports. It's called sterilization, and it's also nothing new. There's a reason why they'd teach one technique after the other at the (hypothetical) Academy for Central Bankers. It's because they're so related as to be nearly indistinguishable.

A country's money can be priced in many ways. The easiest to understand is in terms of an interest rate. For instance, the conventional mortgage rate is currently 4 percent. That's one price of money. But no less important is how money is priced versus something else — a car, gold or even another currency. For instance, a car may cost $25,000. That equation serves to price both the car and the dollar: One car equals $25,000. Alternatively, one dollar equals one twenty-five-thousandth of a car. Thus, we have two measures for the dollar — one, the interest rate, and two, the car.

Now let's try that with the Chinese currency. Like any currency, it can be priced with an interest rate. And like any currency it can also be priced versus something else, like a car or — directly to the point — the dollar.

Thus, when Chairman Bernanke changes the price of the dollar to rev the U.S. economy by raising or lowering interest rates, he is doing what Governor Zhou is doing to rev the Chinese economy, except that Governor Zhou is doing it using a different pricing measure. Chairman Bernanke employs the interest rate measure. Governor Zhou employs the currency measure. But in fact, both have been doing exactly the same thing: expanding their money supplies.

Some decades back, I seem to recall British Prime Minister Margaret Thatcher commenting that a central bank can focus on its interest rate or its currency, but not both. As usual, the Iron Lady had it precisely correct. The U.S. has been focusing on its interest rate, letting the dollar fall where it may in the currency markets. China, on the other hand, has been focusing on its exchange rate, letting interest rates fall where they may.

But it isn't just that it would be near hypocritical for us to condemn China's monetary policy. It's that it wouldn't be in U.S. interests for China to change right now. How can I be sure that nothing will change 12 months after the election? Pretend you're the secretary of the Treasury. What could you say to China? Something like this? "Now listen up, China. If you don't cut out the currency manipulation, we'll raise tariffs on everything we import from you. That'll teach ya." As this scene ends, China, sorely chastened, relents and repegs the yuan at double its current strength while the American consumer, already hamstrung by the slowness of the recovery, now faces higher prices at the cash register. Is that what we really want?

There are legitimate grounds for debate about how best to deal with China, but if President Obama and Mr. Romney wish to offer the electorate practical versions of a China policy, they'll need something more substantive than merely throwing out the word "manipulation."

Michael Justin Lee, a veteran Chartered Financial Analyst, teaches in the department of finance at the University of Maryland. McGraw-Hill has just published his new book, "The Chinese Way to Wealth and Prosperity." His email is

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