Currency & Sacrifice: The New Math

Author Gary Moreau

Both before and after the November election President -elect Donald Trump has consistently referred to China as a currency manipulator. The implication, of course, is that the Chinese have pushed the Renminbi (Translated literally, The People’s Money.), or the Chinese New Yuan (CNY), as it is known to currency traders, to artificially low levels to allow their export companies to pick the pockets of Americans.

There is no truth to this claim. I know because during my decade of living there I was paid in US dollars and lived on CNY. And I most definitely felt the pinch of a strengthening Chinese Yuan.

When I first moved to China in 2007 I was converting my US dollar paycheck at almost 8/1. Over time, however, the CNY was up to approximately 6.1/1. That’s more than a 20% appreciation, meaning, of course, that I could buy 20% fewer goods and services with the same paycheck.

Now it is true that the CNY hit a high against the dollar in 2014 and has decreased in value since then. It currently trades at about 6.9/1 against the USD. But that is not 8/1 by the laws of math I was taught in school.

Like so many things with President-elect Trump I don’t really know if he truly believes that China is manipulating its currency or he is just saying that for its political benefits. I am not sure it really matters. He is saying it. Over and over again.

In an Op-Ed piece appearing in China Daily on January 10 contributor Yasheng Huang wrote:

“There is no method to Trump’s madness. In the tweet justifying his phone call, (To Taiwan’s political leader, Tsai Ing-wen.) he also repeated a false charge that China is depreciating its currency to gain export advantages vis-a-vis the US. His knowledge of international economics is either non-existent or 10 years out of date. In reality, China is now hemorrhaging foreign exchange reserves and desperately trying to prop up the renminbi’s value in the face of capital flight.”

Mr. Trump also talks a lot about border taxes. The truth is, however, that China is one of the few countries in the world that actually taxes its own exports. The amount varies by industry but every exporter pays a 17% VAT tax when the exports are shipped and receives some amount of refund when the foreign customer actually pays. (If you don’t get paid you are out of luck on the refund.)

Understanding China is available at Amazon in paper and electronic formats.

And, of course, the US still charges tariffs on a wide variety of goods and services from a wide variety of countries. The US has no free trade with China, as it does with Mexico and Canada. (NAFTA)

It is hard for me to believe that President-elect Trump’s staff isn’t aware of all of this. So why the feint? I honestly can’t figure it out.

The reality is that the cost of making things in China is relatively high today and, as Yasheng Huang noted, the Chinese government is actively trying to support the CNY in order to address a serious problem with the outflow of capital.

The jobs that left the US two decades ago have already left China and moved to other countries in Asia and Central America. Energy is very expensive in China. Factory wages have been increasing 7% – 10% per year for several yeas, and the wages of senior managers in China are already on par with Western pay scales. Corporate tax rates – another Trump favorite – are also fairly high when you add in the corporate income tax, VAT, and a growing number of local taxes being assessed to support education and the cleanup of the environment.

The personal income tax rate in China, moreover, races up to 45% pretty quickly and there are no deductions for things like mortgage interest and health costs. (My Chinese tax return was one page. My US tax return was close to 100 pages.) Chinese executives, moreover, have little access to the many financial tools created by Wall Street to help US executives shield income or defer taxes.

“China cheap”, as it is sometimes called, is more a function of mindset than wages. I will give you one example: When American companies build a new plant they are likely to install energy efficient hot water heaters in the washrooms to reduce costs. Many Chinese companies, however, won’t install any hot water heaters for the washrooms. It’s a question of no cost, not lower cost.

Perhaps it is this difference in mindset that best explains the inability of many Western companies to compete with the Chinese. They are simply playing two different games.

And the Chinese will eventually bring their game to the US. And if you believe that American workers won’t accept some of these sacrifices for the sake of jobs and a better life you should talk to the folks in Trump Country.

At the end of the day I found it pretty painless to wash my hands without the benefit of steaming hot water. Sacrifice is all relative.

Contact: You may reach the author at understandingchina@yahoo.com. Mr. Moreau is also available for public speaking and the provision of third-party written content on a wide variety of topics for your website or other communications material.