Hans-Werner Sinn, a professor at the University of Munich and the president of the Ifo Institute, a leading German think tank, has a controversial theory of why the U.S. is all of sudden crying for yuan appreciation.
Never before in history has the U.S. government been so vocal and hostile about China's undervalued yuan as it threatens to enact import tariffs on China.
The U.S. government certainly has moral justification: China is arguably the biggest currency manipulator in the world and grossly undervalues it through capital controls and by accumulating huge foreign exchange reserves.
However, China has been doing this for a long time. So why the fuss now?
Most theories point to the weak state of the U.S. economy and jobs market as the impetus for the U.S. outcry. Sinn, however, thinks something else is behind this.
The real reason, he said, is because China no longer finances the U.S. government. Instead of returning dollars it accumulates from the trade surplus back to America by buying Treasuries, China is pouring it in raw materials in Africa and elsewhere, said Sinn.
China used to finance the U.S. government. For example, in 2008 and 2009, China purchased on average $17 billion worth of U.S. debt per month. However, that net buying apparently stopped in November 2009. During the first seven months of 2010, China not only refrained from buying U.S. debt, it actually became a net seller of it, dumping on average $7 billion per month, said Sinn. (However, China's holding of U.S. Treasuries rose by $21.7 billion to $868.4 billion in August 2010. In August 2009, China held of $936.5 billion.)
It is understandable that the Chinese are now reluctant to invest more money in the US, said Sinn.
That's because the U.S. essentially limits them to purchasing mostly U.S. government. So China sells products (cheap manufactured goods) the U.S. wants, but the U.S. is unwilling to sell products China wants.
China wants U.S. companies, for instance.
It tried to buy Unocal, a U.S. oil company, but ran into stiff U.S. political opposition. The same thing happened with Firstgold, a U.S. gold company. China probably also wants technology from the U.S., but the U.S. is again unwilling.
America may have valid reasons for denying China technology and companies on grounds of national security, but if it is unwilling to sell them, why did it trade with China in the first place? One explanation is Americans just wanted China to finance their expensive lifestyle.
Sinn said by financing the U.S. government and supplying America with cheap goods, China freed up money that then fueled the housing sector and a sharp rise in the American standard of living. In return, however, the U.S. only wants to give China structured securities of questionable creditworthiness and government paper that is now clearly exposed to the risk of inflation and devaluation.
Sinn also said when China left as a buyer of U.S. debt, the U.K. stepped in. In 2008 and 2009, the U.K. bought only about $1 billion monthly; in the first seven month of 2010, it is purchasing an average of $28 billion monthly. But because the U.K. is itself an external deficit country, it is probably not holding onto U.S. debt, but restructuring it and selling it to the world under a new name and with the London stamp on it, he said.
Email Hao Li in New York at email@example.com.