The financial markets have been focused on China's economy and its impact on global growth. Suddenly, the Shanghai composite stock index impacts the opening of the U.S. markets. And politicians have found a new target.
Is China our worst enemy, sucking jobs from American workers because of low wages there? Or are they helping American consumers afford more consumer goods at lower prices?
Are they seeking to undermine America by becoming the world's "reserve currency"? Or are they our "best friends" -- buying our debt so we can keep running up big deficits and financing our spending?
The truth lies somewhere in between. But before passing judgment you might want to be aware of a few financial facts about China.
1. The Chinese currency is referred to as the renminbi or the yuan, depending on the circumstances. Basically, renminbi is the official name for the currency, and yuan is the main unit of currency. So it's correct to use renminbi when referring to China's currency rates, for example, but use yuan when referring to a specific price of an item. By the way, yuan is pronounced "you-on," not "won."
2. China is the largest central bank holder of U.S. Treasury securities. According to the latest Treasury department figures, China holds $1,271 billion of U.S Treasuries, compared to second-place Japan, which holds $1,197 billion of our IOUs. China has recently sold some of its U.S. debt holdings to support its currency (buying yuan, selling dollars) to keep exchange rates from falling farther after the recent mild devaluation.
3. China has not devalued its currency dramatically, despite the recent headlines. In fact, the Chinese currency was closely linked or "pegged" to the American dollar for the past decade. That meant with the dollar so strong, the renminbi was strong -- making China's exports less competitive.
The recent devaluation of the renminbi amounted to only about 5 percent. By way of comparison, the Canadian dollar has fallen close to 25 percent against the U.S. dollar in the past year, and the Euro has fallen 15 percent against it -- and no one is yelling at them!
4. China is NOT America's largest trading partner. America's largest trading partner is Canada. We export nearly three times as much goods and services to Canada, compared to China. And even when you include our imports, Canada remains America's largest trading partner. And, as noted, its currency has fallen much further than China's.
5. China has been accumulating gold as a reserve. Since 2009, China's holdings of gold have risen from 1,054 metric tons, to 1,658 metric tons today. (By comparison, the United States has a reported 8,133 metric tons.) It's suggested that China has increased its gold holdings as part of its effort to join the IMF's benchmark basket of reserve currencies.
Likely, China's main focus is not on undermining the U.S. but on getting its own economy growing strongly again. It has cut interest rates, pumped reserves into its banking system, and even directly supported its stock market -- all in an attempt to deal with a political crisis of middle-class disillusionment amid slowing growth.
If that sounds familiar, it's similar to what the Fed and Congress did in 2008-09. But China doesn't yet have the precise touch, because it's new to having a "free market" economy. And that's the Savage Truth.