Chinese Stock Syndrome: Don’t let it bring us down

It appears that China’s economy has caught the flu, and we must stop it from spreading the fever to the United States. 

In the last several months China’s stock market has plunged 44 percent. During the Great Crash in 1929, stocks tumbled 47 percent from September to November and then fell much further over the next several years. In 2008, the U.S. stock market plunged 44 percent, but recovered much more quickly than during the Great Crash. The U.S. stock market has declined by 10 percent this year already. 

Enough is enough.

{mosads}“Chinese syndrome” refers to a hypothetical nuclear-reactor accident in which the fuel would melt through the floor of the containment structure and burrow into the earth. “Chinese Stock Market Syndrome” means a severe stock market crash in China leading to a meltdown in the world economy.

China’s real economy is in real trouble, but the U.S. economy is not. Credit insurer Euler Hermes forecasted the number of corporate insolvencies to rise 25 percent this year in China. HSBC China Economist Julia Wang said in a report recently that China had unsold housing inventory of 1.8 billion square meters (19 billion square feet of space or 436,000 acres of floor space), which could house up to 90 million migrants from rural areas. This is more housing space than all of New York City! These are empty apartments, ghost towns that were built on credit, with billions in debt that is now past due.

In contrast, the U.S. economy is doing relatively well. Our banks are much stronger than they were in 2008. Reserves are double what they were before the Great Recession. There are no major bankruptcies like the AIG, GM and Lehman Brothers ones that threatened the economy eight years ago. Our consumers are cautiously saving money, whereas in 2007 we had a negative savings rate. Unemployment is at 5 percent, a 10-year low.

During the past five years the United States has increased its manufacturing employment by more than 500,000. Part of that increase was caused by a rise in costs in China, and part was due to increased U.S. tariffs on solar panels and other products that China illegally dumped into the United States.

In order to stimulate its economy, China plans to drive its currency down so that it can sell more products overseas into the United States and European markets. Japan has successfully done this. The Japanese yen has been devalued by 50 percent in the past three years despite the fact that Japan runs a massive trade surplus with the United States. We must not let any country unfairly compete by manipulating its currency. 

During the past year, the Chinese yuan has decreased in value by 6.5 percent. Most economists believe that the Chinese currency is between 20 percent and 40 percent undervalued.

A bipartisan group of U.S. senators — Rob Portman (R-Ohio), Sherrod Brown (D-Ohio), Jeff Sessions (R-Ala.), Charles Schumer (D-N.Y.), Lindsey Graham (R-S.C.), Debbie Stabenow (D-Mich.) and Richard Burr (R-N.C.) — introduced the Currency Undervaluation Investigation Act last year. The measure, S. 433, would utilize U.S. trade law to counter the economic harm to U.S. manufacturers caused by foreign currency manipulation and provide consequences for countries that fail to adopt appropriate policies to eliminate currency undervaluation. The bill would require the Commerce Department to treat currency manipulation as an illegal subsidy and impose countervailing duties.

In the House of Representatives, H.R. 820, the Currency Reform for Fair Trade Act, was introduced by a bipartisan group of 39 members of Congress (12 Republicans and 27 Democrats). This proposal would allow tariffs to counter currencies that were “fundamentally undervalued.” The House and Senate bills are very similar.

The U.S. Congress should impose tariffs on China, and other nations, that manipulate their currency to gain an unfair advantage in trade. Congress should pass H.R. 820 or S. 433 to protect manufacturing jobs in the United States. 

Joseph is chairman of the Made in the USA Foundation.