Just before U.S. President Obama arrived in China, his hosts proffered an outspoken criticism of the negligence of the U.S. in allowing their currency to promote speculative finance. Specifically, the Chinese object to the U.S. turning a blind eye to the "carry trade." This is a practice whereby hedge fund operators borrow U.S. dollars at low U.S. interest rates, and invest in high interest securities in currencies with higher interest rates. As the U.S. dollar slides lower, the hedge funds also gain the difference in capital appreciation of the rise in the value of the target currencies against the dollar.
The Chinese have a point. In the last year alone some 141 new hedge funds have been created. They have doing very well, on average increasing in value by 40 per cent. Some of this gain is due to buying low after security prices had been depressed in 2008; most of the rise is due to the carry trade. When hedge funds can borrow money on margin -- use leverage -- they can amplify their gains. Banks stand behind the carry trade by lending money to the hedge funds.
Instead of addressing the serious issue of why government bank bailout money should be funneled back into creating more speculative bubbles, the U.S. has focused on blaming China for the U.S. external deficit in international trade. American policy makers want to get the Chinese to raise the value of their currency. Even Americans who should know better such as New York Times columnist and Nobel Prize-winning economist Paul Krugman promote the view that China is undermining the U.S. dollar by keeping its currency artificially low.
The U.S. trade problem cannot be understood just from the U.S. point of view. If China were to allow its currency to rise, its exports to the U.S. would simply be replaced by those of other low cost manufacturing sites such as Vietnam, and Mexico.
http://www.rabble.ca/columnists/2009/11/chinese-challenge-us
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