04 August 2007

Questions for Senator Dodd

I recently wrote a piece for an eMag my employer publishes in which I discussed China's investments in the US and related matters. Two of the experts I interviewed for this story made unflattering references to a bill on "currency manipulation" now before the US Senate, a bill sponsored by Senator Christopher Dodd, of Massachusetts.

Naturally, I offered the Senator, through his office, every opportunity to respond to these comments. In fact, I formulated the gist of them into five specific questions.

The replies I got from his staff members were unfailingly polite and unfailingly unproductive of any reply, either in time for inclusion in the eMag piece or subsequently.

Okay, the Senator's a busy guy. He's busy managing a much-ignored Presidential candidacy and all that. Still, I'm going to post the questions here, because its as good a form of typing practice as any.

1. Is currency manipulation (or misalignment) really a large factor in the US/China trade imbalance? Wouldn't there be a huge imbalance in wage levels at any plausible yuan/dollar rate of exchange? And if China disappeared from the picture, wouldn't a lot of the manufacturing/outsourcing simply move to Vietnam, Indonesia, or elsehwhere -- again for wage rather than for currency-specific reasons?

2. One view I encountered, in discussing the matter with experts, is that the US has made a virtue of necessity by making a diplomatic push for the free float of every currency against every other currency. From the Bretton Woods period until the Nixon administration, fixed rates of exchange were US policy, after all. Does your bill assume that everything must float freely against everything else? If so, why? Given the volatility such a situation allows (as exhibited starkly in east Asia just ten years ago) aren't there good reasons why a particular sovereign nation might want to avoid convertibility altogether?

3. I understand that the Financial Times may soon run a letter-to-the-editor from several economists -- including, for example, T.J. Marta, fixed income analyst, Royal Bank of Canada -- who maintain that Senator Dodd and the other sponsors of the bill "audaciously pretend to have a certainty over something that's fundamentally uncertain." The bill, the letter says, is plainly directed at China, yet there is no certainty that the yuan and dollar are badly misaligned, intentionally or otherwise. Would you like to respond to that general critique?

4. Although there seems to be a majority view, among observers of the question, to the effect that if the yuan were freely convertible and allowed to float, it would strengthen vis-a-vis the US dollar, there is also a contrarian view expressed by some experts, that the yuan would fall. This is (the contrarian theory goes) in part because China's elites would likely prefer to keep their own money offshore, and in other nation's denominations, and in part because foreign corporations doing business in China would likely find it easier to repatriate their profits by holding them in dollars, or something other than the yuan. If the yuan is in fact over-valued already relative to the dollar, isn't any alleged manipulation working in favor of the US?

5. Do you see the investment this year by a China state agency of $3 billion in an American investment fund management firm as a good sign of mutual interdependence, of the repatriation of dollars, etc.? Or is it ominous, as many thought when China considered the purchase of Unocal? Are the Blackstone/Unocal cases markedly different?

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.