What is Stephen Roach Smoking?

Morgan Stanley economist Stephen Roach thinks that the USA should pin its hopes for economic growth on increased exports to China. Sounds reasonable, right? China is a fast-growing market after all. But this is probably the dumbest strategy possible. China is a hard-core mercantilist power, and we’ve seen this movie before with Japan.

We have spent decades trying to get Japan to open its markets. And to this day, only 5% of the cars sold in Japan are imports, as opposed to 52.9% in the USA. The Japanese say that their consumers don’t like imports, but in reality Japan is the master of non-tariff trade barriers.

We will see the same from the Chinese. And we will not live to see the day of open markets in China. If we couldn’t accomplish it with Japan, a political ally, how can we expect to fare better with a non-ally like China?

The Chinese have studied the USA-Japan trade relationship, and they have vowed not to repeat Japan’s “errors” – especially the Plaza Accord “error” where Japan allowed the USA to push up the value of the yen.

Roach says not to worry about the yuan because it has been strengthening. But that is not an accurate statement. As a matter of fact, it is a deceptive statement because the PBOC sets the value of the yuan versus the dollar. Roach is trying to fool us into thinking that the value of the yuan is set by market forces.

The fact is that Beijing has been forced by US outrage to fix the yuan higher. We’ve made a tiny bit of progress, but Stephan Roach wants to put an end to it.

What are we supposed to think when confronted by an economist who argues for “free trade” in everything except the yuan? An economist who defends having the yuan set by dictate in Beijing?

When asked (in the linked interview above) how we can level the playing field with China, Roach responds: “Deflect attention away from the currency.” He went on to denounce China’s mercantilist trade practices, but that was an odd way to begin his response, no? “Deflect attention away from the currency” sounds like a talking point to me; probably written by some multinational PR flack.

Each time the PBOC inches up the yuan-dollar peg, the massive sweatshop profits of the multinationals inch down.

Is it impossible to simultaneously pressure the Chinese to float the yuan and open their markets? Not at all. So, Roach’s argument is completely specious.

And the Chinese haven’t strengthened the yuan very much at all in the grand scheme of things. They have only reversed a little bit of their massive devaluations from the 1980s and 1990s. Go here, and make a long-term chart and see for yourself.

Of course, demand for yuan is far higher than it was before the Chinese started devaluing. Just think how many yuan Apple needs to purchase when they go to China to buy iPads from Foxconn. How high would the yuan spike if allowed to float? I don’t know, but you would be hard-pressed to find an economist who thinks it would decline.

If you are bullish on the yuan, you can buy the CYB ETF. However, if you did so when CYB began trading in 2008, you would have only a 1.35% gain. That’s the peg in action. Below is a “percent change” chart comparing the CYB (red line) to the FXE euro ETF (blue line). Click chart to enlarge:

I’m comparing the yuan to the euro to showcase the difference between a currency set by market forces and one set by dictate. The euro bounces around; the yuan is practically a flat line. Anybody who says that China is not a currency manipulator is full of it. The movements of the yuan are purely artificial.

Note: According to the Best Selling Cars Blog, there were no imports at all in the top-30 selling cars in Japan in 2011.