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China can’t deny market forces forever

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TESS VIGELAND: China is rich and powerful, and getting richer and more powerful all the time. But the markets are richer and more powerful still. And commentator David Frum says not even China can successfully tangle with them for long.

David Frum: China runs a huge trade surplus with the United States. Cheap labor is part of the explanation, but so too is a cheap currency. Over the past year, the dollar has lost one-fifth of its value against the Euro. But China has used every trick in the central banker’s handbook to match the dollar all the way down.

These methods keep China’s economy growing — and China’s workers employed — at the expense of output and employment almost everywhere else on the planet. With China such a huge creditor of the United States — and lending more all the time — the United States has little leverage to force a change.

But the United States does not need leverage. Market forces can be delayed. But they cannot forever be denied. China’s undervalued currency exacts its own revenge: inflation. To prevent its currency from rising against the dollar, China must create more and more money. In China’s super-charged economy, more money means higher prices. Property prices in central Shanghai have bulged by 40 percent over the past year. Consumer price inflation rages at 15 percent or more.

The alternative is for China to do the rational thing: allow its currency to appreciate. That will slow inflation. The prices of imported goods, like grain to feed chickens and pigs, will drop. Chinese families will enjoy an improved standard of living.

The prices of Chinese exports at your local Wal-Mart will rise. But that’s necessary too. If that happens, Americans will do what they need to do: export more, save more, consume less. No fun, but the shift doesn’t have to be traumatic.

But if China does not alter course, they and the world are headed for another bubble, and another very painful pop.

Vigeland: David Frum is a fellow at the American Enterprise Institute.

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